NaviPlan® functional documentation
Estate settlement
NaviPlan Standard v11.0.2.0 Level 1 Level 2 Level 3
This functional document addresses the following questions:
What items are included in estate needs?
In what order are assets liquidated to cover estate needs?
How does estate settlement apply to the different levels?
Other sources on this topic:
Asset Availability options in survivor income analysis
Automatic redemption strategy for deficit coverage
Pre-death family cash flow deficits are satisfied using normal deficit coverage methods. (See
Other sources on this topic above for more information on deficit coverage.) Once pre-death
cash flow deficits are satisfied to the extent possible under deficit coverage rules in the year
of death, any remaining needs of the decedent and survivor are then isolated from one
another. Remaining deficits of the survivor that are unmet in the year of death are
accumulated to the next year and continue to be met by normal deficit coverage methods
(except in the survivor analysis, where there is another round of deficit coverage in the year
of death for the survivor after the estate is settled and life insurance proceeds are
transferred to the survivor). A separate account liquidation ordering is applied to pay for
estate needs of the decedent in the year of death and this process is referred to as ‘estate
settlement’ in NaviPlan. This document explains the estate settlement process in detail.
When a client dies, NaviPlan pays certain estate expenses before performing any
testamentary transfers. If the estate lacks sufficient cash to cover estate needs, NaviPlan
liquidates assets to cover them. Assets are liquidated in a predefined order (as explained
later in this document) and the order is not modifiable. The following explanation of estate
settlement is for Level 3 Plans, but this paper concludes by outlining how estate settlement
applies to Level 1 and 2 Plans.
What items are included in estate needs?
The following items are included in estate needs:
Federal estate taxes and estate taxes calculated by NaviPlan, which are not otherwise
payable by a qualified terminable interest property trust (QTIP) or a marital trust.
State death taxes (Goals section – Estate Planning – Objectives page – Assumptions
tab).
Probate and administrative fees (Goals section – Estate Planning – Objectives page –
Assumptions tab).
Final estate expenses (Goals section – Estate Planning – Objectives page – Estate
Expenses tab).
Liabilities with one of these options selected: Payoff at first death (from estate), Payoff
at owner’s death (from estate), or Payoff at death (from estate).
Pre-death accumulated deficits of the decedent (pre-death lump-sum expenses in the
year of death and pre-death income taxes can contribute to the deficit). These are
decedent deficits unresolved by normal deficit coverage methods in the year of death
due to lack of assets available under deficit coverage rules.
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Estate needs are listed in the Estate Planning Liquidity report.
REPORTS MENU– ESTATE PLANNING – GENERAL – DETAILED – LIQUIDITY NEEDS
Did you know? Generation-skipping transfer taxes (GSTT) on bequests and IRD taxes
triggered by the bequeathing of qualified assets are not included as part of estate needs,
but are paid out of the bequeathed asset. The same applies to assets transferred to QTIP
trusts.
In what order are assets liquidated to cover estate needs?
Available assets are liquidated to cover estate needs on December 31 of the year of death.
Liquidations are large enough to cover any estate needs triggered by the liquidation
(accurate to within $10). The Summary Asset Distribution report (Reports menu – Estate
Planning – General – Summary category) lists the assets and cash surplus used.
Assets are liquidated in the following order to the extent required to cover estate needs:
1. Pre-death cash flow surplus of the decedent, including life insurance proceeds where
the beneficiary of the policy is the decedent.
Exception: If the estate scenario contains a generic testamentary, QTIP or marital
trust with a funding option of Remainder, then cash flow surplus remaining after
probate and administrative fees, final expenses, and liabilities are paid (but before
estate taxes are paid) is used after #2 below. In other words, estate expenses
remaining at this point are covered first using funds designated for credit shelter
trusts/generic testamentary trusts (maximum exclusion amount), and then by the
remaining cash flow surplus.
2. Assets funded into new credit shelter trusts or generic testamentary trusts with the
Maximum Exclusion funding option selected.
Exception: Note that these trust assets are not used to cover the state death tax
portion of estate needs in years when the state death tax is treated as a deduction
(i.e., for As legislated and No sunset tax options, this exception applies to the years
2005–2009; for No sunset and no estate tax repeal, 2005 and beyond).
