Funeral Trust Pros and Cons – 2024 Update

You should undoubtedly consider Funeral Trust pros and cons review to help you decide whether to use a funeral trust. 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.

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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:

  1. The trustor – the individual who creates the funeral trust
  2. The trustee – the trust company, the bank, or the funeral home who will manage the funeral trust
  3. 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 from 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 trust’s beneficiaries.
  • 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 the such benefit of the beneficiaries,
  • The trustee made or previously made the election to treat the trust as a Qualified Funeral Trust.
  • The trust would have been treated as owned by the contracts’ purchasers because of an individual’s death but only during the 60 days 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:

  • Embalming
  • Cremation
  • Funeral home usage
  • The service charge of funeral director and staff
  • Casket / Burial vault
  • Dressing and casketing
  • Clothing
  • Makeup and hairstyling
  • Clergy fee
  • Musicians for service
  • Death certificate
  • Printed Death Notices
  • Burial plot
  • Urn
  • Cemetery fees
  • Headstones / Monuments
  • Flowers
  • 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:

  1. 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.
  2. 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.

  1. What type of trust should you enter – revocable funeral trust or irrevocable funeral trust?
  2. Will the funeral trust affect your Medicaid eligibility?
  3. What effect will the funeral trust have on your ability to collect Medicaid benefits?
  4. 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 implications 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 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 can 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: parents, siblings, your spouse, your children, and your 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. Ensure 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 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 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:

  1. Cash
  2. Savings bond
  3. Certificate of Deposits (CDs)
  4. Payment plans
  5. 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 a 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 a 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.

For most states, the Medicaid asset limit in 2019 is $2,000 for a single applicant. Please note that if you have $15,000 assets and are single, you would not qualify for Medicaid.

However, suppose you have a $15,000 asset but use an irrevocable funeral trust life insurance to pre-pay your funeral expenses for $13,500. In that case, your countable assets will only be $1,500, and you would qualify for Medicaid.

Medicaid’s asset limit depends on the state you live in and your marital status. $2000 is the typical asset limit of most states except Connecticut ($1,600), Missouri ($3,000), Mississippi ($4,000), and New York ($15,450).

The Community Spouse Resource Allowance allows married couples with only one spouse applying for long-term care Medicaid to retain more assets.

Community spouses or non-applicant spouses can retain a maximum amount of $126,420 from their joint assets. This spousal allowance is given to avoid spousal impoverishment.

Higher valued assets like home furnishings, automobiles, weddings, and engagement rings are not counted towards these limits, including the house where the applicant 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 qualify for Medicaid.

Although, you can use this planning strategy as a pre-planning tool since a funeral trust has several benefits.


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.

Medicaid Eligibility

If you want to qualify for Medicaid, your assets should not exceed the eligibility requirement of your state.

The amount of countable assets for seniors 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, protecting it from health care coverage costs. You must 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 costs.

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 sound financial decisions 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 the products and services you want. They will be free from financial burdens and stress.

Your family can make funeral arrangements as they see fit.

Most funeral trust does not specify arrangements. Any relative or 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

  1. Revocable funeral trust (RFT) can be dissolved at any time. It does not enjoy a favorable tax exemption from being confiscated by Medicaid providers or nursing homes. If you want your medical care to be paid for by the government, you will be subjected to Medicaid spend-down rules.
  2. Your funeral trust fund won’t likely be transferred from one state to another. If you establish your trust account in one state but die in another, the funeral home probably won’t accept the funds you set aside in another state.
  3. Your accrued interest from the funeral trust is taxable. You are responsible for reporting your interest income to the IRS in most states. 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.
  4. 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 risk having the provider 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 is 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 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, 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 funeral insurance, 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 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 funeral home; assets for 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. Communicating with your loved ones makes 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 your state. Seek the counsel of a lawyer or Medicaid professional planner who knows the rules in your state.

Purchasing a burial insurance policy is the best option if you are thinking of ways to pay for your funeral expenses. 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?

