Content area
Full Text
A self-canceling installment note (SCIN) is an installment promissory note with a special feature: If the payee dies before the note is paid in full, the unpaid balance is canceled. Because the note is canceled, nothing is included in the payee's estate. In other words, the asset has been transferred free of transfer (estate and gift) taxes.
One reason for accepting a self-canceling note is the seller's ability to demand a higher principal or higher interest rate as compensation for agreeing to such a cancellation feature. Besides, the estate tax consequences are wonderful. Recent court cases, such as Moss vs. Commissioner, 74TC 1239 (1980), report the exclusion of the remaining balance of the note in the payee's includable gross estate.
The gift consequences are favorable as well, as long as the note is constructed so as not to produce a bargain sale of property between the two parties in the agreement. The sale price must be fair, as if agreed upon by two disinterested parties in an arm's-length transaction.
In a more recent tax case in 1993, Frane vs. Commissioner, 92-1818 (7/6/93), the technique of self-canceling installment notes received a clarification on the income tax consequences on such death-terminating notes. The appellate court confirmed the lower court's decision that the note is not includable in the decedent's gross estate. However, it reversed the lower court's decision on including the unpaid balance of the installment note, making it not reportable on the decedent's personal return, but reportable on the tax return of the estate. We now have clear precedence supporting the estate tax and income tax consequences for this planning tool.
WHEN SCINS ARE APPROPRIATE