What is a Self-Canceling Installment Note (SCIN)?

Self-Canceling Installment Note

What is a Self-Cancelling installment Note (SCIN)?

From Your Multimillion-Dollar Exit, by Wayne Zell

What is a Self-Cancelling installment Note (SCIN)?

A Self-Canceling Installment Note (SCIN) is a promissory note that contains a provision under which the buyer’s obligation to pay automatically ceases in the event that the seller dies before the note’s maturity date.

When are Self-Cancelling installment Notes (SCIN)s used?

SCINs are typically used in family business transfer situations. An installment note is useful if your business is appreciating in value and you would like to sell it, but you’d like to spread the income tax on the gain over a term of years. SCINs are especially useful when one family member, typically a parent or grandparent, wishes to transfer property to another family member, typically a child or grandchild, with minimal gift and estate tax consequences. 

How does a Self-Cancelling installment Note (SCIN) affect my estate?

Absent the self-canceling feature, the fair market value of the unpaid portion of an installment note on the date of death is included in the estate of the seller. However, if the note contains a properly designed self-cancellation provision, the buyer is under no obligation to make any further payments after the seller’s premature death, which leaves no unpaid balance to be included in the seller’s estate. The self-canceling feature allows the seller’s estate to avoid estate tax on the unpaid balance of the note at the date of death.

What are the rules surrounding Self-Cancelling installment Notes (SCIN)s?

For income tax purposes, self-canceling installment notes are subject to the installment sale rules. Although these rules are complex, the general rule is that the interest rate on an installment sale note must at least equal the appropriate applicable federal rate with semiannual compounding. Failure to follow these rules may result in reapportionment of interest and principal of scheduled payments and imputation of interest income to you as the seller, even in periods in which you may not have received payments.

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