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The pros and cons of funeral trusts

A coffin at a funeral procession
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The Internal Revenue Service defines a funeral trust as “a ‘pooled income fund’ set up by a funeral home/cemetery to which a person transfers property to cover future funeral and burial costs.” Funeral trusts allow people to pay funeral expenses in advance, and that can spare survivors a lot of difficult decisions. Some nursing homes even require a funeral trust as a condition of admission. However, if the trustees are not reputable, the information is not kept up to date or if Medicaid and tax implications are not considered, financial planners warn that such trusts can instead bring bereaved families even more grief.

What is an irrevocable funeral trust?

The funeral trust is a legal agreement between three parties. These include the individual consumer who creates the funeral trust (the trustor, grantor or settlor), the trustee (the bank, trust company or funeral home who manages the funeral trust) and the beneficiary (the funeral home who will benefit from the funeral trust).

There are two types of funeral trusts: revocable and irrevocable. The difference between them is control. If you set up an irrevocable funeral trust, then you transfer control of your assets to the trust account for management by a trustee. You cannot revoke the contract or get benefits until your beneficiaries receive the benefits upon your death. One advantage is that an irrevocable funeral trust (or irrevocable burial trust) is excluded when counting assets to determine if you qualify for Medicaid coverage, but it must be purchased within five years of applying and qualifying for Medicaid benefits.

If you set up a revocable funeral trust, then you retain control of your assets and can make changes to your contract terms, including dissolving the contract and getting most of your prepaid funds back. However, assets included in a revocable trust do have an impact on qualifying for Medicaid coverage.

What expenses are covered by a funeral trust?

Funerals can be quite expensive and are often an unexpected expense for which grieving families are not prepared. A funeral trust can help families pay for these expenses.

Expenses might include:

  • Embalming or cremation
  • A casket, burial vault or urn
  • Dressing and casketing
  • Clothing, makeup and hairstyling
  • A burial plot and headstone
  • Cemetery fees
  • Viewing, visitation and funeral service fees
  • Service charges for the funeral director and staff
  • Fees for clergy and musicians
  • Transportation (hearse/limousines)
  • Obituary and death certificate fees
  • The cost of stationery and flowers

Things to consider about prepaid funeral trusts

First, you will need to decide between an irrevocable or revocable trust. Determine if purchasing one or the other will affect your Medicaid eligibility and/or social security eligibility. Setting up a funeral trust before applying for Medicaid can be prudent, as is knowing the Medicaid asset limit in your state. If you are unsure about the process, talking to a financial advisor may be helpful.

Before deciding on a prepaid funeral trust, consider that there are some advantages and disadvantages.

Benefits of funeral trusts

Funeral trusts can be beneficial in several ways and knowing the benefits can help you make an informed decision.

Executor options

A funeral trust allows for any relative, other person, entity or funeral home (not just immediate family members) to handle funeral arrangements, if necessary.

A gift to family members

A funeral trust can be a final gift to your family. Grieving family members often have difficulty making decisions during such an emotional time. Having arrangements made is often helpful and appreciated. Not only does it save your family members from mental exhaustion, it can also save money because expenses are pre-paid at the current rate rather than the rate at the time of death. Lastly, a funeral trust is a financial gift as well, because it helps family members with unexpected and costly funeral expenses that they may otherwise have had to pay out of pocket. This can give both you and your family members peace of mind, knowing that expenses are pre-paid and arrangements are already planned.

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, 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 higher spending.”

Disadvantages of funeral trusts

While funeral trusts can be a blessing to family members, there are drawbacks that you should be aware of before proceeding.

Potential for abuse

If a funeral trust is purchased from a privately owned funeral home and that funeral home then goes into bankruptcy or mismanages the funds, the money spent on pre-paid funeral needs can be irretrievably lost. In addition, funeral trusts often do not transfer from state to state. If you purchase a funeral trust in one state but live in another state when you die, funds may not transfer between funeral homes.

Angie Grillo, a Certified Financial Planner at South County Financial Planning in Laguna Niguel, California, says her experience was anything but peaceful. Although her grandmother had assured family members that “everything was taken care of,” the circumstances were more complicated than she likely expected.

“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. Months of phone calls, paperwork and mounting frustration ensued, 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.

Medicaid and tax implications

Medicaid and tax implications need to be considered when opening a funeral trust.

While an irrevocable trust does not affect Medicaid eligibility as the assets included are not counted as part of the qualification process, a revocable funeral trust can affect your Medicaid eligibility and is subjected to Medicaid spend-down rules.

In terms of taxes, in most states, interest income from a funeral trust account is taxable and must be reported on your income tax returns.

Not a common product

Funeral trusts are so little used by professional planners that information about them is often not included in the course work for certification, according to 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

Setting up a funeral trust requires that a consumer take reasonable precautions and understand the process.

  • Know who can set up a funeral trust: Any competent adult 99 years or younger and of legal age can set up a trust. Family members can open a trust for immediate family members such as, parents, siblings, spouses, children or stepchildren.
  • Choose a reputable funeral home provider: Check online reviews or local word of mouth recommendations to find the top funeral home provider with a good reputation. Funeral trusts are also sold through insurance companies, in which case they are typically funded with single-premium whole life insurance.
  • Determine how much your funeral will cost: Check the funeral cost limitations set by your state.
  • Compare various methods of funding a prepaid funeral trust: Cash, savings bond, CD’s, Payment Plans, or Final Expense Insurance (Burial Life Insurance) may be used to fund a prepaid trust.
  • Consider consulting an attorney: An attorney for the elderly can help consumers understand the legalities and tax requirements involved in funeral trusts.
  • Confirm that proceeds from the trust will be accepted as payment: If your chosen funeral home will not accept the funds from the trust as payment for services, your family could be left confused and frustrated after your death.
  • Research relocation regulations: Before opening your funeral trust, confirm that if you move across state lines the trust can be changed to the new state. If you relocate, be sure to change the trustee and beneficiary to the new funeral home you will use.
  • Make sure family members are aware of your plans: Provide your executor and all your heirs with a copy of the trust as well as contact information for the funeral home and the beneficiary, if they are different.
  • Appoint an independent trustee: This person will audit the funeral bill for reasonableness and pay any excess to the family.

Alternatives to funeral trusts

Although funeral trusts can be helpful, there are alternatives that can be considered.

Payable-on-Death Account

Money can be invested into a bank or credit union account for the purpose of covering funeral expenses. The account owner can name at least one beneficiary (and trustee). You retain control and can withdraw funds while you are alive, but beneficiaries can claim and withdraw funds for funeral expenses after your death.

Final Expense Insurance or Burial Insurance

Insurance ranging from $5,000 to $30,000 can be purchased from an insurance company to cover funeral expenses. Beneficiaries can use the money to pay for funeral expenses and for other final life expenses such as medical debt. Comparing quotes from several different companies can help you find a policy to fit your needs.

Savings Account

Another alternative is to open a savings account earmarked for funeral expenses. You can deposit funds to save up enough to cover funeral expenses, burial goods and services. Extra funds can help your family pay for additional and unexpected expenses and account for inflation. You may wish to consider designating a beneficiary who can withdraw the money immediately to finance your funeral.