To lessen these financial burdens for your loved ones, you might find it helpful to prepay or pay for your funeral in advance. And one way to prepay your costs is by setting up a funeral trust.
A funeral trust is an inter vivos trust created by an individual consumer while alive, with one specific goal: to cover final expenses associated with future funeral arrangements.
Rules and regulations vary from state to state. But, this type of prepaid trust is usually established, as a legal agreement, between three parties: the settlor, grantor, or trustor (individual consumer who creates the funeral trust); the trustee (the bank, the trust company, or the funeral home who manages the funeral trust); the beneficiary (the funeral home who benefits from the funeral trust). Find out how you can set up a funeral trust to prevent the heavy financial burden of funeral costs.
What is a funeral trust?
Over the last 31 years, funeral costs have risen by more than 200% in the United States. Though these funeral costs and pricing vary by location and provider, the median cost for a traditional adult funeral with a viewing and burial nowadays, according to National Funeral Directors Association data, is $7,360
In your case, you (the trustor) will read, evaluate, sign, and commit to this funeral trust contract, also sometimes known as a preneed contract, to fund these costs, usually in a secured interest-bearing, government back trust account, at a locked-in price—right away or over time. You determine the amount of money you’ll place in the funeral trust and can fund it in several ways:
- Certificates of Deposit (CDs)
- Savings bonds
- Life insurance
- Payment plans
After signing the funeral expense contract, state laws give you several days (7 days, 10 days, 30 days, for instance) to review and terminate your contract—also known as a cancellation period—if you choose to.
Furthermore, you should let them know you’ve established this type of fund account after signing for your family’s future benefit. Giving them personal copies of your contract for their own records will also prove helpful.
Who can set up this type of trust?
Any competent adult 99 years old and younger can qualify for a funeral trust. Specifically, the 50 and older population have been familiarizing themselves with this type of trust. Results of a 2007 AARP Funeral and Burial Planners Study conducted by ICR Survey Research Group found: 23 percent of Americans over 50 prepaid funeral expenses for themselves and/or family members. (Please Note: Besides yourself, you can also set up a funeral trust for immediate family members: your spouse, your children and stepchildren, your siblings and your parents.)
Adult children and caregivers also have some knowledge of funeral trusts. When senior parents can’t establish these accounts themselves, usually, these family members set them up on their parent’s behalf.
Generally, you’ll have no underwriting requirements for consideration. In other words, you’ll be free from submitting to a medical examination. Also, your health history won’t affect your chances of approval.
You might, though, be responsible for the management and administrative fees. For instance, if you’re located in New York, you can expect a fee of .0075%—added to your trust’s principal sum—to cover these costs.
Your rights and options
You want your family to carry out your funeral desires, and you’re interested in setting up a funeral trust to make it all possible. But before establishing a funeral expense trust fund, you should consider a few things. Let’s discuss them below.
- Your final wishes — Prepaying for your funeral allows you to also preplan your arrangements. This preplanning gives you the opportunity to make known your final wishes, which may include:
- Your casket choice.
- Your headstone epitaph ideas.
- Your visitation and viewing preferences.
- Your funeral or memorial preferences.
- Your graveside service preference.
- Your preferred service location, venue, or funeral home provider.
Your chosen goods and services will express your final wishes. And your funeral home will provide an itemized statement of these items, separate from your contract, for your personal records.
- Your rights as a consumer — Before working with a funeral director, you might find it helpful to know your rights under the Federal Trade Commission Funeral Rule, which protects consumers from abusive business practices in the death care market. A few of your rights include:
- Getting price information before purchasing.
- Refusing to accept unwanted packages.
- Buying a casket or urn from a third-party source.
There are also state rules and regulations governing funeral homes. And it’s important to become familiar with them, so you’ll be fully informed about your funeral planning process.
- Your funeral home options — One of the best things you can do is: carefully select your funeral home provider. This selection process can require a significant amount of time and research, but it’ll help you choose the best one for you. Dedicate time to comparing and visiting a few. Also, consider important factors, such as:
- Their reputation, location, and premises.
- Their capabilities and trustworthiness.
- Their offered services and packages/
- Their price and fee information (be sure to request their ‘General Price List).
- Their décor and amenities.
