You should undoubtedly consider Funeral Trust pros and cons to help you decide whether to use a funeral trust. A funeral trust is one way to pre-pay for your funeral is to set up a funeral trust to pay the cost of your funeral, burial and final expenses.
Some of the benefits of a funeral trust are the peace of mind that your funeral will not be taken out of your estate, and your family will not shoulder your funeral cost. Protection from Medicaid spend down is the most significant benefit of setting up a funeral trust.
In this article, you will understand the pros and cons of funeral trust to help you determine if setting a funeral trust is right for you. We will also discuss the best method of pre-paying for a funeral.
WHAT IS A FUNERAL TRUST?
The IRS defines funeral trust simply 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.”
A funeral trust is a legal contract you enter to set aside money to cover funeral arrangements and final expenses. They are a legal arrangement that allows you to have peace of mind knowing that funeral and final expense funds are available when needed.
The rules and regulations for funeral trust vary from state to state.
This type of trust is established as a legal agreement between three parties:
- The trustor – the individual who creates the funeral trust
- The trustee – the trust company, the bank, or the funeral home who will manage the funeral trust
- The beneficiary – the funeral home who will benefit from the funeral trust
Funeral trusts are subject to specific rules set down by the Internal Revenue Service.
A funeral trust, according to the IRS:
- The trust arises as a result of a contract with a person engaged in the trade or business of providing funeral or burial services or property to provide such services.
- The sole purpose of the trust is to hold, invest, and reinvest funds in the trust and to use those funds solely to pay for funeral or burial services or property to provide such services for the benefit of the beneficiaries of the trust.
- The only beneficiaries of the trust are individuals for whom such services or property are to be provided at their death under the contracts described above.
- The only contributions to the trust are contributions by or for such benefit of the beneficiaries,
- The trustee makes or previously had made the election to treat the trust as a Qualified Funeral Trust.
- The trust would have been treated as owned by the purchasers of the contracts by reason of the death of an individual but only during the 60-day period beginning on the date of such death.
WHAT EXPENSES CAN BE COVERED WITH A FUNERAL TRUST?
Funeral trust can cover a variety of final expenses, including:
- Funeral home usage
- The service charge of funeral director and staff
- Casket / Burial vault
- Dressing and casketing
- Makeup and hairstyling
- Clergy fee
- Musicians for service
- Death certificate
- Printed Death Notices
- Burial plot
- Cemetery fees
- Headstones / Monuments
- Hearse / Limousines
- Travel expenses of relatives coming to the funeral
WHAT ARE THE DIFFERENT TYPES OF FUNERAL TRUST?
There are two types of funeral trust:
- Revocable funeral trust – if you set up this type of trust, you maintain control of all your assets. You can make changes to the contract terms at any time. You can also dissolve the trust and get most of your pre-paid funds.
- Irrevocable funeral trust – if you set up this type of trust, you transfer control of your funds to the trust account for trustee management. You cannot revoke it until the contract terms have been fulfilled. You can be sure that your beneficiary or your chosen funeral home will not receive the money until your death. It’s also an invaluable Medicaid planning tool. It is a proven way to lower your countable assets and meet Medicaid’s asset limit to qualify.
There are several factors to assess when establishing a funeral trust.
- What type of trust should you enter – revocable funeral trust or irrevocable funeral trust?
- Will the funeral trust affect your Medicaid eligibility?
- What effect will the funeral trust have on your ability to collect Medicaid benefits?
- Will the trust have any effect on your social security eligibility?
While setting up a funeral trust is easy, you must understand all the financial implication before setting up a trust. You also need to ensure that you know all the specific requirements in your state since laws vary by state.
Consult a lawyer, financial advisor, or a funeral director for help in setting up a funeral trust.
WHO CAN SET UP A FUNERAL TRUST?
Any competent adult 99 years and below can qualify for a funeral trust.
Anybody who is of legal age and has the ability to enter into a legal contract can be eligible for a funeral trust. The 50 and older population will specifically benefit from a funeral trust.
If your senior parents can’t establish a funeral trust, any family member can set them up for them.
You can set up a funeral trust for your immediate family members: parents, siblings, your spouse, your children, and stepchildren.
HOW TO SET UP A FUNERAL TRUST
- Step 1 – Determine if you need Medicaid. If you need Medicaid, set up a funeral trust before applying for Medicaid.
- Step 2 – Determine how much assets you have over the Medicaid asset limit in your state. Most states have a $15,000 funeral trust limit. If your assets exceed that amount, you need to convert them to non-countable assets through other means.
