The Internal Revenue Service defines funeral trusts as “a ‘pooled Income Fund’ that is established by a funeral home/cemetery and to which a person transfers assets to cover future funeral or burial costs.” This can save survivors a lot and help them make difficult decisions. As a condition for admission, some nursing homes require that a funeral trust be established. Financial planners warn against trusts that can bring more grief to bereaved families if they aren’t trustworthy, the information isn’t kept current, or if Medicaid or tax implications are not taken into consideration.
What is an irrevocable trust for funeral planning?
A funeral trust is an agreement between three parties. The funeral trust is a legal agreement between three parties. These are the consumer who creates it (the trustor/grantor or settlor), and the trustee (the bank trust company or funeral home that manages the funeraltrust).
There are two types: irrevocable and revocable funeral trusts. Control is the difference between them. You can set up an irrevocable trust for funerals, and then transfer ownership of your assets to the trust account. The trustee will manage them. You can’t cancel the contract or receive benefits until your beneficiaries have received the benefits. An irrevocable funeral trust or irrevocable burial trust is exempted from the calculation of assets that will determine whether you are eligible for Medicaid coverage. However, it must be purchased within five year after applying for and qualifying for Medicaid benefits.
You can set up a revocable trust for funerals to retain control over your assets. You can also make changes to the contract terms. This includes dissolving the contract or getting your prepaid funds back. The assets in a trust can have an impact on eligibility for Medicaid coverage.
What funeral trust expenses cover?
Funerals can be very expensive and often come as an unexpected expense to grieving families. These expenses can be paid for by a funeral trust.
These expenses could include:
- Cremation or embalming
- A casket, burial vault, or urn
- Casketing and dressing
- Hairstyling, makeup, and clothing
- A headstone and a burial plot
- Funeral fees
- Viewing, funeral and visitation fees
- There are service charges for the funeral director, staff and their assistants
- Musicians and clergy pay fees
- Transportation (hearse/limousines)
- Funeral and death certificate fees
- Cost of flowers and stationery
Consider these things when you think about pre-paid funeral trusts
First, decide whether you want an irrevocable trust or a revocable trust. You should determine if the purchase of one or both will impact your Medicaid eligibility and/or Social Security eligibility. It is a good idea to establish a funeral trust prior to applying for Medicaid. Also, it is advisable that you know the Medicaid asset limit for your state. Talking to a financial advisor can help you get clarity about the process.
Consider the pros and cons of a pre-paid funeral trust before you make your decision.
Funeral trusts have many benefits
Funeral trusts are beneficial in many ways. Knowing the benefits can help to make informed decisions.
Executor options
If necessary, a funeral trust can be used by any relative, person, entity, or funeral home.
Gift for family members
A funeral trust is a great way to give your loved ones a last gift. During such an emotionally charged time, grieving family members can have trouble making decisions. It is helpful and appreciated to have arrangements in place. It saves your family from mental exhaustion and can save you money by pre-paying expenses at the current rate instead of the death rate. A funeral trust can also be a financial gift because it assists family members with unexpected, expensive funeral expenses they might otherwise have to pay out-of-pocket. You and your family can have peace of mind knowing that funeral expenses have been pre-paid and arrangements are in place.
Jeanni Harrison is a Certified Financial Planner at Harrison-de Charon Wealth Advisory Group, San Diego. She says that she was initially skeptical of her mother’s decision not to pay ahead for funeral arrangements. It was a gift that gave her peace of mind when her mother died unexpectedly.
Harrison states that it was “probably one of the most precious gifts my mother ever gave to me.” She made all the decisions in advance, including whether she wanted to be cremated and what type of urn she would like for her ashes. I only had to tell the hospital which mortuary I wanted. They took care everything.
Harrison says that mortuaries sometimes use survivor guilt to increase spending when no arrangements have been made.
Funeral trusts have disadvantages
Funeral trusts are a blessing for family members. However, you need to be aware of the drawbacks before proceeding.
