Self Cancelling Promissory Notes


A Self-Canceling Installment Note (SCIN) typically involves the sale of an asset, such as real estate, stock, or a business interest by a client to a family member, in exchange for an installment note or promissory note. The client who is the seller serves and as the Lender by financing the sale of the asset through a loan to the purchaser (family member), which is paid back in periodic installments, which may be monthly or annually, over a specified term.

But unlike a typical promissory note, a SCIN includes a provision wherein the unpaid balance is canceled if the Seller (holder of the note) passes away prior to the term of the note ends and the borrower does not have to make any further installment payments.  The objective of this type of note is to exclude the unpaid balance of the note from the Seller/Lender’s estate, diminishing the client’s estate tax liability.  The downside of this type of note is that the lender typically has to charge a higher interest rate to the borrower than a regular promissory note, due to the potential benefit of the note canceling at the death of the Lender, and if the lender lives longer than the term of the note, the benefits of the SCIN are diminished.