The Secret to Self-Cancelling Installment Notes

As experienced estate planning attorneys, we at Doane & Doane spend a great deal of time understanding the many estate planning investment vehicles out there. We are also well versed in those techniques that are used primarily to limit or even avoid altogether gift and estate taxes when giving assets to family members.  

Those estate planning techniques can be effective, but there is a significant risk that goes along with them. That risk is called “mortality risk.” In other words, for a tax-avoidance technique to be effective you may need to outlive the term of trust or some other investment vehicle in order to reap the tax benefits. If you don’t outlive the relevant term, then you risk losing those tax benefits. 

With a self-cancelling installment note mortality risk goes away. That is the great secret of self-cancelling installment notes, also called SCINs.

That said, while a self-cancelling installment note may allow you to be free of mortality risk, there are other potential downsides.  

In this blog, we will take this opportunity to discuss the self-cancelling installment note, consider how it works, and delve into its pros and cons. If, after reading this blog, you have more questions about self-cancelling installment notes, then we invite you to call the seasoned West Palm Beach estate planning attorneys at Doane & Doane at 561-656-0200 .  Let us help you plan your future with proper estate planning.

To put it bluntly, a self-cancelling installment note is similar to a bet against your life expectancy. While that might sound somewhat morbid, the SCIN can result in significant tax benefits to your children if you pass away before the note’s term. That is why using a self-cancelling installment note makes sense if you are in less-than-good health and believe that you will not live to your normal life expectancy.  

The process to use a self-cancelling installment note is as follows. First, you would engage in a transaction in which you “sell” the asset that you ultimately you wish to transfer the asset to your children. In exchange for that “sale,” you would receive an installment note that generates interest. 

Second, your children would then receive the whole asset at the time of the transaction but would have to pay for the “sale” in installment payments. Those payments would cease, however, when you pass away. So, if you pass away before the note’s term, then the note is cancelled and your children keep the entire asset without having paid the full purchase price. Hence the name self-cancelling installment note.   

Importantly, while we put the word “sale” in quotes, the transaction must be treated as a real sale (i.e., one that is for the reasonable value of the asset and not some nominal sum like $1). Then, it will be treated as a sale for tax purposes, and no taxable gift will have occurred. The benefit here is that you do not need to use any allotted yearly gift tax exclusion, or lifetime gift tax exemption.

The SCIN is called an “installment note” because it mirrors an installment sale, which prices the assets at their fair market value and charges interest at a rate required by law on each installment payment. 

The “self-cancelling” feature means that if you die during the term of the note (which cannot be longer than your actuarial life expectancy at the time of the sale), then the “buyers” (your children, or other loved ones) are relieved of any future payment obligations, and receive the entire asset free of any transfer taxes.

We have basically covered the pros of a self-cancelling installment note already. Namely, if you pass away before your normal life expectancy, then your children will keep the asset that was “sold” to them without any tax encumbrances, and at a price that is lower than the fair market value of the asset. 

The con, however, is the chance that you will live beyond your normal life expectancy. In that case, your children will be paying installment payments in an amount that exceeds the fair market value of the asset. That is because the value of the asset and the installment payments are keyed to your actuarial life expectancy.  

In other words, the downside of a self-cancelling installment note is that you may live beyond your normal life expectancy.  Thus, the risk with a self-cancelling installment note is the polar opposite of mortality risk, whereby you must outlive a particular term to enjoy the tax benefits.  

In sum, there are many options for those who wish to plan their estate and minimize as much tax liability as possible. The best way to review all of those options is to engage the services of a qualified estate planning attorney.  

If you are intrigued by the self-cancelling installment note option after reading this blog or have been considering including one in your estate plan, then you should contact the seasoned estate planning attorneys at Doane & Doane, in order to understand all of the advantages and disadvantages involved.  

Many Palm Beach estate planning clients seek the assistance of the attorneys of  Doane & Doane, P.A.  to help them make the right decisions for their family’s future.  

 Moreover, the founding partners of Doane & Doane are board-certified  West Palm Beach Probate Attorneys  . With the additional advantage of certified public accountancy in their backgrounds, they present a unique combination of skills and experience which enables them to effectively settle, administer, and manage clients’ trust and estates.

In short, at Doane & Doane, we have the resources and experience to help you understand all aspects of the estate planning process. Doane & Doane’s attorneys in West Palm Beach can be your South Florida legal guides. 

At Doane & Doane, we are prepared to give you sound, accurate advice on a self-cancelling installment note. If that is something that would be a solid option based on your circumstances, then we can reliably ensure the transaction will be handled properly. Call us at Doane & Doane today, at 561-656-0200.