Deficit Coverage Strategies

• Deficit coverage strategies allow you to specify the order in which accounts are to be redeemed to cover deficits occurring during the pre-retirement period.
• Some trusts are available for deficit coverage through principal distributions, for the purpose of covering end-of-year cash flow deficits for the surviving spouse.
  • You can define the order in which pre-retirement and retirement deficit coverage automatically make principal distributions from included eligible trusts. Furthermore, you can specify an annual maximum for the amount that can be withdrawn from the trust principal. As a planner, this gives you full control over the automatic distributions.

• When an expense causes a deficit, NaviPlan will cover the expense by redeeming assets.
  • Note: An expense must have the Cover any pre-retirement deficits created by this expense option selected from the Expense Details dialog box in order for NaviPlan to redeem assets to cover the expense.
• Assets that are not allocated to any goals are used before the selected pre-retirement deficit coverage order for redeeming assets begins.

• Only the following types of funded trusts are available for a manual principal distributions strategy:
  • Marital (not required to distribute 100% of the income)
  • QTIPs/State QTIPs (required to distribute 100% of the income)
  • CSTs
  • Irrevocable ^‡‡
  • First-to-die ILITs^‡
  • Generic Testamentary Trust

^‡ Except for ILITs, grantor trusts will not be made available for principal distributions. For these trusts, NaviPlan will not allow principal distributions to be made until after the insured's death, which means no special tax treatment is required (i.e. the trust will always be responsible for paying the tax).

^‡‡ Irrevocable type trusts are not always eligible for principal distributions. If the Transfer Income to Surviving Client on Death option is selected, the trust will no longer be eligible for Principal distributions.

1. From Pre-Retirement Deficit Coverage Order, select the Redeem from accounts to cover deficits in pre-retirement period option.
2. You have two options for the method by which to redeem accounts:
   • To specify the redemption order by account type, select an option from the menu. You may skip the following steps.
   • To specify redemption order by individual account, select View/Modify Deficit Coverage Order and proceed to step 3.
3. From the Manual Deficit Coverage Order dialog box, Select the Modify the deficit coverage order option.
4. Use Move Up and Move Down to re-order assets. Assets will be redeemed in descending order.
   Note: You can also use the Account Sorting order menu to sort accounts in this dialog box. Make a selection from this dialog box and click Apply Sort.
5. When you are satisfied with these options, click OK.
   

• Selecting non-qualified- Equity Compensation from either the Choose the order in which accounts are redeemed to cover pre-retirement deficits menu or the Account Sorting order menu will indicate to NaviPlan that non-qualified accounts should be liquidated before other account types.
  These accounts are further ordered by the following criteria (in descending order):
  • Cost Basis: Accounts are ordered by their ratio of cost basis to market value. Accounts with the highest ratio are used first to minimize capital gains taxes.
  • Return Rate: The account with the lowest rate of return is used first.
    Note: For all Plan Scenarios other than the Current Plan Scenario, all accounts earn the rate of return specified for that scenario on the Objectives tab.
  • Market Value: Accounts are redeemed based on start-of-year market value from lowest to highest.
  • Asset category: Asset categories are redeemed in the following order:
    • cash account
    • mutual fund
    • investment portfolio
  • Alphabetical order: Accounts are redeemed in alphabetical order based on your entry in the Description field.
• Non-qualified annuities (not paying out)
  • Annuities with the Income Option set to Withdrawals as Needed are used first.
  • Then, annuities are ordered by their ratio of cost basis to market value. Annuities with the highest ratio are used first to minimize capital gains.
  • When annuities have the same ratio have of cost basis to market value, the annuity with the lowest pre-annuitization rate is used first.
    Note: For all Plan Scenarios other than the Current Plan Scenario, all accounts earn the rate of return specified for that scenario on the Objectives tab.
  • If necessary, deficits between the clients are shifted to avoid penalty taxes that may arise from early withdrawals from annuities.

• Roth Accounts and annuities are ordered by their total return rates, from the lowest to the highest.
  Note: Accounts with the same return rate are ordered alphabetically.

• Accounts and annuities are ordered by their ratio of qualified basis to qualified market value from highest to lowest. Accounts and annuities with the highest ratio are used first to minimize income taxes.
  • Where the ratio is equal, accounts and annuities are ordered by their total return rates, from highest to lowest.
  • Where both the ratio and the total return rate are equal, accounts and annuities are ordered alphabetically.
• Deficits between the clients are shifted to avoid penalty taxes that may arise due to early distributions from qualified accounts or annuities.

• The initial ordering of accounts in this list depends on the predefined deficit coverage order used previously.
• You can re-order this list to fit the needs of your clients.
  • In order to use this feature, you must select Modify the deficit coverage order from the Manual Deficit Coverage Order dialog box.