NaviPlan® Select v12.0 functional documentation
Estate settlement liquidation ordering
NaviPlan Select v12.0 Level 1 Level 2
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 plan levels?
Other sources on this topic:
Retirement cash flow and estate settlement in the year of death
Asset availability options in survivor analysis
Payoff options at death
Deficit coverage, surplus reallocation and automatic account redemption
Pre-death family cash flow deficits are covered using normal deficit coverage methods (see
Other sources on this topic above for more information). Once pre-death cash flow deficits
are covered 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. In NaviPlan this process is referred to as estate settlement,
and this document explains NaviPlan’s 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 cannot be modified.
While the focus of this document is an explanation of estate settlement in Level 2 Plans, an
explanation of how estate settlement applies to Level 1 Plans is also provided. The Estate
Planning module is available in Level 2 Plans only.
What items are included in estate needs?
Unless indicated, the estate needs listed below are located on the Set Goals section – Estate
Planning category – Assumptions and Estate Expenses pages. Estate needs are listed in the
Estate Planning Liquidity report and include the following items:
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 on the Assumptions tab.
Probate and administration fees on the Assumptions tab.
Final estate expenses on the Estate Expenses page.
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Additional Lump Sum Needs on the Estate
Expenses page.
Liabilities when the Payoff at first death
(from estate) option is selected under Payoff
Options at Death (located in the Other Options
section of the Liabilities Details dialog box).
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 because of the lack of
assets available under deficit
coverage rules.
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) 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
2005–2011).
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).
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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 order 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 Results section – Analyze Goals category – Scenarios page –
Estate Planning selected – Asset Estate Details tab), 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)
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
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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 plan levels?
Level 1 Plans do not have an estate planning module and estate settlement occurs behind
the scenes using the same defaults as a Level 2 Plan. Level 2 Plans provide control for asset
availability at first death in the survivor analysis, so this default can be modified. Level 2
Plans also contain estate planning illustrations in client reports.
NaviPlan uses the following defaults:
A Simple Will scenario is assumed.
Estate taxes, probate, and administration fees (and liabilities where Payoff at death is
selected in Level 2) are settled.
Probate and administration fees are each 1% of assets subject to probate and can be
modified on the Assumptions page (Set Goals section – Estate Planning category –
Estate Planning page).
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 flow at death in the Current Year Cash
Flow report (Reports menu – Cash Flow – Details), created for the year of death, under the
line item Goal Expenses. For further information on this topic, please refer to the Payoff
options at death functional document found under Other sources on this topic.
Did you know? In Level 2 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 Milestones page (Plan Management section – Assumptions category) with
those entered on the Assumptions tab (Set Goals section – Estate Planning category –
Assumptions page), and then generate the Cash Flow Details report (Reports menu – Cash
Flow – Details) for the year of death or a Single Asset Details report (Reports menu – Net
Worth – Assets) for the specific asset.
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