What Can a Self-Cancelling Note Do for My Estate Plan?

When you want to find ways in which to pass on your assets to your children with as few encumbrances as possible, then you sometimes need to get a little creative. That is what trusts & estates attorneys do. We find ways for you to pass on your legacy to your children and other heirs that maximize their benefits and minimizes any financial obligations, while of course following the letter of the law. 

There is one technique that might be a viable option for you called the “self-cancelling note,” or sometimes called the “self-canceling installment note.”  This type of estate planning vehicle is actually related to your life expectancy, and thus there are pros and cons to whether this would be a worthwhile choice to consider. 

In this article, we are going to discuss the basics of a self-cancelling note , and then give you the pros and cons as to whether it might be something you want to consider for your own estate planning.     

If, after reading this article, you have additional questions about self-cancelling notes, then we welcome you to contact the Palm Beach County lawyers at Doane & Doane, PA.  Call today at 561-656-0200 or fill out our online contact form . 

The first thing you need to know is that a self-cancelling note works the same as a sale of property or another asset. So, for example, let us assume that you are looking to pass on your business to your heirs.  Using a self-cancelling note, what you would do is sell the business to them while you are still alive and kicking (rather than waiting to have it pass at the time of death), and in exchange for the business, you would receive a self-cancelling note, which requires installment payments from your heirs.

The sale itself has to be legitimate, meaning that it cannot be for a nominal sum like $1.  The reason it needs to be a sales transaction is that then it does not trigger any taxable gift liability.  

The self-cancelling note is often called an installment note because it is very similar to an installment sale.  Taking our example, the business being sold will be priced at fair market value, and the “buyers” (your heirs) will pay for the business in installments.  Each installment payment must include some interest payment at the legal rate.

Now, you may ask:  “how is this different from just a regular sale of an asset to your heirs?”  Well, the key to a self-cancelling note is that it is canceled, i.e., your heirs no longer have to pay for the asset, if you die during the term of the note.  So, essentially, your heirs will pay for the asset – your business in our example – only until you pass away.  Then, your heirs receive the full asset without having to pay any further installment payments, and without having to be responsible for any transfer taxes.  

A self-cancelling note is worth considering if you believe that, based on your health, you will not live as long as an actuarial estimate of your life expectancy.  That is when your heirs will receive the benefit, because they will only have to pay a portion of the term of the note prior to your passing, thus receiving a valuable asset at a much-reduced price.  

That said, if you live longer than the term of the self-cancelling note (which is typically set at your actuarial life expectancy) then your heirs will eventually pay the full purchase price for the business.  There is still, however, the benefit that your heirs will avoid gift taxes on the asset.  

It is also important to recognize that a self-cancelling note does require the heirs to pay a premium (or slightly higher amount) for the asset because of the chance that they may receive the asset for a reduced amount.  The premium is typically in the form of a higher purchase price, or higher interest rate on installment payments.  

As a threshold matter, cases have demonstrated that a self-cancelling note would not be allowed if a person, who wants to transfer assets, is in imminent danger of dying.  Thus, the best environment for a self-cancelling note is if you believe that you will not outlive your life expectancy, yet there is a reasonable chance that you could live to the end of the note’s term.  

Founded in 2003 by husband and wife legal team, Randell C. Doane and Rebecca G. Doane , Doane & Doane provides legal and financial services to families, individuals, and businesses throughout Southeast Florida.

Estate planning is about much more than just giving away property.  It is an act of love and kindness, with the ultimate goal of providing for the future financial security of your loved one.  At Doane & Doane, our tax and estate professionals help people plan for retirement, consider various types of wills and trusts, make provisions for loved ones, figure out future child support, and minimize tax liability.  Experienced wills and trusts attorneys know which tools to use to get the best results for their clients.  Our lawyers can help you determine which tools are best suited to your specific circumstances.

When it comes to probate matters, such as the formal administration of an estate, Florida fiduciaries seek the assistance of the attorneys at Doane & Doane, P.A. to administer and manage their trusts and estates.  Notably, 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’ trusts and estates.

Since the day we opened our doors, we have worked hard to earn a reputation as one of the region’s most prominent tax and estate planning law firms in Palm Beach County, Florida. Our dynamic team includes the firm’s founding partners, experienced associate attorneys, and an outstanding team of paralegals, legal assistants, and support

Call the Palm Beach County lawyers at Doane & Doane, P.A.  You can reach us at 561-656-0200.  Call us today.

The information in this blog post is provided for informational purposes only and is not intended to be legal advice. You should not make a decision whether or not to contact an attorney based upon the information in this blog post. No attorney-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.

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