SCINs Explained: Minimizing Gift and Estate Taxes

The IRS imposes a gift or estate tax on the transfer of money or property from one individual to another, with certain exceptions. One exception that we’d like to delve into is the self-canceling installment note (SCIN). It is a promissory note used to transfer valuable accounts and property between individuals. However, the note includes a clause stating that the buyer’s obligation to repay the loan terminates upon the seller’s death, lessening gift and estate tax implications. 


An Example

Many people utilize SCINs as an effective estate planning strategy. For example, a parent may sell a valuable property to their child. The child makes regular installment payments to the parent, and if the parent passes away before the child repays the loan in full, the remaining debt is forgiven. This arrangement minimizes gift and estate taxes, as the unpaid balance is not considered part of the parent’s estate upon death. Further, the property is not a gift either since an original loan was attached to it. 

The Terms

The note’s term should not exceed the seller’s life expectancy for estate planning purposes. Many factors must be taken into consideration when determining the seller’s life expectancy and, thereby, the terms for the SCIN. Therefore, we recommend anyone interested in using this as part of their estate plan consult with an experienced professional. 

Interest Rate 

Every promissory note, including a SCIN, requires an interest rate. The correct rate must be applied even if the transaction is between family members. Typically, the interest rate for a SCIN must meet or exceed the applicable federal rate (AFR) with semiannual compounding. The SCIN’s repayment term determines the appropriate AFR:

  • Short-term rate for repayment terms of up to three years
  • Mid-term rate for repayment terms between three and nine years
  • Long-term rate for repayment terms greater than nine years

Added Premium

An added premium must cover this risk of the seller passing away before the buyer pays off the loan. You can do this in two ways: increase the sales price above the fair market value or raise the interest rate above the standard AFR. The choice depends on the buyer’s and seller’s tax situations. 

Utilizing SCINs

Understanding and utilizing SCINs can be a powerful tool in your estate planning strategy, helping to minimize gift and estate taxes while ensuring a smooth transfer of assets. However, crafting a SCIN with the correct terms, interest rates, and premiums requires accuracy and expertise. To learn more about how to incorporate SCINs into your estate plan, contact Law Stein Anderson. Our skilled estate planning attorneys are here to guide you through the process and tailor a plan that meets your needs.