- Step 3 – Determine how much your funeral will cost. Ask for an itemized list of funeral expenses from your nearest funeral home. Make sure that your funeral cost is within the limit set by your state. Do not over-fund your funeral trust because the remaining proceeds are subject to recovery by the state Medicaid office.
- Step 4 – Make sure that the funeral trust you will open is not a countable asset by the Medicaid.
- Step 5 – Consult an elder or Medicaid attorney to understand all the legalities and tax requirements.
- Step 6 – Sign the funeral trust agreement. Invest the funds into a trust account after completing the necessary paperwork. Apply for Medicaid.
Typically, a funeral director will help you set up a funeral trust when you are entering into a contract with them. You can open a trust account with a bank and deposit your money in a certificate of deposit or savings account.
There are different ways you can fund a funeral trust:
- Savings bond
- Certificate of Deposits (CDs)
- Payment plans
- Burial life insurance
There are no underwriting requirements to open a funeral trust. You don’t need to take a medical exam, and your health history won’t affect your eligibility.
However, you need to pay the management and administrative fees. If you’re living in New York, you can expect a fee of .0075% added to your funeral trust’s principal amount to cover the costs.
Interest income from funeral trust account is taxable, and you must report it on your income tax return. One advantage of funding your trust with life insurance is that the interest from your insurance policy is not taxable.
HOW FUNERAL TRUST HELP PEOPLE QUALIFY FOR MEDICAID
The only reason to consider funeral trust to pay for your funeral and burial costs is to shelter your assets from Medicaid.
Funds you set aside in an irrevocable trust will not be counted as assets when determining your eligibility to receive Medicaid or Supplementary Security Income (SSI). On the other hand, funds placed in a revocable trust can be taken by Medicaid if your other assets have been depleted.
The Medicaid asset limit in 2019, for most states, is $2,000 for a single applicant. If you’re an individual Medicaid applicant with $15,000 in assets, you would not be Medicaid eligible.
However, if you pre-paid your funeral expenses but purchasing an irrevocable funeral trust for $13,500, you would have only $1,500 remaining in countable assets, therefore, you would be eligible for Medicaid.
Medicaid’s asset limit varies by state and with your marital status. While most states have an asset limit of $2,000, some exceptions are Connecticut ($1,600), Mississippi ($4,000), Missouri ($3,000) and New York ($15,450).
Married couples with only one spouse requesting for long-term care Medicaid can retain a higher amount of assets for couples due to the Community Spouse Resource Allowance.
The spousal allowance is given to prevent spousal destitution. As of this writing of this article, most states allow non-applicant spouses, or community spouses, to retain up to $126,420 of the couple’s joint assets.
Higher valued assets like home furnishings, automobile, wedding, and engagement rings are not counted towards these limits, including the Medicaid applicant’s home if she and her spouse live in it,
Medicaid does not count the funds in an irrevocable funeral trust as countable assets. You can make the assignment right up until the time you need to enter a nursing home.
There is no lookback period in setting up a trust. Funeral trust has been used to help people in a crisis-planning situation to qualify for Medicaid.
Although, you can use this planning strategy as a pre-planning tool since there are several benefits from a funeral trust.
FUNERAL TRUST PROS AND CONS
We need to examine Funeral Trust pros and cons to understand if this option is right for you.
PROS OF FUNERAL TRUST
There are several benefits to purchasing a funeral trust.
If you want to qualify for Medicaid, your assets should not exceed the eligibility requirement of your state.
The amount of countable assets for senior is usually capped at $2,000 for singles and $3,000 for married couples. If your assets exceed this limit, you’ll be responsible for covering your long-term care costs, or you need to spend down until you reach the qualifying limit.
An irrevocable funeral trust is an exempt asset from Medicaid. When you set aside money for your final expenses through an irrevocable funeral trust you may be able to comply with Medicaid spend-down rules. The money in the funeral trust will still be available when you die.
Medicaid will exclude the money you put in the trust from your assets, and it’s protected from health care coverage costs. You must do this transfer to your irrevocable funeral trust within five years of applying and qualifying for Medicaid to receive protection.
Your family does not have to pay for your funeral and burial cost.
The funeral trust will cover all funeral and burial expenses. You will not worry about the strain of your funeral expenses on your family because you know they are already covered (assuming your funeral trust is fully funded)
Prevents emotional overspending
It’s hard for family members to make a sound financial decision after a death in the family. Most of the time, they spend more on funeral arrangements.
However, if you have a funeral trust, you spare your family from spending money on products and services you want. They will be free from financial burden and stress.
Your family can make funeral arrangements as they see fit.
