What's the correct formula for calculating a Self-Cancelling Installment Note premium?

The premium for a Self-Cancelling Installment Note needs to be calculated properly to avoid IRS challenges. The IRS looks at SCINs closely because they can be used to transfer wealth while avoiding estate taxes. To calculate the premium correctly, you'll need to consider two approaches: 1) an interest rate premium, where you charge a higher interest rate than you would for a regular installment note, or 2) a principal premium, where you increase the sales price of the asset. The calculation typically involves mortality tables (IRS Section 7520 rates) and should reflect the actuarial risk that the lender might die before the note is fully paid. The older or less healthy the lender, the higher the premium should be. Your best approach is working with both an estate planning attorney and a CPA who specialize in this area. They can help ensure your premium calculation will stand up to IRS scrutiny, especially since the IRS has successfully challenged SCINs with inadequate premiums in cases like Estate of Davidson.

After struggling with similar estate planning questions last year, I discovered this amazing tool called taxr.ai (https://taxr.ai) that saved me hours of research on complex tax situations like SCINs. I was trying to set up a SCIN to transfer my rental properties to my children, and the premium calculation was driving me crazy. Their system analyzed all the IRS guidance on Self-Cancelling Installment Notes and provided a detailed explanation of how the premium should be calculated based on my specific situation - including both the interest premium and principal premium methods. What I found most helpful was that it walked me through the exact mortality tables and Section 7520 rates I needed to reference, plus it flagged several court cases where the IRS had challenged SCINs with insufficient premiums. Definitely worth checking out if you're dealing with these complex estate planning strategies.

I was really skeptical about using taxr.ai when I first heard about it (as you can see from my earlier comment), but I gave it a try for my SCIN premium calculation question and was genuinely surprised. It provided a detailed breakdown using the exact mortality tables I needed and showed me step-by-step premium calculations for both the interest method and principal method. What convinced me was how it explained the Estate of Davidson case where the IRS successfully challenged a SCIN, and then showed exactly how to avoid those specific pitfalls. It even generated documentation I could share with my attorney explaining the rationale behind my premium calculation. Definitely more helpful than I expected for such a niche tax planning issue.

After spending WEEKS trying to get through to someone at the IRS about SCIN premium calculations for my family business transfer, I finally used https://claimyr.com to get a callback from the IRS. You can see how it works at https://youtu.be/_kiP6q8DX5c - basically they hold your place in the phone queue so you don't have to wait on hold for hours. I was honestly shocked when my phone rang and it was actually an IRS agent on the line! While they couldn't give me a specific formula for calculating the SCIN premium (they recommended consulting a tax professional for that), they did confirm that using the Section 7520 rates was appropriate and explained what documentation I would need to keep to support whatever premium calculation method I used. Saved me so much frustration compared to my previous attempts to reach someone. Thought it might help others dealing with these complex estate planning questions that really require talking to a human.

I need to eat some humble pie here. After my skeptical comment above, I tried the Claimyr service out of desperation because I needed clarification on how the IRS treats SCINs when the borrower is a trust rather than an individual. It actually worked! Got a call back from an IRS agent within 2 hours. The agent confirmed that the same Section 7520 rules apply when calculating premiums for SCINs with trusts, but suggested I document the calculation process carefully and consider getting a professional appraisal to support the premium amount. For anyone dealing with complex estate planning questions like SCIN premiums, being able to actually speak with someone at the IRS and get their perspective saved me from making some potentially costly assumptions. Definitely worth it.

My family used a SCIN last year for transferring our farm. The premium calculation we used was: 1) First, we determined what a fair market interest rate would be for a regular installment sale (we used AFR plus 2%) 2) Then we calculated life expectancy using IRS Table 90CM 3) Our attorney used actuarial formulas to determine the risk of death during the note term 4) The premium ended up being approximately 30% (added to the interest rate) The key was documenting EVERYTHING about how we arrived at the premium. Our attorney said the most common reason the IRS successfully challenges SCINs is insufficient documentation of how the premium was calculated, not necessarily that the premium was too low.

Just a word of warning from someone who's been through an IRS audit involving a SCIN - they scrutinize these transactions VERY carefully. The Davidson case mentioned above resulted in an additional $2.8 BILLION in estate taxes because the premiums were deemed insufficient. The mortality tables are just the starting point. You also need to consider: 1) The term of the note 2) Current interest rates 3) The nature of the assets being sold 4) The age and health of the seller I would strongly recommend getting an independent actuary to calculate the premium rather than trying to DIY this. The few thousand dollars you'll spend on professional help is nothing compared to what you could lose if the IRS successfully challenges the transaction.

