Lower Your Estate Value And Generate Income With A Self-Cancelling Installment Note
by Shane Flait | Feb. 18, 2013
Wealthy retirees seek ways to lower their estate value to reduce estate tax because estate tax can take a big chunk of their estate. Also, since gift taxes are part of the estate tax, gifting it all way at once won't avoid the estate tax. But using a self-cancelling installment note (SCIN), you can sell property to a family member and remove most of it from your estate if you die before collecting all the proceeds. Here' how it works.
If you sell property worth $200,000 to a relative and he gives you $200,000 in cash, you haven't changes the value of your estate. You've simply changed one asset type for another.
However, if you sell the asset under an installment sale over a defined term, you can cancel all remaining payments at your death with a self-cancelling installment note (SCIN). The effect is that you've removed those remaining payments from your estate, and you've collected some income in the mean time. And by selling, you also removed any appreciation the asset would have added to your estate.
What requirements must you meet to use an SCIN sale?
Suppose you sell your son property you originally purchased for $200,000. Now it's worth $340,000. Your son agrees to buy it and pay you the full amount (i.e. $340,000) plus interest in a balloon payment in 10 years. You write up a self-cancelling installment note stipulating this is a sales document.
If you die before the 10 years elapses, your note cancels all remaining payments due at your death and excludes those remaining payments from your estate. In order for this to work - from the IRS's point of view:
* The property sales price must accurately reflect it value. So get it appraised.
* You must charge a reasonable rate of interest. So use the IRS-fixed applicable federal rate to be safe.
* The period for making payments can't be fixed (i.e. agreed to) at a duration greater than your life expectancy. The implication here is that you formally intended to be paid everything due.
To get over this third point, the ideal seller to use this SCIN technique should have a shorter actual life span than his actuarially projected life expectancy - which the IRS uses. And the earlier during the instalment term the seller dies, the better is this technique.
But postponing receipt of payments doesn't postpone recognition of capital gain indefinitely. The gain - here the difference between your basis of $200,000 and the sale price of $340,000 - must be recognized on your final income tax return.
If you don't die during the term, you'll receive full compensation. But an advantage still remains since you've eliminated the asset's appreciation being added to your estate.
About Shane Flait
Shane Flait helps you with your financial legal, tax, and retirement goals. Get his FREE report on Managing Your Retirement =>
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About Chia-Li Chien
Chia-Li Chien, CFP®, CRPC, PMP; Chia-Li “like JOLLY,” Succession Strategist of Value Growth Institute, dedicated to helping private business owners increase their company equity value. She is the award-winning author of the books Show Me The Money and Work toward Reward and a faculty of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. Contact her at email@example.com or (704) 268-9378 .