Could You Benefit From a Funeral Trust?

Have you ever considered a funeral trust as part of your estate planning? Planning and paying for your funeral (though it sounds morbid) could save your loved ones a lot of hassle.

But before we discuss how you and your family could benefit from a funeral trust, let’s define the term since it has a few different meanings:

• When a person contracts directly with a Funeral Home to purchase a prepaid funeral contract wherein the funds are placed into an escrow or trust account at a banking institution. Pennsylvania law requires that the Funeral director deposit 100% of funds received into such an account.  Such Prepaid Funeral Trusts can be of a guaranteed type wherein the Funeral home guarantees that the trust will cover the full cost of the services selected when the time comes to use them or non-guaranteed where the person arranging the funeral may have to supplement the trust monies with an additional payment.  Depending on state laws, many of these types of arrangements allow the transfer of the funds to a different funeral home (typically throughout the state where purchased) but always check when purchasing such a contract.
• Funeral trusts or similar pre-need plans sold through insurance companies, often funded with life insurance policies or annuities. One advantage of funding a funeral trust with life insurance is that the trust will have no taxable income to report, since life insurance cash values grow tax deferred. The specific funeral home can be named as a beneficiary or it can be someone else you choose to handle the arrangements.
• Setting up a so-called Totten Trust or payable on death (POD) bank account and placing funds into it for the cost of a funeral. The benefit of this approach is simplicity and cost as well as flexibility; for example, the beneficiary can be changed at any time, funds go straight to the beneficiary without probate and the account can be closed at any time and funds received back.  However, this approach has many of the same disadvantages as a Revocable Living Trust in that the funds continue to be legally owned by the person establishing it and subject to creditor’s claims, Medicaid spend down and Inheritance taxes. In addition, one cannot guarantee that the beneficiary will use the funds for the purpose intended.

Keep in mind that unless the Prepaid Funeral Trust is irrevocable it will not be considered a non-exempt Medicaid asset and protect against Medicaid spend down.  Always ask the product salesperson about this and get it in writing that it will be protected against a spend down.

So, let’s recap the benefits of an irrevocable funeral trust.

1. Helps an individual to become Medicaid compliant.
2. Funds used to purchase pre-paid funeral expenses are protected from creditors.
3. Removes decision making from grieving loved ones.
4. No taxable income if funded by life insurance policy.

Be sure to review your trust every few years to make sure your trust remains up to date and consult your elder law attorney should you require any changes.  Still have questions about trusts? Feel free to come into our office and we can discuss your needs in person.