By Drew Grey, CPA, Partner

As discussed in previous blogs, all gift and estate tax planning involves the transfer of assets from parents to their heirs.  One principal challenge is to determine the technique to use to most effectively accomplish the transfer.  In that analysis a self-cancelling installment note (SCIN) will certainly be considered.

A SCIN is, at its core, a sale for a promissory note.  The “cancellation” feature refers to the fact that upon the surviving parent’s death, all payments cease so that nothing further – no unpaid balance on the note – is included in the parents’ taxable estate.  In that respect, a SCIN is similar to a private annuity: it has the capacity to achieve estate tax magic, complete estate tax exclusion.  In exchange for that termination of payment feature, the buyer – the grantor trust for the children – must pay a premium.  The premium can be expressed as either an increase in the face of the note or as an increase in the interest rate on the note.  However, the latter is almost always what is used.  Let’s try an example.

Assume Mom and Dad are 65 and 70 years of age.  They own an apartment building worth $1,000,000, which is not subject to debt, and which generates $50,000 of cash flow per year.  Since we know that any balance due on the note is forgiven on the surviving parent’s death, we want to choose the longest possible term.  However, the maximum term the IRS allows on these facts is 23 years.  That is a little less than the table life expectancy of 24.3.  We have no incentive to pay any principal on the loan since we want to have any unpaid balance forgiven.  So, on an interest-only note, where the required interest rate is 2.18%, the SCIN interest rate is 3.578% which consists of the 2.18% AFR plus a 1.398% mortality premium.  If Mom or Dad survives the 23 year term, then the note must be paid off.  However, all is not lost as long as the building appreciates in value faster than the 3.578% “hurdle rate.”

The goal of the SCIN is to use a term that the parents do not survive.  As a result, it is often paired with a grantor retained annuity trust (GRAT), the goal of which is to pick a term that the parents will survive.  The combination – referred to as a SCIN-GRAT – uses the strengths of each to “lock in” a benefit as soon as the second leg of the transaction is closed.  This “combo” is a complex transaction only used when the dollars involved are large.  But it is an interesting one for the correct situation.

Please call us to discuss your income tax, gift, estate and generation skipping transfer tax goals.  We can help you achieve them.


The above is not tax advice for any client or matter; it is provided as a topic of general interest to our readers and should not be used for tax planning purposes.  Each client’s situation contains unique facts.

If you are interested in exploring how these rules could benefit you, please contact Drew Grey at (818) 995-0090 or at to receive advice on your specific matter.



October 20, 2012 Posted in Estate Tax Planning, Tax