Pros and cons of funeral trusts

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Funeral trusts allow people to pay funeral expenses in advance, and that can spare survivors a lot of difficult decisions, say advocates. Some nursing homes even require a funeral trust as a condition of admission. But if the trustees aren’t reputable or the information isn’t current, financial planners warn that such trusts can bring bereaved families more grief.

The Internal Revenue Service defines a funeral trust as “a ‘pooled income fund’ set up by a funeral home or cemetery to which a person transfers property to cover future funeral and burial costs.” They’re often referred to as “pre-need programs.”

A blessing for some

Jeanni Harrison, a Certified Financial Planner at Harrison-de Charon Wealth Advisory Group in San Diego, says she was initially skeptical about her mother’s decision to pay for funeral arrangements in advance. But when her mother passed away unexpectedly a year or two later, she says, the peace of mind it afforded her was priceless.

“It was probably one of the greatest gifts my mother ever gave me,” Harrison says. “She made the necessary choices in advance — to be cremated, the type of urn she wanted for the ashes and so on. All I had to do was tell the hospital which mortuary to call. They took care of everything.”

When no arrangements have been made, Harrison says, “there’s sometimes a tendency on the part of mortuaries to play on survivor guilt to push up spending.”

A curse for others

In contrast, Angie Grillo, a Certified Financial Planner at South County Financial Planning in Laguna Niguel, Calif., says her experience was anything but peaceful. Although her grandmother had assured family members that “everything was taken care of,” it wasn’t.

“We didn’t even know she had a funeral trust until we found the account statement in her papers,” Grillo says. “She lived in Florida, but the trust had been written while she lived in Wisconsin, and the trustee and beneficiary was a funeral parlor in Wisconsin.”

The Florida firm refused to accept the funeral trust for payment, and the Wisconsin funeral home refused to release funds.

“My father was extremely upset that although the money was set aside to cover her burial, he could not access it,” Grillo says.

There ensued months of phone calls, paperwork and mounting frustration, aggravated by the fact that an aunt who held power of attorney for Grillo’s grandmother had died before her. Finally the Wisconsin funeral home released the funds to the successor power of attorney, Grillo’s uncle, who was not the executor of the estate.

Potential for abuse

Unlike Grillo’s grandmother, Harrison’s mother made her arrangements through an insurance company rather than a funeral home, a precaution J. David Lewis, president of Resource Advisory Services in Knoxville, Tenn., endorses, even though the fee structure will likely be higher.

Early in his career, Lewis says, he managed an investment trust for a funeral home, an experience that left him wary of the potential for abuse.

“Here in Tennessee, a couple of large funeral homes got into very serious trouble because they were taking people’s money and putting it into the business instead of a trust,” Lewis says. “When they went bankrupt, there was no money there for a whole lot of people who had paid for pre-need.”

While the pitch is that you save money by locking in today’s prices, he says, “I suspect some funeral homes are making an extraordinary profit on them by billing the trust for high-priced funerals.”

Not a common product

Lewis questions whether, in most cases, a trust is the best way to go.

In fact, funeral trusts are so little used by professional planners that information about them is not included in the course work for certification, says Marilyn Capelli Dimitroff, a CFP with Capelli Financial Services and immediate past chair of the Certified Financial Planner Board of Standards, an independent certifying body for the financial planning profession.

“As financial advisers,” Dimitroff says, “we tend to build funeral expenses in as part of overall planning rather than set up a specific trust.”

How to set up a funeral trust

Lewis advises that anyone contemplating a trust program offered through a funeral home make sure there’s an independent trustee who will audit the funeral bill for reasonableness and pay any excess to the family.

Before making a funeral home your trustee or beneficiary, Grillo recommends confirming that proceeds from the trust will be accepted as payment to avoid putting a burden on your heirs.

“A funeral trust seems like a great idea,” she says, “but you must keep your information current or major problems will come your way. If you relocate, change the trustee and beneficiary to the new funeral home you will use. Provide your executor or all your heirs with a copy of the trust as well as contact information for the funeral home and the beneficiary, if they’re different.”

While Harrison’s experience was positive, she warns that a funeral trust should never be considered an investment vehicle.

“There’s some validity to locking in prices in advance,” Grillo says, “but its true value is your family’s peace of mind.”