How is a Self-Cancelling Promissory Note Treated in Estate Death Tax Administration

Understanding What a Self-Cancelling Note Means

Self Canceling NoteUnder federal law “[t]he value of a gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”  I.R.C. § 2033.  In the context of the estate tax, when properly written, a self-cancelling installment note (“SCIN”) functions to remove from the estate the property that is the subject of the installment note leaving no taxable asset in its place.

An installment note reflects an agreement related to an installment sale.  As defined by the code, “‘installment sale’ means a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs.”   I.R.C. § 453 (b)(1).  A self-cancelling installment note represents “[a] debt obligation that is automatically extinguished at the creditor’s death.  Any remaining balance on the note becomes uncollectible.  Self-cancelling notes are typically used in estate planning.

To be recognized a SCIN, the transaction must be bona fide, for full and adequate consideration, the seller must not retain control over the property, the cancellation provision must be bargained-for consideration, and the terms of the alleged note must not exceed the seller’s life expectancy.  In addition, the seller must receive a risk premium as consideration for the cancellation clause since it may prevent seller from receipt of the full purchase price.  The risk premium is generally reflected as an increased purchase price or interest rate.  (“To obtain benefit [of a SCIN, a] premium is required to be paid…  A premium must be paid by the buyer to ensure that no gift arises from the cancellation provision.”)

“[A] SCIN signed by family members is presumed to be a gift and not a bona fide transaction.”  One who shows a real expectation of repayment and intent to enforce the collection of indebtedness may rebut the presumption.  As an intra-family transaction, the estate has the burden to prove that “there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of indebtedness.”  Where the evidence is clear there was no obligation that borrowers repay the loan, the SCIN will be rejected.

The decedent offered to sell 231 shares of corporate stock and real property to his -corporation in exchange for promissory notes.  The sale was considered to be a “bona fide sale for adequate and full consideration.”  The promissory notes “provided for 4 percent interest and equal monthly payments” over the course of nine years and seven months.  At 72 years of age, decedent was in average health.  The court found “[t]here was nothing to indicate that his life expectancy would be shorter than the approximate 10 years of life expectancy which was indicated by generally accepted mortality tables.  Nearly ten months later, the decedent was diagnosed with terminal cancer for which he underwent treatment.  The installment note by which the decedent sold the stock and property to the corporation contained a cancellation clause:  “unless sooner paid, all sums, whether principal or interest shall be deemed cancelled and extinguished as though paid upon death…”  The decedent received timely payments under the notes until the date of his death.  According to the executor, the unpaid balances of the notes had no value at decedent’s death.  The estate argued the loan obligation is a self-cancelling installment note (“SCIN”) extinguished at decedent’s death pursuant to the agreement between borrowers and decedent.  In accepting the Federal Form 706 as filed, the estate contended that the IRS improperly included the loan principal and taxation erred by including the loan proceeds in the gross estate.  In support of the assessment, New Jersey argued the loan constituted a gift of money conferred on the borrowers at decedent’s date of death, the equivalent of a testamentary disposition.  The state further contended the court should look to standards established by the New Jersey inheritance tax statute and the interpretive case law, and extend that law to this case.  Specifically, the state argued that a SCIN constitutes a gift in contemplation of death subject to inheritance tax when made within three years of decedent’s death.  It contended the SCIN represents evidence of a debt extinguished at decedent’s death.  Fortunately, the NJ Tax Court rejected the state’s reliance on principles of the New Jersey inheritance tax.  The court found no basis to extend that law to an SCIN.  Moreover, the state’s position disregards federal precedent that recognizes a SCIN as a valid device for the avoidance of federal estate tax.  The NJ tax court is guided by federal precedent where the issue before the court is governed by federal law.

To discuss your NJ estate administration matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq., a Freehold Township, Monmouth County NJ Probate and Estate Administration Attorney

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Can the Legal Guardian or Parent of a Minor Child Set Up a Protective Trust?       

  • This article discusses support trusts for minor children when a parent dies.
  • New Jersey has a statute(s) that specifies the provisions that must be included in the trust.
  • A surviving parent or legal guardian of a minor child can set up a trust.

The guardian statutes in New Jersey provide a specific procedure for a surviving parent and/or legal guardian to set up a trust on behalf of their minor child who inherits property from their deceased father, mother, grandparent, or for that matter, any person.

