Gimme Some SCIN

S.C.I.N.’s, or Self Canceling Installment Notes, are a great tool for the transfer of family wealth from one generation to another.

Great care must be taken in structuring such an arrangements however, since the IRS will be anxious to tear them apart under an audit.  Here’s why:  Let’s say an appreciated asset is sold to a child on an installment basis in an arm’s length transaction.  The gain on that sale is recognized over time according to the schedule of loan payments (Installment Sale). With a Self Canceling Installment Note, the outstanding debt is canceled upon the death of the parent and the value of the canceled loan no longer adds to the parent’s taxable estate.  The unrecognized gain remaining in the installment sale is reported on the parent’s final tax return and the resulting tax liability is a deduction against the estate.  Tricky stuff but certainly worth evaluating when an aging parent has a lot of appreciated assets with unrealized gains just waiting to be taxed.

Estate tax is also a complicated subject but much has been clarified with the passage of the American Taxpayer Relief and Accountability Act (ATRA). Under ATRA, a person may leave an estate upon their death of $5.25 Million (that’s $10.5 for a married couple) without incurring federal gift or estate taxes.  The amounts for 2014 are $5,340,000 per person or $10,680 for a married couple.

The annual gift tax exclusion is $14,000 for 2013 & 2014.  This is the amount that may be given to any individual each year and excluded from the gift tax calculations.  This gift is per person per person so folks with large taxable estates who are so inclined, may give $14,000 to as many people as they like.  If Grandpa and Grandma have a taxable estate – the amount above $10,680,000 in 2014 – of $336,000, they may lower their estate by that amount and avoid any gift or estate tax if they have 12 people they wish to give to ($14,000 X 2 = $28,000 X 12 = $336,000).  These gifts are to whomever Grandpa and Grandma choose.  They can be gifts of cash or property assuming the value is easily documented.

If some of those donees are little kids, Grandpa and Grandma could open College Saving 529 Plans for them and deposit the gifts into those accounts.  And, 529 Plans may be front loaded with 5 years of gifting.  We are talking about tons of money assuming Grandpa and Grandma have it and are so inclined.

Estate planning is a crucial step in the Wealth Management process. Without careful (expert) planning, the transfer of wealth likely will not go according to one’s intentions. And, Uncle Sam could end up being the biggest beneficiary. Depending on the financial circumstances, Estate Planning can be an expensive proposition, but the investment in solid planning is cheap insurance compared to the tax an estate will incur in the absence of such planning.

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