Self-Cancelling Installment Note: The #1 Estate Planning Secret

Photo of author

Paul Sundin, CPA

Do you have an estate plan?

We'll show you our favorite strategies

You know that I am big fan of estate planning strategies. We use many of the basic strategies, but also some of the less known. Have you ever heard of the self-cancelling installment note (“SCIN”)?

In this post, we will review this little-known estate planning structure and point out the advantages and disadvantages. If it sounds like a good fit for you, make sure you review with your estate attorney or CPA.

What is a Self-Cancelling Installment Note (SCIN)?

A SCIN is a special kind of debt instrument. It contains a provision that calls for the cancellation of the liability upon the holder’s death during the term of the promissory note. 

Suppose you, as the holder of the SCIN, die before the expiration of the duration of the SCIN. In that case, the automatic cancellation feature may operate to remove a significant amount of assets from what would otherwise be included in your estate.

Basics of a SCIN

This technique is beneficial if you believe that you will not survive your actuarially determined life expectancy. Using the SCIN, you will exempt any portion of the sales price for your interest(s) that is not paid before your death, together with any post-sale appreciation, from estate tax at your death. 

Although your estate may be subject to income tax at your death (based upon the unpaid sales price), the applicable federal rate will be the capital gains tax rate rather than the federal estate tax rate. In addition, your estate will be in the position to argue that this capital gains tax should be deductible for estate tax purposes.

Suppose you believe you will survive to or beyond your actuarial life expectancy. In that case, a SCIN may not be the ideal solution, as you may end up with more value in your estate (to be subjected to estate tax) than if you did not engage in the transaction at all. In that case, a traditional installment sale would be preferable.

How does a Self-Cancelling Installment Note work?

The critical elements of the transaction closely resemble the traditional installment sale with some key differences:

  • The term of the SCIN would be years less than your life expectancy. Otherwise, it might be deemed a private annuity.
  • The terms of the note must take into account the possibility of your death before the note is paid off by including an increased interest rate or an increased principal amount.

This is known as a “risk premium.” The sales price would be determined based upon:

  1. the fair market value of the interests being sold plus
  2. the “risk premium” for the possibility that you may die before receiving all of the payments (i.e., the full purchase price). 

If the sales price includes these two values, no gift tax consequences will result from the transfer. The risk premium is incorporated by either utilizing a higher interest rate (i.e., an “interest rate premium”) or by increasing the purchase price (i.e., a “principal premium”). 

What constitutes an adequate risk premium is a fact-specific question. Since your life expectancy is a critical component of the risk premium, it must be considered. If the seller has a “terminal illness,” such actuarial tables may not be used. A terminal illness means that the seller has “an incurable illness or other deteriorating physical condition,” which results in at least a 50% probability that the individual will die within one year.

The SCIN can be arranged to be:

  • self-amortizing,
  • interest-only with a “balloon” payment of principal at the end of the term
  • require level principal payments, or
  • something in the middle like the traditional installment note.

Generally, an interest-only SCIN (using an interest rate premium or principal premium) will likely result in the most estate tax savings.

Advantages of using a SCIN?

In addition to the benefits outlined under a traditional installment sale, the SCIN offers the following additional benefits:

Potentially greater estate tax savings

Unlike a traditional installment sale with a SCIN, the remaining principal balance would not be included in your estate at your death because it cancels at your death by the terms of the promissory note. The estate tax savings can be substantial if the seller dies materially before her life expectancy. A private annuity also shares this benefit.

Lower interest rate

Although the issue is not settled, most estate planners agree that the applicable base interest rate (excluding a risk premium component) to use for the promissory note is the AFR in effect for the month of sale. However, a conservative approach would be to use the higher section 7520 rate, which is 120% of the mid-term AFR for the month in which the sale occurs.

Backloading of payments

If you use an interest-only SCIN that defers the payment of principal, at least initially, the purchasing trust would have a greater opportunity to convert its illiquid interest into liquid assets (i.e., cash or marketable securities), which would leverage the proceeds, allowing you to more easily shift value to younger generations. 

More importantly, a SCIN offers a significant advantage if you were to die before the end of the term because of the possibility for a sizeable principal balance payment never being made back to you or your estate. As previously explained, the estate tax savings could be substantial.  

Disadvantages of a SCIN?

In addition to the disadvantages outlined under the traditional installment sale discussion, the SCIN has the following disadvantages:

Substantially greater seed funding

If the principal premium approach is taken, the initial seed funding of the trust would accordingly increase, i.e., to maintain 10% of the principal obligation, at a minimum.

Risk of lengthy life

If you outlive your life expectancy, the assets included in your estate will be substantially greater had the property been sold in a traditional installment sale. Because of the risk premium, the SCIN payments will be significantly higher. A similar risk, although less substantial, exists with a private annuity.

Uncertainty of calculations

The calculation of payments under a SCIN can be uncertain, including determining the risk premium and your life expectancy. By comparison, private annuity calculations are relatively straightforward.

What are the tax considerations of doing a SCIN?

There are different income tax consequences of a SCIN involving a grantor trust versus a non-grantor trust. If your interest is sold to a grantor trust, the sale of the interest and the interest “income” you receive from the grantor trust should be a nontaxable event for income tax purposes. 

If the SCIN is paid off while you are alive, the proceeds will be included in your estate, and you will recognize gain unless the purchaser is a grantor trust.

Concerning a non-grantor trust, if the SCIN is canceled upon your death, any deferred gain will be recognized at that time. However, although the issue is unclear, such deferred gain arguably should not be recognized if the purchaser was a grantor trust. 

Concerning a non-grantor trust, if the principal premium approach is taken (i.e., increased purchase price), it will result in higher capital gains and lower interest income being reported by you. Accordingly, the trust would receive a higher basis in the interest and lower interest deductions. 

Conversely, suppose the interest premium approach is taken. In that case, it will result in lower capital gains and higher interest income being reported by you, with a corresponding lower basis and higher interest deductions.


The self-cancelling installment note (“SCIN”) is not for everybody. But in the right situation, it can make a lot of sense.

Make sure you carefully review the advantages and disadvantages of this complex structure and see if you can make it a part of your estate planning arsenal.

Leave a Comment

We know that estate planning can be complex. That's why we are there every step of the way.


Estate CPA

Gilbert, AZ