For business owners and real estate investors looking to transfer wealth without triggering capital gains tax or adding assets to their taxable estate, Self-Canceling Installment Notes (SCINs) offer a powerful solution. When paired with an irrevocable trust, SCINs can eliminate capital gains tax on asset transfers while reducing estate tax exposure.
If structured correctly, a SCIN allows you to sell highly appreciated assets to your trust while deferring capital gains tax and ensuring that any unpaid balance is forgiven tax-free upon your death.
How a SCIN with an Irrevocable Trust Works
The Grantor (Seller) Transfers Assets to the Trust
The grantor (typically the senior family member or business owner) sells an asset—such as a business, real estate, or securities—to an irrevocable grantor trust in exchange for a SCIN.
The trust makes installment payments based on the terms of the SCIN.
Payments Continue Until the Grantor’s Death or SCIN Term Completion
The trust continues making principal and interest payments to the grantor.
If the grantor dies before the SCIN is fully paid, the remaining balance is forgiven, and no further payments are due.
Tax Treatment: No Capital Gains, Reduced Estate Tax
Since the trust is a grantor trust, the IRS disregards it as a separate taxpayer—meaning no capital gains tax is triggered when the asset is sold.
When the grantor dies, the remaining SCIN balance is canceled and does not trigger taxable income or gift tax (although in some cases there may be gift tax when the trust is set up).
The forgiven balance is not included in the estate, reducing estate tax exposure.
Why Use a SCIN with an Irrevocable Trust?
1. No Capital Gains Tax on Asset Transfer
A SCIN sale to a grantor trust is ignored for income tax purposes (Rev. Rul. 85-13). That means:
The grantor defers capital gains tax on the sale.
If the SCIN is forgiven upon death, the remaining balance escapes taxation entirely—eliminating capital gains tax that would have been due under a traditional sale.
2. Estate Tax Reduction
By structuring the sale through a SCIN, the value of the asset is removed from the grantor’s estate, reducing exposure to 40% estate tax rates.
Example:
Suppose a grantor sells a $10 million business to a trust using a SCIN.
If the grantor dies with $5 million still unpaid, that $5 million is forgiven and never taxed.
This avoids $2 million in estate tax that would have been due had the asset remained in the grantor’s estate.
3. No Gift Tax Risk (If Properly Structured)
A properly structured SCIN is not a gift, provided:
The purchase price is fair market value.
A risk premium (higher interest rate or price) is included to compensate for the cancellation feature.
This allows assets to pass to heirs without triggering gift tax or using up the grantor’s lifetime exemption.
Key Considerations for Structuring a SCIN
To give your SCIN a better chance at withstanding IRS scrutiny, it should be:
Fairly Valued – A qualified appraisal should establish fair market value at the time of sale.
Include a Risk Premium – The note should charge above-market interest or a higher sale price to account for the possibility that payments will end early.
Grantor Must Be in Good Health – If the seller is terminally ill, the IRS may treat the SCIN as a taxable gift instead of a legitimate sale.
SCIN vs. Traditional Installment Sale to a Trust
Feature | Traditional Installment Sale | SCIN with Irrevocable Trust |
Capital Gains on Sale? | Yes, taxed over time | No, disregarded transaction |
Estate Tax on Unpaid Balance? | Included in estate | Excluded from estate |
Risk Premium Required? | No | Yes (higher interest or price) |
Payments Stop at Death? | No | Yes, remaining balance is forgiven |
Basis Step-up on Death | No | No |
Who Should Consider a SCIN with an Irrevocable Trust?
Business Owners & Real Estate Investors – Those looking to transfer valuable assets without capital gains tax or estate tax exposure.
High-Net-Worth Individuals – If estate taxes would apply, a SCIN can remove appreciating assets from the estate while allowing heirs to acquire them over time.
Families Seeking Tax-Efficient Wealth Transfer – A SCIN allows the next generation to acquire assets without gift tax consequences.
Comentarios