Finding a policy if you want a funeral trust needn’t be frustrating; 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 to find the plan that fits your financial requirements and budget. You don’t have to waste your precious time 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 specialize 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.

Additional Questions & Answers On Funeral Trust Pros And Cons

What is a funeral trust?

A funeral trust is a legal document that allows you to make arrangements for your funeral in advance. It also allows you to name someone to fulfill your wishes and provides them with the necessary funds.


How do burial trusts work?

Burial trusts work by setting aside money to cover the costs of your funeral. This money can be used to pay for funeral home services, cemetery plots, headstones, and other associated expenses.


Are burial trusts a good idea?

Yes, burial trusts can be a good idea. They allow you to make your funeral arrangements in advance and ensure that your loved ones are not left with the burden of paying for your funeral.


Are there any drawbacks to burial trusts?

Yes, there are some drawbacks to burial trusts. For example, if the money in the trust is not enough to cover the costs of your funeral, the balance will have to be paid by your loved ones. Additionally, the trust may be subject to estate taxes upon your death.


How do I set up a burial trust?

To set up a burial trust, you will need to work with a lawyer. He or she will help you create the trust and name an executor to carry out your wishes.


What happens to the money left over in a funeral trust?

The money left over in a funeral trust can be used to pay for other final expenses, such as medical bills or estate taxes. It can also be distributed to your loved ones.


What is a trust and what does it do?

A trust is a legal document that allows you to set aside money for a specific purpose. In the case of a funeral trust, the money is set aside to cover your funeral costs.


What is a trustee?

A trustee is a person who manages the trust and oversees the distribution of its assets. The trustee is responsible for ensuring that the trust is used for the benefit of the beneficiaries.


Why would a person want to set up a trust?

There are a number of reasons why a person might want to set up a trust. For example, they may want to ensure their loved ones are not burdened by paying for their funeral. They may also want to use the trust to pay for other final expenses, such as medical bills or estate taxes.


What are the disadvantages of a trust?

There are a few disadvantages to trusts. For example, the money in the trust may not be enough to cover your funeral costs. Additionally, the trust may be subject to estate taxes upon your death.


What is an irrevocable trust?

An irrevocable trust is a type of trust that cannot be changed or canceled after it has been created. This means that the money in the trust can only be used for the purpose specified by the trustor.


What are the benefits of an irrevocable trust?

The benefits of an irrevocable trust include:

  • The trustor cannot change or cancel the trust after it has been created.
  • The trustor does not have to pay taxes on the income generated by the trust.
  • The trust is exempt from estate taxes.


What is a trust funded contract?

A trust-funded contract is a type of burial trust that allows you to set aside money for your funeral expenses. The money in the trust can be used to pay for the funeral home services, cemetery plot, headstone, and other associated expenses.


Are there any drawbacks to using a trust funded contract?

Yes, there are some drawbacks to using a trust-funded contract. For example, the money in the trust may not be enough to cover your funeral costs. Additionally, the trust may be subject to estate taxes.


How do trusts work after death?

Trusts work after death in a few different ways. For example, the trust may be used to pay for other final expenses, such as medical bills or estate taxes. It can also be distributed to the trustor’s loved ones.


What happens when a trust is formed?

When a trust is formed, the trustor (the person creating the trust) transfers money or property to a trustee. The trustee then holds the money or property for the benefit of the trustor’s beneficiaries.


Which type of funds is not allowed in a trust account?

In most cases, you cannot use retirement funds to set up a trust account. This is because retirement funds are protected by federal law and cannot be used to pay for funeral expenses.


What is considered a trust fund in real estate?

In real estate, a trust fund is a type of account that is used to hold money or property for the benefit of another person. The trustee holds the money or property for the benefit of the beneficiary.


What documents are required to open a trust account?

To open a trust account, you will need to provide the following documents:

  • The trust agreement
  • The trustee’s name and contact information
  • The beneficiary’s name and contact information
  • The date the trust was created


Is a living trust the same as a will?