- Your Contract Lock-In Funeral Guarantee. When purchasing funeral home goods and services in advance through your chosen funeral home provider, you want your funds ‘locked in’ as a contract guarantee. This will result in your trust fund amount growing every year—and offsetting inflation, so be sure that it’s included in your contract.
Revocable vs. irrevocable funeral trusts
There are two types of funeral trusts, revocable and irrevocable. And there’s one crucial difference between them: Control.
If you set up a revocable funeral trust, then you (the trustor, grantor, or settlor) maintain control of all your assets. At any time, you can make changes to the contract terms. You can also dissolve it and get most of your prepaid funds.
If you set up an irrevocable funeral trust, on the other hand, then you transfer control of your assets to the trust account for trustee management. You can’t revoke but must fulfill all contract terms. Because of special protections for this type of funeral trust, you can be sure that your beneficiary (or chosen funeral home provider) will not receive your money until your death.
Choosing a funeral home provider
Selecting the right funeral home provider is a vital part of making your funeral arrangements and advanced payments. While you can select the funeral home nearest your residence or the one suggested to you by a friend, you shouldn’t make your decision based on these reasons alone. If you do, you’ll risk working with one who won’t provide the quality service and value you deserve.
There are lots of funeral homes and directors to choose from. But you want the best funeral provider for you. One who’ll listen to, understand and deliver your wishes and needs — on budget.
To find this provider, the first thing you should do is research funeral homes. You can start with your personal interests:
- Location and proximity
- Religious and cultural affiliations
- Specific goods and services
- Ceremony preferences
Then, you can learn more about funeral homes meeting your personal interest criteria through positive and negative customer reviews—online and in person. You can also learn more about them through their blog and social media content, better business bureau reviews and ratings, and state consumer protection division complaints (if any).
Another way to learn and assess providers is by asking questions. To assist you, here’s a checklist of questions to (look for and) ask when choosing a funeral home.
- Are you an independent, locally, or nationally owned corporation?
- How long have you been in business?
- Are you a trade association member, such as the National Funeral Directors Association?
Capabilities and experience:
- What makes your company the best one to meet my needs and wishes?
- Are you a full or limited-service provider? How many hours are you available to support families on a daily basis?
- How many years of experience do you have as a funeral director?
- Can I have a copy of your General Price List (GPL) and services descriptions?
- What items does your basic fee include?
- Should I expect additional expenses and fees?
- Can I purchase a castle or vault from another retailer?
- What types of services and packages do you offer?
- Do you offer post-funeral arrangement services?
- Do you outsource any of your services? If so, do you charge cash advance fees for these services?
- Can I personalize my funeral service?
- Who will be the point of contact person for our family during this time?
- How many hours can a funeral ceremony last? How much more will you charge if the ceremony runs over the allotted time?
- What will your funeral home do with my pre-paid money? Will you deposit it in an FDIC bank?
- Do you offer monthly payment plans? What’s the minimum monthly payment?
- Do you offer a ‘lock-in’ guarantee for chosen funeral goods and services?
- How can I cancel a revocable contract? Will I get a refund upon cancellation? Do you charge for cancellations?
Décor and amenities:
- Are your entrances, elevators (if any), and bathrooms handicap accessible?
- How many on-site parking spaces do you provide for a funeral ceremony? Is parking free or paid?
- How many people can your funeral home (and chapel) hold?
- Are we allowed to bring in our own decorations?
- Can I visit and tour your premises?
- Do you have hearse and limousine transportation?
You’ll have the information needed to compare funeral home providers by asking the questions relevant to your circumstances. From there, you can choose the best one for your needs and budget.
How to set up a funeral trust
It’s relatively simple to set up a funeral trust. You (as the creator and trustor) already know the goal of your trust: to set aside a specific amount of money for the prepayment of your future funeral and burial expenses.
So, your next task would be identifying the second and third parties essential to the creation of your funeral trust. (Note: above, we discussed the 3 parties necessary to a funeral trust setup: the trustor (settlor or grantor), the trustee, and the beneficiary.) In some trust setups, the second and third parties are the same: the funeral home provider.
For this reason, it’s important to effectively research and select a funeral home provider. After doing so, you can determine the exact costs of the goods and services you want for your arrangements. This information will help you identify the amount you’ll need to deposit into your account.
Then, you can:
- Consult the funeral home of your choice — and invest funeral funds into a trust account after completing the necessary paperwork.
