SCINs Excluded From Estates
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Last month the IRS issued Chief Counsel Advice regarding how SCINs are recognized under federal estate tax law. SCINs (self-canceling installment notes) are used in estate planning to minimize gift tax burdens. An individual can sell an asset to a relative or trust and receive a self-cancelling promissory note in exchange. Should the individual die before the note is satisfied, the asset transfers to the buyer immediately (tax-free), the payments are cancelled, and the balance is excluded from the decedent’s estate.
AnchorIn CCA 201330033 issued by the IRS, multiple SCIN transfers were analyzed and it was determined that gift tax was indeed payable; however, these were not recognized as part of the individual’s taxable estate. The IRS stated: “There is no estate tax consequence associated with the cancellation of the notes with the self-canceling feature upon the decedent’s death.” When calculating risk premiums, the IRS’ mortality tables are used as long as the individual does not have a terminal health condition. Part of the CCA addresses this method and states that these mortality tables are not applicable. Instead, the IRS advises that the transferring individual’s life expectancy on the date the gift is made be used to determine the SCIN’s value.
What can be done to better utilize SCINs in the future? Request the individual’s life expectancy from an actuarial valuation. This will add significant cost to an individual’s estate planning budget. However, an estate planning lawyer can advise if the costs are prohibitive or if moving forward with SCINs is cost-effective.
Although the CCA affirmed that SCINs are excluded from federal estate tax, gift tax was still required. Why would gift tax be issued on a SCIN when they are popularly used to avoid this tax? The transfers addressed in the CCA involved an individual who was diagnosed with an illness just after the SCINs were established, and he passed away six months later. The IRS stated that due to “the decedent’s health, it was unlikely that the full amount of the note would ever be paid. Thus, the note was worth significantly less than its stated amount, and the difference between the note’s fair market value and its stated amount constitutes a taxable gift.”
There may be other estate planning tools that offer similar or more attractive benefits depending on your needs. Check with your North Carolina estate planning lawyer during regular reviews of your plan. Also, the terms established by CCAs are not applicable to every transaction, but should be considered as assistance for more effective planning practices.