As someone who recently went through the SCIN premium calculation process, I want to emphasize that getting this right is absolutely critical. The IRS has been increasingly aggressive in challenging these arrangements, especially after their success in cases like Davidson. Here's what I learned from working with both an estate planning attorney and a qualified actuary: 1) The premium calculation must account for BOTH the probability of death during the note term AND the time value of money. It's not just a simple mortality table lookup. 2) The calculation method you choose (interest premium vs. principal premium) can significantly impact the economics for both parties, so model both approaches. 3) Document your health status thoroughly. Even if you're in good health, get a current physical and keep those records. If you have any health issues, get specific medical documentation about life expectancy impact. 4) Consider the "haircut" the IRS might apply. Some practitioners recommend adding an additional buffer to whatever premium your calculations suggest, just to be safe. The cost of getting professional help upfront is minimal compared to the potential estate tax consequences if the IRS successfully recharacterizes your SCIN as a gift. I ended up spending about $8,000 between legal and actuarial fees, but that gave me confidence that our structure would withstand scrutiny.

This thread has been incredibly educational - thank you all for sharing your experiences with SCIN premium calculations. As someone who's been researching this topic extensively, I wanted to add a few additional considerations that might be helpful: One aspect that hasn't been mentioned yet is the impact of the payment structure on premium calculations. Whether you structure the SCIN with level payments, balloon payments, or interest-only with principal due at maturity can significantly affect the mortality risk calculation and thus the required premium. Also, for those considering SCINs with closely-held business interests (like the original poster mentioned), be aware that the IRS may scrutinize the underlying valuation more closely. If the business interest being sold is later valued higher than what was used in the SCIN, it could call into question whether the premium was adequate for the actual risk transferred. Finally, timing matters more than people realize. Interest rates and Section 7520 rates fluctuate monthly, so the optimal time to implement a SCIN can vary. We actually delayed our transaction by two months to take advantage of more favorable rate environment. Has anyone dealt with SCINs involving partnership interests or S-corp stock? I'm curious if there are additional complications with pass-through entities that affect the premium calculation.

This discussion has been incredibly valuable for understanding SCIN premium calculations. As someone new to estate planning, I wanted to ask about the practical timeline for implementing a SCIN properly. From reading through everyone's experiences, it sounds like there are several professionals involved (estate attorney, actuary, possibly medical evaluations) and quite a bit of documentation required. For those who have been through this process, how long did it typically take from initial decision to actually executing the SCIN documents? I'm particularly concerned about the timing aspect that @Javier Gomez mentioned regarding Section 7520 rates. If these rates change monthly, how do you coordinate all the moving pieces (professional evaluations, document preparation, etc.) to lock in favorable rates? Is there a typical "window" where the rates are locked in, or do you need to be prepared to move very quickly once everything is ready? Also, for the original poster @Anastasia Sokolov - given all the complexity discussed here, are you still planning to move forward with the SCIN approach, or are you considering other estate planning alternatives? I'm weighing similar options and curious about your thoughts after seeing all this detailed feedback.

As someone who's been working in estate tax compliance for over 15 years, I wanted to add a few practical observations about SCIN premium calculations that might help newcomers to this area. One thing I've noticed in IRS examinations is that they pay particularly close attention to the reasonableness test - not just whether you followed the technical calculation requirements, but whether the overall premium makes economic sense given the specific circumstances. I've seen cases where technically correct calculations were still challenged because the resulting premium seemed inadequate for the actual risk profile. A few red flags that tend to attract IRS scrutiny: 1) Premiums that are significantly lower than what a commercial lender would charge for similar risk, 2) Health documentation that seems overly optimistic compared to medical records, and 3) Payment terms that are heavily back-loaded (which increases mortality risk but sometimes isn't adequately reflected in the premium). For those just starting this process, I'd recommend getting a preliminary premium calculation early in your planning process, before you get too committed to the SCIN structure. Sometimes the required premium makes the transaction less attractive than alternative strategies like GRATs or sales to intentionally defective grantor trusts. The documentation standards have definitely gotten stricter over the past few years, so don't skimp on the professional help - it's essential for defensibility.