- Consult an elder, estate planning, or Medicaid attorney—and familiarize yourself with legalities and tax requirements, sign off on a funeral trust agreement, and pay the funds at once or make several payments.
- Consult a financial advisor — and complete the required application and paperwork.
Remember to also account for cemetery and burial (maintenance, opening, and closing) costs, when establishing your funds. In most cases, they’ll be separate from the costs of your funeral home services and will require setting aside more money.
Note: If you prefer, before you take the steps of identifying your trustee and beneficiary, you can first contact a funeral home director, attorney, or financial advisor for more information.
Depositing money into a trust
A funeral trust can be a viable option for many families, and nowadays, seniors are prepaying their funeral costs to minimize the strain of a lack of finances when they die. But, while there are certainly advantages of funeral trusts, there are also disadvantages.
What are the benefits and drawbacks? We’ll start with the pros:
- You can worry less. You’ll worry less about the burden of your funeral expenses on your children and family because you’ll know they’re covered. You’ll also worry less because you’ll know you made known your funeral wishes and preferences.
- You can change funeral home providers. In most cases, you can make changes to your funeral home choices at any time.
- You can receive asset protection. We already discussed irrevocable funeral trusts and their protection from Medicaid spend-down regulations. In many states, you can receive this protection straight away.
Drawbacks to consider:
- Your money likely won’t transfer from one state to another. If you establish your funeral trust fund account in one state but you pass away in another, the funeral home provider probably won’t accept the funds you’ve set aside.
- Your funeral home provider might close (or go out of business). When you pay for your funeral and burial expenses ahead of time, depending on the funeral home you choose, you run the risk of it being out of business when you need its goods and services.
- Your accrued interest is taxable. It’s important to note that accrued interest is taxable. In most states, you’re responsible for reporting the interest income on your Internal Revenue Service (IRS) tax form and paying tax obligations.
When to use a funeral trust
You should certainly evaluate the pros and cons of a funeral trust to help you decide whether to use a funeral trust. While your circumstances can also influence your decision, let’s discuss two general reasons why you should:
1. Preventing emotional overspending
Family members go through a wide range of emotions when they’re grieving. Because of their emotional distress (and desires to express their love and affection), it’s harder for them to make good financial decisions during this time. And, in most cases, they spend overspending their money on funeral arrangements.
The shortage of online price transparency by funeral home providers can also result in overspending. Only 30 of 193 funeral homes in small to mid-size capital cities provide their pricing information online, according to a new pricing study by the Funeral Consumer Alliance and the Consumer Federation of America. Without knowledge of pricing information and a spending plan, your family can unnecessarily spend more on expensive goods and services when planning your funeral.
One of the best ways to curb this overspending in your family is by establishing a funeral trust fund account. By doing this in advance, you’ll have time to:
- Create an affordable budget.
- Know your rights.
- Research and shop around for fair funeral home providers.
- Choose only the specific items you want for your service and burial.
- Compare their prices (and reduce costs, if interested).
- Put aside the funds needed to cover the costs of your chosen items.
Your family will benefit in several ways:
- They’ll be free from guessing the products and services you want (and wasting money).
- They’ll be free from financial burdens and turmoil.
- They’ll be free from the stress of shopping under time constraints.
- They’ll be free to honor your funeral wishes.
2. Protecting yourself from Medicaid spend-down rules
Research by The Centers for Disease Control and Prevention shows an increase in life expectancy. Specifically, here in America, life expectancy increased from 72.6 to 78.8 years between 1975 and 2015. Life expectancy increases invite the possibility of future long-term care needs.
Thing is, long-term care costs, too, have risen in all settings — home health care, adult day care, assisted living and nursing homes. For instance, according to the National Council on Aging, the average nursing home care costs run upwards of $87,000.
Many seniors need help financing their long-term care services with rising costs. The Medicaid program is available as financial assistance for seniors, but the qualification process comes with financial asset requirements and assessments.
The amount of monthly countable assets for seniors varies by state but is usually capped at $2,000 for singles and $3,000 for married couples who live together.
If you’re interested in qualifying for Medicaid and the amount of your assets exceeds the eligibility requirements of your state, then one of two things will happen: Medicaid will deem you ineligible. Or, you’ll be responsible for covering these long-term care costs out of your own pocket or spending down until you reach the point of qualifying eligibility.