No, a living trust is not the same as a will. A living trust is a type of trust that is created while the trustor is still alive. A will is a document that is used to distribute the trustor’s property after death.


Do I need to have a lawyer to create a trust?

No, you do not need to have a lawyer to create trust. However, it is always a good idea to consult with a lawyer to make sure that your trust is set up correctly.


What is the difference between a revocable and an irrevocable trust?

The difference between a revocable and an irrevocable trust is that a revocable trust can be changed or canceled after it has been created, while an irrevocable trust cannot be changed or canceled.


Can you hold property on trust for yourself?

Yes, you can hold property in trust for yourself. This is called self-trust. When you hold property on trust for yourself, you are the trustee and the beneficiary.


Can I use my 401k to fund my burial trust?

In most cases, you cannot use retirement funds to set up a trust account. This is because retirement funds are protected by federal law and cannot be used to pay for funeral expenses.


How do trusts avoid taxes?

Trusts can avoid taxes in a few different ways. For example, a trust may be exempt from estate taxes or it may be set up in a way that allows the trustor to avoid paying taxes on the income generated by the trust.


How does a beneficiary get money from a trust?

A beneficiary can get money from a trust by receiving distributions from the trust or by selling their interest in the trust to another person.


Should I put my bank accounts in my trust?

It is generally a good idea to put your bank accounts in your trust. This will make it easier for the trustee to manage your money and pay your bills.


Does a trust get a step up in basis at death?

A trust does not get a step-up in basis at death. The basis of a trust is the same as that of the property transferred to the trust.


Can a beneficiary withdraw money from a trust?

Yes, a beneficiary can withdraw money from a trust. However, the trustee has the right to approve or deny any requests for withdrawal.


Can I use my trust to buy a house?

Yes, you can use your trust to buy a house. The trustee will need to explain to the lender how the money in the trust should be used to purchase the house.


Is a trust the same as a corporation?

A trust is not the same as a corporation. A trust is a type of legal entity that is created to hold money or property for the benefit of another person. A corporation is a type of business organization that is used to own and operate a business.


How much is a trust fund?

There is no set amount for a trust fund. The size of a trust fund will depend on the amount of money or property that is transferred to the trust.


How many members are needed for trust?

There is no set number of members for a trust. A trust can be created with one or more members.


Can I change my mind after creating a trust?

Yes, you can change your mind after creating trust. However, you will need to create a new trust agreement to make any changes.


Can I cancel my trust?

Yes, you can cancel your trust. However, you will need to create a new trust agreement to make any changes.


Who is the legal owner of a trust property?

The legal owner of the trust property is the trustee. The trustee has the legal authority to manage and control the property in the trust.


Does a trust avoid inheritance taxes?

It depends on how the trust is set up. Some trusts are exempt from inheritance taxes, while others are not.


Can I sell my interest in a trust?

Yes, you can sell your interest in a trust. This is called selling your beneficial interest in the trust. When you sell your interest in the trust, you receive money or property in exchange for your interest.


Can I name my trust as the beneficiary of my life insurance policy?

Yes, you can name your trust as the beneficiary of your life insurance policy. The trustee will need to explain to the insurance company how the money should be paid out when you die.


How is money distributed from a trust?

Money can be distributed from a trust in a few different ways. For example, the trustee may distribute money to the beneficiaries on a regular basis or the trustee may distribute money to the beneficiaries when they need it.


Can I change the trustees of my trust?

Yes, you can change the trustees of your trust. However, you will need to create a new trust agreement to make any changes.


Can I add or remove beneficiaries from my trust?

Yes, you can add or remove beneficiaries from your trust. However, you will need to create a new trust agreement to make any changes.


Can I name myself as the trustee of my trust?

Yes, you can name yourself the trustee of your trust. However, you will need to create a new trust agreement to make any changes.


Can I name someone other than myself as the trustee of my trust?

Yes, you can name someone other than yourself as the trustee of your trust. However, you will need to create a new trust agreement to make any changes.

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