Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Structured Sales for Tax-Free Cash Flow
Transcript
- Lucas: So Luna, there's a quiet little tool in the estate planning world that the ultra-wealthy use to sell a business or a big block of stock without taking the full tax hit in one year. It's called a structured sale, and the most elegant version of it is a self-canceling installment note — a SCIN, for short. Luna: I've heard the term, but honestly, it sounds like something that only works if you have a family office and a very patient tax attorney. Lucas: It does, but the core idea is actually pretty simple. Instead of selling an asset for cash and paying capital gains tax on the whole thing immediately, you sell it for a promise to pay over time — an installment note. If the note self-cancels on your death, the remaining payments never become part of your estate. That's the magic. Luna: So you're essentially stretching the gain over years, and then wiping out the unpaid balance when you die. But the IRS is okay with that? Lucas: There's a catch, of course. The IRS requires you to charge an interest rate high enough to account for the fact that the note might never be fully paid. That's called a risk premium. If you price it right, the IRS treats it as a legitimate sale, not a disguised gift. Luna: And if you price it wrong? Lucas: Then you're in the audit zone. The IRS can recharacterize the whole thing as a gift, and suddenly you're dealing with gift tax and penalties. So the premium has to be real, not symbolic. Luna: That's a good reminder that these structures aren't just fill-in-the-blank documents. They need real financial modeling. Lucas: Exactly. And that's why they're mostly used by families that have a financial advisor who can run the numbers and a lawyer who knows the current IRS rates. But when it works, it's a beautiful thing. Luna: Before we dive deeper, I want to say something. You know, if our money conversations have helped you think about a decision differently, whether it's your own estate plan or just how you look at your investments, there's a small way to keep this going. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a tiny ask, but it genuinely helps us keep the podcast ad-free and independent. And we're back to the SCIN. Luna: So give us a real-world example. Who actually uses this? Lucas: Think of a founder in her late fifties who built a manufacturing company worth, say, fifty million dollars. She wants to retire, but she has two kids who want to take over the business. She doesn't want to sell to a stranger, and she also doesn't want to trigger a ten million dollar capital gains tax bill in one shot. Luna: Right, because selling to the kids at fair market value would still be a taxable sale. Lucas: Correct. So she sells the company to a family trust for an installment note. The note pays her a fixed amount each year, say two million dollars, over fifteen years. The gain on each payment is recognized proportionally, so she spreads the tax out over a decade and a half. Luna: And the self-canceling part kicks in if she dies before the fifteen years are up. Lucas: Exactly. The remaining balance is wiped out. It never goes into her estate, so no estate tax on that future stream. And the kids get the business free and clear, with no second tax event. Luna: But doesn't the IRS require that premium to be pretty hefty? I've seen numbers like twenty or thirty percent above the applicable federal rate. Lucas: It can be. The premium is supposed to reflect the actuarial risk of death. So if she's in good health, the premium might be on the lower end, but still meaningful. Over fifteen years, that can add up to millions in extra interest payments. Luna: So the math has to work both ways. She's paying a premium for the tax deferral and the estate exclusion, but she's also getting a steady income stream. Lucas: Right. And in today's rate environment — this is August 2026 — the applicable federal rates are still elevated compared to a few years ago. That actually helps the seller, because the interest she charges is higher, which makes the note more valuable and the risk premium easier to justify. Luna: But there's also the default risk. What if the kids run the business into the ground? Lucas: That's the other side of the coin. If the buyer defaults, the seller is left with a worthless note and a tax problem. The IRS doesn't automatically give you a bad debt deduction for a family loan gone sour. So the due diligence on the buyer's ability to pay is crucial. Luna: I imagine that's why some families use a private trust company to manage the note and the payments, to keep it arm's-length. Lucas: That's a smart move, and it ties into what we covered in episode 142 on private family trust companies. The trust can hold the note, collect payments, and enforce the terms without the emotional baggage of a parent chasing the kids for money. Luna: Now, for our listeners who are thinking, 'I'm not a fifty-million-dollar founder,' is there a smaller-scale