Kathleen ReynoldsKeymasterOctober 23, 2022 at 5:00 pmPost count: 428
Calculates the required principal premium and the interest premium on a self-canceling installment note for gift and estate tax purposes. It also calculates repayment schedules showing interest, principal, basis recovery, and gain for each scheduled payment.
An installment note is a promissory note (evidence of debt) usually issued in conjunction with the sale of property where at least one payment is to be received by the seller after the close of the taxable year in which the sale occurs. A self-canceling installment note is an installment note which contains a provision under which the buyer’s obligation to pay automatically ceases in the event a specified person, called the measuring or reference life (usually the seller), dies before the end of the term of the note.
- Transfer Date Enter the month and year for the installment sale. See Transition Period Notes
- Discount Rate Enter the IRC §7520 discount rate (which is 120% of the applicable federal midterm rate, rounded to the nearest 2/10ths of 1 percent) for the month in which the transaction is completed. The default for this entry is the current month’s Section 7520 rate from the AFR table stored in the program.
- FMV of Property Enter the fair market value of the property being sold.
- Cost Basis Enter the cost basis in the property being sold.
- Recapture (Sec. 1245 or 1250) Enter the IRC §1245 (personal property) or §1250 (real estate) depreciation recapture, if any.
- Initial Down Payment Enter the down payment or other property (boot) paid to seller in year of sale.
- Age(s) Enter the age (to the nearest birthday) of the seller(s) (or measuring life, if different). Enter “0” if there is no second measuring life.
- Term of Note Enter the term of the installment note (which must be less than the remaining life expectancy of the seller (or measuring life, if different).
- Type of Note Select Self-Amortizing, Level Principal, or Interest-Only. Self-amortizing means that the combined principal and interest payments are constant over the term of the note (so the interest component of each payment will decline over the term of the note, while the principal component increases). Level Principal means that the principal of the note is paid in equal annual installments, with annual interest payments based on the principal then outstanding (so the interest payments will decline over the term of the note). Interest Only means that only interest is paid over the term of the note, with a balloon payment of principal at the end of the note.
- Annuity Valuation Select the Complete Method or the Curtate Method. These are the two possible methods for valuing periodic payments. The IRS consistently values annuities and other periodic payments using the “complete annuity” assumption, which is that, if the recipient dies during the year, the recipient receives a pro-rata payment for the year, regardless of whether or not the recipient is entitled to any payment under the governing document. The other method is known as a “curtate annuity”, and it assumes that the recipient receives nothing if the recipient dies before the end of the year.
- No-Risk-Premium Market Interest Rate Enter a market rate of interest for the note, which should not be less than the applicable federal rate for the month in which the sale occurs. The applicable federal rate for a note of not more than three years will be the federal short-term rate, the applicable federal rate for a note of more than three years but not more than nine years will be the federal mid-term rate, and the applicable federal rate for a note of more than nine years will be the federal long-term rate.
- Payment Period Select the number of payments that will be made each year to the beneficiary (Annual, Semiannual, Quarterly, Monthly, Quarterly, and Weekly).
- Amortization or Principal-Recovery Period of Note Enter the amortization or principal-recovery period of the note (which must be equal to or greater than the term of the installment note).
- Balloon Payment Select the check box to use an amortization or principal-recovery period that is greater than the term of the note, so that there will be a balloon payment of unpaid principal at the end of the note.
- View Repayments Click the button and the repayment schedules will show the amount of principal and interest paid each year, the amount of capital gain and return of basis attributable to each payment of principal, and the principal balance remaining at the end of the year.
When is it Used?
What are the Estate Consequences?
How should a SCIN be structured?
What Interest Rate or Discount Rate Should Be Used In A SCIN?
What Is the Maximum Allowable Term of a Self-Canceling Installment Note?
How Is the Risk Premium Determined?
Which Risk Is Preferable?
Is It Possible to Split the Risk Premium between Principal and Interest?
How Can the Analyses Be Adjusted to Reflect Greater-Than-Average Mortality Risk?
Can the Life of Someone Other Than the Seller Be Used to Trigger the Cancellation Feature?
What Kind of Repayment Schedules Are Used in SCINs?
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