Most funeral trust does not specify arrangements. Any relative or the funeral home can handle your funeral arrangements when the time comes.
Funeral trust does not restrict which funeral home to use
You can change funeral home providers. You can choose your funeral home at any time. Any funeral home, in any location, can be an option.
CONS OF FUNERAL TRUST
- Revocable funeral trust (RFT) can be dissolved at any time. It does not enjoy favorable tax exemption from being confiscated by Medicaid providers or nursing homes. If you want your medical care to be paid by the government, you will be subjected to Medicaid spend-down rules.
- Your funeral trust fund won’t likely be transferred from one state to another. If you establish your trust account in one state, but you died in another, the funeral home probably won’t accept the funds you set aside in another state.
- Your accrued interest from the funeral trust is taxable. In most states, you are responsible for reporting your interest income to the IRS. Income from the funeral trust assets may be taxed to you unless your trustee elects to treat the funeral trust as a qualified funeral trust by filing form 1041-QTF with the IRS, in this case, the trust income is taxed to the trust.
- If you entered a funeral trust through a funeral home, the funeral home might go out of business. When your funeral and burial expenses are already paid to the funeral home provider, you run the risk of having the provider being out of business when your family needs the goods and services.
FUNERAL TRUST ALTERNATIVES
There are other ways to pre-pay for your funeral, including:
Payable-on-death account – this is also called “Totten trust” you can invest money into a bank or credit union to cover your funeral expenses. Like a revocable trust, you have control over the account, and you can withdraw your money while you’re still alive. Upon your death, your beneficiary can claim the remaining funds from your account for your funeral and burial services.
Savings account – another way to pre-pay your funeral is to open a savings account specifically for depositing money for your funeral and burial expenses. You can deposit a certain amount of money every month and designate a beneficiary to manage your account and withdraw the money to pay for your funeral and other expenses.
Burial insurance – If you’re not interested in setting up a funeral trust, you can purchase final expense or burial insurance from an insurance company to cover the cost of your funeral and final expenses. Your beneficiary will receive your death benefit payout and pay for your funeral services when you pass away. Unlike a funeral trust, your beneficiary can use the money in any way they see fit.
THE BEST WAY TO PRE-PAY FOR FINAL EXPENSES
Buying burial insurance is the best way to pre-pay for your final expenses. Think of it as a pre-paid funeral plan with additional benefits. It is similar to a pre-paid funeral plan in a way that it helps you pay your funeral expenses in advance…most of the time with 100% coverage from the very first day.
You can assign your burial insurance policy to a funeral home, assets going toward funeral and burial costs are exempted when determining Medicaid eligibility. Your burial insurance death benefit will go to the funeral home when you die, and anything left will go to your beneficiary.
Once you have transferred ownership of your insurance policy to a funeral home, the cash value of your whole life insurance will not affect your Medicaid eligibility. The face value or death benefit amount will not be counted as assets when determining your eligibility because you no longer own it.
If you are setting burial insurance to fund a funeral trust to pay for your funeral, be sure to tell your immediate family about your funeral arrangements.
Tell your family about the burial insurance and the funeral home and make sure your family knows where the paperwork is kept. By communicating with your loved ones, you make it easier for them to handle your funeral arrangements when the time comes.
The rules regarding life insurance, funeral trust, and Medicaid eligibility vary depending on the state you reside. Seek the counsel of a lawyer or Medicaid professional planner who knows the rules in the state you live.
If you are thinking of ways to pay for your funeral expenses, the best option is to purchase a burial insurance policy. We have helped many people find the insurance coverage they need at a price they can afford. We can help you too.
HOW CAN FUNERAL FUNDS HELP ME?
Trying to find a policy if you want funeral trust needn’t be a frustrating process; working with an independent agency like Funeral Funds will make the process easier and quicker.
If you have a health history or pre-existing medical conditions, let us help you; we will work with you side by side to find a plan that fits your needs.
We will work with you every step of the way to find the plan that fits your financial requirements and budget. You don’t have to waste your precious time anymore searching for multiple insurance companies because we will do the dirty work for you.
We will shop your case to different insurance carriers and get you the best price.
We work with many A+ rated insurance carriers that specialized in covering high-risk clients like you. We will search all those companies to get the best rate. We will match you up with the best burial insurance company that gives the best rate.
We will assist you in securing the coverage you need at a rate you can afford. So, if you are looking for funeral insurance, or burial insurance, or life insurance to fund a funeral trust.
Fill out our quote form on this page or call us at 888) 862-9456 and we can give you an accurate quote.