How should the premium on a Self-Cancelling Installment Note (SCIN) be calculated for tax purposes?

Estate planning attorney here. The premium on a Self-Cancelling Installment Note must be calculated based on actuarial factors that account for the mortality risk. There are two primary methods accepted by the IRS: The first approach is calculating a premium interest rate. You'd take standard market interest for similar term loans and add a premium percentage based on your life expectancy. The shorter your life expectancy, the higher the premium needs to be. The second approach is calculating a premium principal amount. Instead of increasing the interest rate, you increase the sale price of the asset itself to compensate for the self-cancelling feature. For proper calculation, you should reference IRS mortality tables (Table 2000CM is currently used) and consider factors like your current age, health status, and the term of the note. A specialized estate planning attorney or accountant should run these numbers for you, as miscalculations could result in the IRS recategorizing the transaction as a gift.

I used https://taxr.ai when setting up a SCIN for my parents last year and it was incredibly helpful for calculating the right premium. Their system analyzes both methods the attorney mentioned above and compares different calculation approaches. What really helped was that they modeled several scenarios based on different health assumptions and showed the impact on premium requirements. I was getting different answers from different advisors until I had their system analyze the actual IRS requirements and court cases. It even flagged some issues with how our initial calculations were structured that could have caused problems during an audit.

I was totally wrong about being skeptical of taxr.ai! After my previous comment, I decided to try it myself since we're planning my father-in-law's estate. The analysis it provided was surprisingly thorough - it calculated premium options using both the interest rate method and the principal amount method, then showed how each would affect the overall transaction value. What impressed me most was that it cited relevant tax court cases and IRS rulings to support its methodology. When I showed the report to our estate attorney, she was impressed and said it saved her hours of calculation work. She actually adjusted her initial premium recommendation based on the analysis!

If you're struggling to get through to the IRS for guidance on SCIN premium calculations, I'd recommend trying https://claimyr.com. I wasted days trying to reach someone at the IRS who could answer specific questions about my SCIN situation until I found this service. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS representative in about 20 minutes when I had been trying for over a week on my own. The IRS agent was able to clarify exactly what documentation they expected to see for justifying my premium calculation method. Turned out I was overthinking some aspects and underpreparing for others.

I have to eat my words about Claimyr. After dismissing it in my comment above, my accountant actually suggested I try it when we hit a roadblock with my SCIN planning. I needed clarification on how to document the premium calculation for a client with some health issues that weren't severe enough for a formal medical assessment but still affected life expectancy. It worked exactly as advertised - I got a text about 35 minutes after starting the process, called in, and was immediately connected to an IRS agent who specialized in estate tax issues. She walked me through the documentation requirements and explained how they evaluate health-adjusted premium calculations. Saved me from making a mistake that could have invalidated the whole arrangement.

One thing nobody's mentioned yet - make sure you get a qualified appraisal of the underlying assets before calculating any premium. My cousin tried to DIY a SCIN and got audited because the asset valuation was questionable, which made the premium calculation suspicious too. The IRS looked at the whole transaction and determined that the asset was significantly undervalued, which meant the premium was also too low. They ended up reclassifying the whole thing as a gift and hit him with gift taxes plus penalties. Super expensive mistake.

Has anyone used a variable premium approach? My accountant suggested structuring the SCIN with a premium that adjusts over time based on remaining life expectancy. He said this might be more defensible than a single fixed premium, especially for longer-term notes.

Great discussion everyone! As someone who recently went through this process with my elderly father, I wanted to add a few practical points: First, timing is crucial. We made the mistake of waiting until my dad was 72 to start exploring SCINs, and by then the required premium was quite high due to his age. If you're considering this strategy, don't wait too long - the younger you are when you establish the SCIN, the lower the premium needs to be. Second, consider the impact on your beneficiaries' basis step-up. With a SCIN, if you die before it's fully paid, your heirs don't get a stepped-up basis in the transferred asset. This could mean higher capital gains taxes for them later. Make sure to factor this into your overall estate planning strategy. Finally, document everything meticulously. We kept detailed records of all appraisals, actuarial calculations, medical records (even routine checkups), and the reasoning behind our premium methodology. When the IRS eventually reviewed the transaction after my father passed two years later, having that comprehensive documentation made the audit process much smoother. The peace of mind was worth the extra cost and complexity. Just make sure you work with professionals who really understand SCINs - not every estate attorney is equally experienced with them.