Potential for abuse
A funeral trust purchased from a private funeral home can result in irretrievably losing the money that was used to pay for pre-paid funeral expenses. Funeral trusts are not often transferable from one state to the next. Funds may not transfer between funeral homes if you buy a funeral trust in one place but die in another.
Angie Grillo is a certified financial planner at South County Financial Planning, Laguna Niguel, California. She says that her experience was not peaceful. Despite her grandmother’s assurances to family members that “everything is taken care of”, the situation was more complicated than she expected.
Grillo says, “Until we found the account statement from her papers, we didn’t know she had a burial trust.” She was born in Florida. However, the trust was written in Wisconsin while she was living there. The trustee and beneficiary were both Wisconsin funeral parlors.
The Florida funeral home refused payment and refused to accept the funeral trust. There were months of paperwork, phone calls and frustration, compounded by the fact that Grillo’s grandmother died before Grillo. The Wisconsin funeral home finally released the funds to Grillo’s uncle, the successor power-of- attorney. He was not the executor.
Medicaid and tax implications
When opening a funeral trust, you should consider tax and Medicaid implications.
An irrevocable trust doesn’t affect Medicaid eligibility because the assets are not included in the qualification process. However, a revocable burial trust can impact your Medicaid eligibility and be subject to Medicaid spend-down rules.
Taxes are a concern in most states. Interest income from a funeral trust account must be reported on your income tax returns.
Not a common product
According to Marilyn Capelli Dimitroff (CFP) with Capelli Financial Services, and the immediate past chair of Certified Financial Planner Board of Standards (an independent certification body for the financial planning profession), funeral trusts are not used very often by professional planners.
Dimitroff states, “As financial advisors,” Dimitroff said that “we tend not to set up a trust but build funeral expenses into our overall planning.”
How to create a funeral trust
A funeral trust is a process that requires consumers to take reasonable precautions and fully understand it.
- Who can establish a funeral trust? Anyone over the age of 99 and legally competent can create a trust. A trust can be opened by family members for immediate relatives, such as parents, siblings, and children, or stepchildren.
- Find a trusted funeral home provider. Look online for reviews and ask around to see if there are any recommendations. Insurance companies also sell funeral trusts. These trusts are usually funded with single-premium, whole life insurance.
- Calculate the cost of your funeral: Review the state-set funeral costs.
- You can compare the various funding options for a prepaid burial trust. Cash savings bond, CDs, CD’s and Payment Plans are all possible methods to fund a prepaid estate trust.
- Consult an attorney. An attorney can help seniors understand the tax and legal requirements of funeral trusts.
- Verify that the proceeds of the trust are accepted as payment. Your family may be confused or frustrated if the funeral home refuses to accept funds from the trust.
- Relocation regulations: Make sure you confirm that the trust can be transferred to a new state if you move. Relocate? Change the trustee and beneficiary of the trust to the new funeral home.
- Inform your family about your plans. Give your executor and all your heirs a copy and contact information for the funeral home or beneficiary, if any.
- Designate an independent trustee: This individual will review the funeral bill and reimburse any excess to the family.
Alternatives to funeral trusts
Funeral trusts are a useful tool, but there are other options.
Payable-on Death Account
For funeral expenses, money can be invested in a bank account or credit union account. An account owner may name at most one beneficiary (and a trustee). While you retain control, you can withdraw funds while your body is still alive. However, beneficiaries can claim or withdraw funds for funeral expenses following your death.
Final Expense Insurance and Burial Insurance
An insurance company can provide insurance to pay for funeral expenses ranging in price from $5,000 to $30,000 The money can be used by beneficiaries to pay funeral expenses or for any other last-life expenses, such as medical debt. Comparing quotes of different companies can help to find the right policy for you.
Savings account
You can also open a savings account to pay for funeral expenses. To save enough money for funeral costs, burial goods, and other expenses you can deposit funds. Additional funds can be used to help your family cover unexpected costs and account for inflation. It may be worth considering naming a beneficiary to receive the funds immediately for funeral financing.