If required to spend down without securing your funeral money into an irrevocable funeral trust account, you’ll run the risk of using these funds to cover your long-term care.
Here’s why. Regulations and policies vary from one state to another, but usually, to the Medicaid program:
- A revocable funeral trust is a non-exempt asset
- An irrevocable funeral trust is an exempt asset
When you set aside money for funeral expenses in an irrevocable funeral trust—an excluded asset, you can be sure the money you fund for your funeral will still be available, upon your death. Medicaid excludes your irrevocable funeral trust from your financial considerations—and it’s protected from health care coverage costs and other debts.
But note this transfer of assets to your irrevocable funeral trust account must take place within 5 years of applying and qualifying for Medicaid benefits to receive protection.
Funeral trust alternatives
A funeral trust is one way you can help your family pay for your funeral arrangements. But, in some cases, it might not be the best choice for putting aside the money. Below, we’ll consider 3 alternatives.
- Payable-On-Death Account. With a payable-on-death account—sometimes known as a “Totten trust”—you can invest money (usually up to $15,000) into a bank or credit union account for the purposes of covering your future funeral expenses. You (the account owner) can name at least one beneficiary (and trustee).
Like a revocable trust, you retain control and can withdraw your money (in accordance with your state’s rules), while you’re alive. When you die, your beneficiary can claim and withdraw the funds from your account for your funeral and burial services.
Beware: if you apply for Medicaid, this account will fall under the non-exempt category.
- Final Expense Insurance. If you’re not interested in setting up a funeral trust, then you have the option of purchasing final expense or burial (term or permanent) insurance (with a value ranging from $5,000 to $30,000) from an insurance company for the purpose of paying your funeral and burial expenses.
You can designate a beneficiary on your policy account to receive your money and pay for your funeral services when the time arises. Unlike funds in a funeral trust, beneficiaries can use the money in this type of insurance policy to cover other final life expenses, such as medical debts.
Beware: policy premiums can be expensive.
- Savings Account. Another alternative is to open a savings account, specifically for depositing money for funeral and burial goods and services (with extra funds to account for inflation and unexpected expenses).
If you choose to finance your funeral through a savings account, consider: depositing a certain amount of money every month, designating a beneficiary to manage the account with you—and withdrawing the money, without probate interruptions, to finance your funeral.
Beware: you must report and pay taxes on the accrued interest.
Funeral trust FAQs
Below, you’ll find a few common questions (not already answered here) about funeral trust and answers to help you increase your understanding of this type of trust fund account—before you deposit your money.
1. Is there a limit to funeral trust amounts?
Funeral trust limits vary by state. Generally, though, they range from a minimum of $1,000 to a maximum of $15,000 in value.
2. How does a funeral trust differ from final expense insurance?
A funeral trust allows you to put aside money for your funeral—into an interest accruing account—without age and medical examination requirements for qualification. If you’re in need of (or will be in need of) medical assistance from Medicaid, an irrevocable trust will count as an exempt asset, which means Medicaid spend-down rules will have no effect on the funds you’ve prepaid for your future funeral arrangements.
A final expense insurance policy, by contrast, allows you to buy a term or whole life insurance policy, from an insurance company to cover the costs of your funeral services and burial. If you’re coping with failing health, you might receive a “graded death benefit” policy, which means you’ll likely have high-interest rates on your premiums.
3. What expenses will my irrevocable funeral trust cover?
If you place your funds in an irrevocable funeral trust, it’ll cover the following expenses:
- Embalming or cremation services
- Viewing, visitation, and funeral services
- Clergies and Musicians
- Casket or Urn
- Clothing and Transportation
- Obituaries and Death Certificates
- Stationeries and Flowers
4. Is there protection against thievery or embezzlement of funeral trust funds?
This depends on your state’s funeral home regulation policies. In some states, funeral home providers must deposit funeral money in a trust account just for this purpose. To learn more about how trustees handle prepaid funeral money, you can contact any funeral home of interest or your state’s consumer protection bureau or agency.
5. What will happen to the excess money in my trust account after my funeral?
If you create a revocable funeral trust, then the excess money will likely go to your closest living relative. However, if you establish an irrevocable trust, the excess money will likely go to your home state. For example, if you reside in New Jersey, your leftover fund money will go to the state of New Jersey.