Blogging from Heckerling – Transferring Wealth to Younger Family Members

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015

Steve Akers of Bessemer Trust spoke about self-cancelling installment notes (“SCINs”) and private annuities.   These techniques are typically used to transfer wealth to younger family members at no gift or estate tax cost. However, they are most successful if the senior family member dies prematurely. Therefore, the ideal candidate is someone in poor health, whose death is imminent.

With a SCIN, a parent typically sells property to a child in exchange for a note that is cancelled if the parent dies prior to the expiration of the note term.  As a result, the remaining note payments that would have been payable had the parent lived are not includible in the parent’s estate.  Obviously, the sooner the parent dies, the better, as fewer assets will be includible in his estate.   

Nevertheless, SCINs have inherent uncertainties.  Because of the mortality risk, the seller must be compensated for the note’s potential cancellation at death by either a higher purchase price or a higher interest rate.   However, there is no universal agreement as to how to determine the premium because there is no clear answer concerning how to value the payments in terms of the appropriate mortality tables and discount rate.  In addition, if the SCIN’s term equals or exceeds the seller’s life expectancy, the SCIN might be characterized as a private annuity.  

With a private annuity, a parent typically transfers property to a child in exchange for fixed annual payments for the remainder of his lifetime.  If the parent dies before his anticipated life expectancy, he won’t receive payments equal to the value of what he transferred, thereby reducing his estate.  A potential risk, however, is that if the annuitant outlives his life expectancy, he will receive “too much” for the transferred property.  Because of adverse income tax effects that likely apply if an asset is transferred to an individual in exchange for a private annuity, it is more attractive to do the transaction with a grantor trust for the benefit of the annuitant’s family.  However, this strategy has its own issues, including determining how much the trust must have so that it will be deemed capable of satisfying the annuity for the annuitant’s life expectancy.

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.