version of this? Lucas: Absolutely. The installment sale itself is available to anyone selling an asset for more than its cost basis, whether it's a rental property, a business, or a block of stock. The self-canceling feature is the estate planning overlay that requires the actuarial analysis. But even a plain installment sale can spread a big tax bill over years. Luna: And there's a lesser-known cousin, the private annuity, which works similarly but with different tax treatment. Lucas: Right. A private annuity is another way to convert an asset into lifetime income without an immediate taxable event. But it has its own IRS rules, and the gain recognition is more complex. For most families, the SCIN is the cleaner structure because you know exactly how much you're getting each year. Luna: So what's the biggest mistake you see families make with these? Lucas: Underpricing the note to make it more attractive to the buyer. If the interest rate is below the IRS minimum, the IRS will impute interest, and the whole deal can be recast. Also, not getting a proper actuarial report. The premium has to be based on real mortality tables, not a guess. Luna: And I'd add — not planning for the scenario where the seller lives longer than expected. Then they're stuck with a below-market income stream for decades. Lucas: Exactly. That's why it's called a self-canceling note, not a guaranteed-return note. The seller is betting on their own mortality, which sounds morbid, but it's a financial trade-off. If she lives to ninety, she'll receive every payment, and the estate gets nothing extra. If she passes at seventy, the kids save millions. Luna: It's really a hedge between the seller's lifespan and the family's wealth transfer. Lucas: And in the current environment, with private credit booming, there's another angle. Some family offices are using structured sales to sell assets to private equity funds or other family offices, using the note as a form of seller financing. That's a whole other layer of complexity, but it's becoming more common. Luna: Because the buyer can get leverage without going to a bank, and the seller gets a higher yield than a Treasury bond. Lucas: Right. But then you're dealing with a third-party buyer, so the self-canceling feature usually doesn't apply. You're just doing an installment sale with a corporate note. The estate planning benefit disappears. Luna: So for the SCIN to work, the buyer has to be a family member or a trust for the family's benefit. Lucas: Typically, yes. The IRS pays close attention to sales between family members to make sure they're bona fide. There have been cases where the IRS argued the whole deal was a sham, especially if the buyer never actually paid the note or if the seller stayed in control of the business after the sale. Luna: So you need a real transfer of ownership and control, not a paper transaction. Lucas: That's the one-line takeaway. If you're going to do this, you need to actually hand over the keys. The founder can't stay on the board or keep signing checks. Otherwise, the IRS will see through it. Luna: And what about the tax rate environment? With the current capital gains rates, how much can a structured sale save in real dollars? Lucas: Let's put it this way — if you're selling a fifty million dollar asset with a ten million dollar basis, you're looking at forty million in gains. At the top federal capital gains rate of twenty percent, plus the net investment income tax, you're at around twenty-three point eight percent. That's over nine million in taxes if you sell outright. Luna: Ouch. Lucas: Spread that over fifteen years, and you might pay something like six million in present-value tax dollars, plus the interest premium. The deferral alone can save a couple million in present value, not to mention the estate tax exclusion on the unpaid balance at death. Luna: So it's not a tax dodge, but it's a legitimate way to manage the timing and the total hit. Lucas: Exactly. And it's one of those tools that's been around for decades, but it's not widely known outside of private wealth circles. The IRS hasn't changed the rules much, but the rate environment and the rise of private credit have made it more relevant. Luna: If someone wanted to explore this, what's the first step? Call their CPA? Lucas: Ideally, a tax attorney who does estate planning for business owners. They can run the actuarial numbers and draft the note. A CPA alone might not have the depth. And they should bring in a financial advisor to stress-test the buyer's ability to pay. Luna: So the takeaway is: if you're selling a big asset and want to keep the family business in the family, a structured sale might be worth a conversation. Lucas: And it's one of those rare moves where you can both defer taxes and shrink your estate at the same time. That combination is hard to beat. Luna: Thanks for breaking that down, Lucas. It's a lot clearer now. Lucas: Glad to help. Next week, we'll look at a related tool — the intentionally defective grantor trust. Stay with us.