Under N.J.S.A. §3B:12-54.1, a parent or guardian may apply to the Superior Court for permission to set up a support trust for the benefit of the child or children when they will be receiving cash, real estate and/or assets from the estate of a deceased parent who dies without a Last Will when they are under 18 years of age.

What Provisions Must Be Included in the Minor’s Trust

The statute specifies the terms that must be set forth in the trust. While the statute uses the word may, it is likely the court will order that certain language be made “mandatory” in the trust. The mandatory provisions are:

  • The trust assets and the income shall be used for the exclusive benefit of the beneficiary, including but not limited to the beneficiary’s health, support, maintenance and education, including college and post-graduate work, in the discretion of the trustees;
  • The beneficiary shall have the right to request distributions of trust principal as follows: one-third of the principal after attaining the age of 25 years, one-half of the then balance after attaining the age of 30 years, and all of the then balance after attaining the age of 35 years; or at such other ages as the court, in its discretion, shall determine;
  • Should the beneficiary die prior to the termination of the trust, the remaining trust principal and accrued income shall be distributed to the beneficiary’s estate;
  • Two individual trustees, or one corporate trustee, or a combination thereof, shall serve at all times, with or without bond, as the court shall determine in its discretion; and

The last part of the statute is interesting because a single parent is going to have to find another person to help him or her run the trust, and if the spouse has no other living relatives, counsel will have to ask the court to appoint the surviving parent solely as the trustee.

Understanding the Circumstances the Court Will Use to Approve a Trust

The statute finally provides a list of factors a court should consider before making its decision. They include:

  • The amount of money involved;
  • The availability of other resources for current maintenance and support;
  • The stability of the entity offering an investment covered by the application;
  • Income tax consequences;
  • Any special needs or vulnerabilities of the minor;
  • The financial and psychological consequences of putting all or a substantial part of the minor’s estate out of reach for a long period of time.

Protecting the inheritance of a young person for their adult years is of critical importance.  A support trust is a cost-effective and powerful tool to achieve this goal.

To discuss your NJ Trust, Estate Probate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.

Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Trust Law Attorney

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Understanding the Law of Tenancy by the Entirety When a Marital Home is Owned by a Husband and Wife

Recently, our associate prepared a memo about executing a creditor’s judgment upon a tenancy by the entirety.  As a result, I read a few of the cases he cited in his memo.  These cases offered a great discussion regarding the laws on tenancy by the entirety that I believe you will find interesting.

What is a Tenancy by the Entirety?  (Hint:  It’s Not a Rental)

A tenancy by the entirety involves the ownership of a personal residence by a husband and wife.  The nature of a tenancy by the entirety is well established under New Jersey law.  It is an undivided legal ownership interest in the marital home for the joint lives of each spouse while married subject to the right of survivorship upon the death of the first spouse.  So what does this mean?  Simply, it means that a spouse’s right of survivorship is not transferable by either spouse while both are alive and married.  Each spouse has a life estate for their joint lives that is not subject to execution by a judgment creditor.  It is well settled that a tenancy by the entirety in a marital residence cannot be broken up at the request of a judgment creditor of one spouse.  And although a judgment creditor may be entitled to an accounting of rents during the non-debtor spouse’s exclusive occupancy, that right must be offset by a fair contribution to the mortgage, tax, insurance, and maintenance expenses incurred by the non-debtor spouse – usually a wash.  Consequently, the value of one spouse’s interest in the tenancy by the entirety during the marriage is ordinarily limited to the survivorship right and is regarded as having nominal value only. 

So What Happens if the Spouses Divorce?

Upon divorce, the tenancy by the entirety, by operation of law, a tenancy in common and the interests of each spouse is one-half and can be seized and sold by a creditor.

It is only upon death or divorce that the property attains a value to creditors or New Jersey and its Medicaid then can collect on.

Contact me personally today to discuss your New Jersey real estate or elder law matter.  I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns.  You can reach me toll free at (855) 376-5291 or e-mail me at

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Real Estate & Elder Law Attorney

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Ever since my initial encounter with Hanlon Niemann & Wright (I was with my father), the entire staff was professional, efficient, courteous, and very approachable.  All of our needs were met in a timely manner.  We even had fun with Fred.  The experience was terrific.  I would highly recommend them to everyone.
Lois Mahler

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