Installment Note (SCN)
There are many tools and techniques
to assist you in meeting your tax and non-tax objectives.
The Self-Canceling Installment Note (SCIN) is a cross
between a private annuity and an installment sale
and has many of the advantages and best features of
A SCIN involves the sale of a business
interest, stock, or an interest in real estate or
other asset, typically to one or more family members
of the owner/seller, or entity that represents them,
in exchange for an installment note with a term shorter
than the seller's life expectancy.
In essence, the seller (usually a senior
family member) serves as a "friendly banker"
by financing the sale of a family business or other
asset through a loan payable by a junior family members
or a trust in installments (annual, semiannual, quarterly,
or monthly) over a specified period of years.
But unlike the classic installment
sale, the note in a SCIN includes provisions for automatic
cancellation of the unpaid balance at the death of
the seller. In other words the SCIN is a promissory
note (evidence of debt), given by a buyer to a seller,
with a provision under which the obligation to make
any future payments ends at the seller's death. If
the seller lives beyond the period over which installment
payments are to be made, the "cancel at death"
provision is ignored. If the seller dies during the
term of the note, the buyer's obligation to make payments
ends on the date of death.
The hoped for objectives are two-fold:
(1) the exclusion of the unpaid balance of the note
from the seller's estate and (2) the avoidance of
any gift tax on the transfer.
The ideal candidate for a SCIN has
a shorter actual life span than would be indicated
by his/her actuarially projected life expectancy.
The earlier into the specified term the seller dies,
the more advantageous the SCIN is. This is because
the property transferred plus all the appreciation
and any income it has produced is removed from the
transferor's estate. Only after-tax loan repayments
received and remaining at the transferor's death are
included in the transferor's estate.
WHY SET UP A SCIN?
Prorate capital gains. You can sell
an asset with a low tax basis and spread the gain
over the term of the note rather than bunching that
gain all into one year. Prorating the taxable gain
over the payment period may enable a shift of income
from high bracket to lower bracket (or higher deduction)
years so that you net more of the income.
Estate tax savings on asset appreciation.
If the stock purchased by the younger family member(s)
appreciates more rapidly than the investment purchased
by senior family members (with the annual after-tax
proceeds of the installment sale, or if you consume
or give away the after-income tax proceeds), the effect
you have created an "estate freeze" since
your estate will either remain the same or decrease.
So the SCIN enables an asset to be
retained within the family unit while its value is
frozen for death tax purposes. This is particularly
appealing during economic conditions in which asset
values are depressed at the same time interest rates
are relatively low.
Estate tax savings on principal. Unlike
the classic installment sale (but similar to a private
annuity), the SCIN will remove the unpaid balance
from the seller's estate since there is a risk premium
(or mortality charge) built into the agreement, therefore,
the present value of any remaining payments should
be excluded from the seller's estate.
Create cash flow. If you own non-income
-producing assets (such as undeveloped land, by selling
it to a family member, the asset (such as a family
vacation home) can be kept within the family unit
yet the seller's income can be increased significantly.
Children who currently (or anticipate to) support
aging parents may want to consider this "graceful
and dignified" approach to provide income for their
parents who might otherwise be financially handicapped.
A fixed stream of income for the term of the note
is secured (assuming the buyer-child remains both
financially able and willing to make payments).
The SCIN, of course, also has downsides
and costs which must be understood. So when planning,
it is always essential to weigh the pros and cons
of all your viable alternatives.
As always, please feel free to call
to discuss these or any other items of importance
The opinions voiced in this material
are for general information only and are not intended
to provide specific advice or recommendations for any
individual. To determine which investment(s) may be
appropriate for you, consult your financial advisor
prior to investing.
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