The Great Debate: Pros and Cons of Funeral Trusts
by Lynda Neuenschwander
The Great Debate:
To utilize a funeral trust or not to utilize a funeral trust…That is the question.First, let’s define what a funeral trust is:
"Funeral trusts allow people to pay funeral expenses in advance, and that can spare survivors a lot of difficult decisions, say advocates. Some nursing homes even require a funeral trust as a condition of admission. But if the trustees aren't reputable or the information isn't current, financial planners warn that such trusts can bring bereaved families more grief."The Internal Revenue Service defines a funeral trust 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." They're often referred to as "pre-need programs." [1]
"A funeral trust is a contract you enter into with a provider of funeral or burial services. Often, the trust is entered into directly with the funeral home, which may agree to "lock in" costs for future funeral or burial services at an agreed upon price. The funeral home sometimes serves as trustee (manager of trust assets), and you usually fund the trust with cash, bonds, or life insurance. A revocable funeral trust can be changed and revoked by you at any time. An irrevocable trust can't be changed or revoked, and you generally can't get your money out except to pay for funeral services." [3]
"An 'Irrevocable Trust' is a 'Trust' that once established cannot be 'dissolved' until the terms of the 'Trust' are satisfied. In the case of an 'Irrevocable Funeral Trust' the person named as the creator [or grantor] of the 'Trust' must pass away before the terms and the assets of the 'Trust' can be put into motion because the wording in this 'Trust' states that the assets cannot be paid out UNTIL the creator passes away. It is very important that you realize that an "Irrevocable Funeral Trust' cannot be dissolved for any reason whatsoever. What these means is that NO PERSON or ENTITY, not even the person in whose name the 'Trust' was created, can gain access to the assets placed into the 'Trust' - EVER. This is the singular reason why no person or entity can confiscate the assets placed in an 'Irrevocable Funeral Trust'. This is also the reason why funeral trusts receive special tax treatment.
A 'Revocable Trust' is one that can be created by anyone, and at a later date, the 'Revocable Trust' can be 'dissolved' by the person who originally created it. Upon dissolution, the assets (if any) that were placed into the 'Trust' revert back to the ownership status they held before they were assigned to the 'Trust'. [4]
What expenses are paid for by a Funeral Trust? [4]
- Basic Services of Funeral Director & Staff
- Other Professional Services
- Embalming
- Other Care of Deceased
- Funeral Home Facilities and/or Staff Services
- Casket
- Cemetery Charges
- Cemetery / Burial Plot
- Other Funeral Merchandise
What are the advantages of having a funeral trust in place?
If you have a funeral trust already set up in advance, "any relative, other person, entity or funeral home" [2] can handle your arrangements when the time comes.You may be able to increase the likelihood of becoming eligible for long-term care benefits available through Medicaid if you create an irrevocable funeral trust.
"An advantage of funding your trust with life insurance is that the trust will have no taxable income to report, since life insurance cash values grow tax deferred." [3]
What are the disadvantages of having a funeral trust?
It is advised to anyone contemplating a trust program through a funeral home to have an independent trustee in place who can "audit the funeral bill for reasonableness and pay any excess to the family." [1]To avoid putting a burden on your heirs, confirm that proceeds from the trust will be accepted as means of payment before making a funeral home your trustee or beneficiary.
"A funeral trust seems like a great idea, but you must keep your information current or major problems will come your way. If you relocate, change the trustee and beneficiary to the new funeral home you will use. Provide your executor or all your heirs with a copy of the trust as well as contact information for the funeral home and the beneficiary, if they're different. A funeral trust should never be considered an investment vehicle." [1]
Otherwise, income from trust assets may be taxed to you as the trustor (creator of the trust) unless the trustee elects to treat the trust as a qualified funeral trust by filing form 1041-QFT with the IRS, in which case trust income is taxed to the trust." [3]
Because a 'Revocable Trust' can be dissolved by its creator, or some other person or entity at any time, a 'Revocable Trust' DOES NOT enjoy favorable tax treatment or exemption from being confiscated by nursing homes or Medicaid providers or even hospitals, doctors and the like. In the case of seniors seeking care in a nursing home, expecting their care to be paid for by the government, they are now subject to the "spend down" rules imposed by all states before providing free nursing home care." [4]
How do I set up a funeral trust?
There are a few different ways in which you can set up a funeral trust:- You can set it up directly with a funeral services provider.
- Finding someone via the internet who deals specifically with funeral trusts and can walk you through it.
- "They are also often sold through insurance companies, in which case they are typically funded with single-premium whole life insurance." [3]
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