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3. Life insurance proceeds where the beneficiary of the policy is the surviving client.
This does not include the proceeds of policies where the insured is Other, and it does
not include the proceeds of policies where the owner is the surviving client and the
insured is the decedent (or Joint 1st to die).
4. Non-qualified accounts, owned by the decedent, not specifically bequeathed and not
transferred to a testamentary trust.
In basis carryover years, the existing regular deficit coverage ordering is used to
liquidate the accounts. NaviPlan redeems the account prior to the basis step-up using
a formula to solve for the amount (accurate to within $10).
5. Fifty percent of joint non-qualified, and 50% of community property non-qualified
accounts (where the owner is the decedent - titled portion only), not specifically
bequeathed and not transferred to a testamentary trust.
6. Non-qualified accounts and cash surpluses (remainder) funding testamentary trusts.
Assets are liquidated from trusts in the following order. Within each trust type,
assets are liquidated in a random order.
a. Marital trusts or qualified terminable interest property trusts (QTIPs)
b. Generic testamentary trusts
c. Credit shelter trusts
7. Non-qualified accounts specifically bequeathed to the surviving spouse (random
selection) are used and then non-qualified accounts specifically bequeathed to the
beneficiary (random selection) are used.
8. Non-qualified annuities.
9. Qualified accounts owned by the decedent, not specifically bequeathed and not
transferred to a testamentary trust.
10. Qualified accounts owned by the decedent, that are transferred to a testamentary
trust or specifically bequeathed are liquidated in the following order:
a. Accounts manually transferred to marital trusts or QTIPs
b. Accounts manually transferred to credit shelter trusts
c. Accounts passing by beneficiary designation
Optional liquidations
By default, real estate and lifestyle assets are not available for estate settlement. If you
make them available (on the Goals section – Estate Planning – Scenarios page – Asset
Estate Details button), and if estate needs still exist after all the assets listed above have
been liquidated, they are liquidated in the following order. Lifestyle and real estate assets
are redeemed partially if the full amount is not needed.
1. Real estate assets owned by the decedent
2. Fifty percent of joint real estate and 50% of community property real estate assets
where the owner is the decedent (titled portion only)
3. Real estate assets designated for a testamentary trust (in the same order used for
non-qualified accounts)
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4. Bequeathed real estate assets
5. Lifestyle assets owned by the decedent, liquidated in the following order:
a. Other personal assets
b. Personal use property
c. Second residence
d. Residence
6. Fifty percent of joint lifestyle assets and 50% of community property lifestyle assets
where the owner is the decedent (titled portion only)
7. Lifestyle assets designated for a testamentary trust (in the same order used for non-
qualified accounts)
8. Bequeathed lifestyle assets
How does estate settlement apply to the different levels?
Level 1 Plans do not have an estate planning module, while Level 2 Plans only contain
estate planning illustrations in client reports. However, estate settlement for these levels
occurs behind the scenes using Level 3 defaults. (Level 2 provides control for asset
availability at first death in the survivor analysis so this default can be modified.)
Level 3 defaults are as follows:
A Simple Will scenario is assumed
Estate taxes, probate, and administrative fees (and liabilities where Payoff at death is
selected in Level 2) are settled
Probate and administrative fees are each 1% of assets subject to probate
All assets, except lifestyle and real estate assets, are available for estate settlement on
first death in the survivor analysis as well as on first and second death in the estate
analysis
You can see the effects of estate settlement on cash flows at death in the Current Year Cash
Flow report (Reports menu – Cash Flow category), created for the year of death, under the
line item Estate Related Expenses.
Did you know? In Level 3 Plans, to view a detailed analysis of how estate settlement
affects the clients’ cash flow or specific assets, you can match the life expectancy dates
entered on the Plan Management section – Assumptions category – Milestones page with
those entered on the Goals section – Estate Planning category – Objectives page –
Assumptions tab, and then generate the Cash Flow Details report (Reports menu – Cash
Flow category) for the year of death or a Single Asset Detailed report (Reports menu – Net
Worth – Assets category) for the specific asset.
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