A self-cancelling installment note (“SCIN”) can be used to sell a business interest, stocks, real estate or other types of assets, usually to a family member of the current owner. This is a variation of an installment sale where the remaining payments are cancelled upon the death of the note holder.
When using a SCIN, the person selling assets essentially serves as a bank. They transfer title to the asset to the buyer in exchange for installment payments, including interest, (at regular intervals, i.e. monthly, quarterly or annually) over a specified time period. The SCIN will contain a provision that the unpaid balance of the note is cancelled upon the seller’s death. If the seller lives beyond the term of the note, the cancellation provision has no meaning and is just ignored, because the entire balance will have been paid. However, if the seller dies before the term has expired, the buyer’s obligation to make the installment payment ends at the seller’s death.
The main purposes of utilizing a SCIN to transfer assets are: 1) minimizing estate taxes – the unpaid balance is not includable in the seller’s gross estate; 2) avoiding gift taxes; and 3) prorating capital gains on the increase in value.
Estate taxes are saved because the title to the asset was transferred to the purchaser for value before the seller’s death. This includes all appreciation which accumulated since the seller took possession of the asset. Additionally, any appreciation in value after the sale will be excluded from the seller’s taxable estate.
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