How to Use a Funeral Trust

Prepaying funeral expenses may allow you to lock in costs for future funeral or burial services. Some nursing homes require a funeral trust as a condition of admission. So what is a funeral trust? The IRS defines it as a pooled income trust set up by a funeral home or cemetery to cover future funeral and burial costs.

You can look at a funeral trust as a contract that lets you lock in costs at an agreed-upon price. Furthermore, you can fund the trust with cash, bonds or life insurance.

What are the advantages of having a funeral trust in place?

• It’s set up in advance so that any relative, entity or funeral home will be able to handle your arrangements when needed.
• Medicaid is partial to irrevocable funeral trusts. So you’ll increase your likelihood of being eligible for Medicaid.
• You can fund your trust with life insurance. Thus, the trust will have no taxable income to report. And, your life insurance cash values grow tax deferred.

And here are some of the finer points you should consider:

• Get an independent trustee! Someone who will audit the funeral bill for reasonableness and pay any excess to the family.
• Avoid putting a burden on your heirs! Confirm that proceeds from the trust will be accepted as a means of payment before making a funeral home your trustee or beneficiary.
• Keep your information current or problems will crop up. If you relocate, change the trustee and beneficiary to the new funeral home you’ll be using. Provide your executor and heirs with a copy of the trust. And, give them the contact information for the funeral home and the beneficiary if they’re different.
• A funeral trust isn’t an investment vehicle. If you treat it as such, you may be taxed. Instead, elect 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.
• A revocable trust doesn’t enjoy favorable tax treatment or exemption from being confiscated by nursing homes, Medicaid providers or even hospitals or doctors — that’s why you want an irrevocable trust.

So how do you set up one?

You can set it up directly with a funeral services provider. You can also set it up with insurance companies, and they typically allow you to fund funeral trusts with single-premium whole life insurance.

Creating an irrevocable funeral trust will usually work around Medicaid’s 60-month past asset transfer or look-back rule. Most states impose a limit on the amount of money placed in a funeral trust, ranging from $5,000 to $15,000 per spouse. So if you have countable assets that exceed these amounts, you still can use a funeral trust, but you may need to combine it with other techniques to lower your asset total to a Medicaid-compliant level.

While a big upside is locking in prices in advance, the true value of a funeral trust is in your family’s peace of mind.

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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