The pros and cons of funeral trusts

End-of-life arrangements can be stressful and challenging, especially if you don’t have a plan in place when the time comes. Setting up a funeral trust can ease some of that pressure by establishing important plans ahead of time, from securing a burial plot of cremation services to determining how assets will be distributed. There are benefits and downsides to these arrangements and it is worth considering what will work best for your needs. Bankrate’s team of insurance experts break down the ins and outs of funeral trusts.

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What is a funeral trust?

It may help to think of funeral trusts like a funeral savings account. The funeral trust is a legal agreement between three parties:

1. The trustor: This is the individual who creates the funeral trust. They may also be called the grantor or settlor.
2. The trustee: This is the bank, trust company or funeral home that manages the funeral trust.
3. The beneficiary: This is the funeral home that will benefit from the funeral trust.

The purpose of these trusts is to pre-arrange funeral plans and prepay for expenses. This money sits in a trust until the trustor passes away, at which point the trust pays out to the specified funeral home.

There are two types of funeral trusts: revocable and irrevocable. The difference between them is whether you can change your mind and cancel the plan. If you set up an irrevocable funeral trust, then you transfer control of your assets to the trust account for management by a trustee. You cannot revoke the contract or reclaim your benefits. With an irrevocable trust, the assets are locked until your beneficiaries receive the benefits upon your death.

Conversely, if you set up a revocable funeral trust, you retain control of your assets and can typically make changes to your contract terms, including dissolving the contract and recovering most of your assets. However, there may be fees involved when you dissolve a revocable funeral trust.

What expenses are covered by a funeral trust?

Funerals can be expensive, with many costs to consider. There are several common areas of expenditure to consider when planning a funeral. Depending on the funeral home and the arrangements of the burial trust, any of these expenses could be included:

• A casket, burial vault, cemetery plot or urn
• Embalming or cremation arrangements
• Clothing, presentation and preparation for viewing and burial
• Transportation and officiant services
• Obituary and death certificate fees
• Venue, food, flowers and other event specifics

Benefits of funeral trusts

Funeral trusts may be beneficial in several ways. Understanding the benefits could help you make an informed decision if you’re considering this type of trust.

Executor flexibility

A funeral trust allows for any relative, other person, entity or funeral home to handle funeral arrangements, if necessary. That means that when you create a funeral trust, you can place just about anyone in charge, provided they agree. This may make it easier for a non-family member or more distant relative to take point on funeral plans.

Medicaid benefits eligibility

One advantage of an irrevocable funeral trust (or irrevocable burial trust) is that they are excluded when counting assets to determine if you qualify for Medicaid coverage. Assets included in a revocable trust do have an impact on qualifying for Medicaid coverage. So, if you’re near the limit for Medicaid eligibility, an irrevocable trust may be more sensible than a revocable one.

However, different states have different laws surrounding trusts and Medicaid eligibility. For example, many states have limits on the amount of money that can be put in the trust as well as how recently the trust was set up.

Reduced funeral cost expenses for loved ones

A funeral trust sets aside money to ensure your end-of-life arrangements are funded and planned in accordance with your wishes, but it could help you save money as well. With a trust, funeral expenses are prepaid at the current rate rather than the rate at the time of death. Because funeral costs tend to increase over time, this may help you and your family save on expenses.

Funeral planning ease

In addition to financial ease, a funeral trust may also reduce emotional stress on your loved ones by pre-planning many specific details. For instance, the style of burial or cremation, funeral attire, viewing hours and more can all be pre-determined when the funeral trust is created. This may reduce the logistical burden on your loved ones while ensuring your final burial wishes are still met.

Potential disadvantages of funeral trusts

While funeral trusts may be used as a financial and logistical resource, there are some potential drawbacks associated with these funeral tools. A balanced view of the pros and cons of funeral trusts can help with your decision of whether to set one up.

Risk of lost or inaccessible funds

If a funeral trust is purchased from a privately-owned funeral home and that funeral home then goes into bankruptcy or mismanages the funds, the money spent on prepaid funeral trusts may be irretrievably lost. In addition, funeral trusts may not transfer from state to state. If you purchase a funeral trust in one state, but live in another state when you die, funds may not transfer between funeral homes.

Medicaid and tax implications

While an irrevocable trust does not affect Medicaid eligibility as the assets included are not counted as part of the qualification process, a revocable funeral trust can affect your Medicaid eligibility and is subject to Medicaid spend-down rules. Even with an irrevocable funeral trust, there are limits to how much can be excluded when determining Medicaid eligibility.

Interest income from a funeral trust account is taxable and must be reported on your federal tax return, as well as on most state tax returns.

Funeral trusts are not a common product

Although these trusts offer several potential benefits, they are a less common mechanism for funeral planning than many alternatives. While this may not reduce their usefulness, it may make obtaining information about them more challenging. In general, information about funeral trust management and beneficiary rights is harder to access, and these types of arrangements may have less clear regulations than alternatives.

How to set up a funeral trust

When you contact a funeral home that handles these types of trusts, they will walk you through the process. It generally entails discussing details about how you want to be buried or cremated, if you want viewing arrangements, how you want your funeral structured, what your obituary should be and any other specifics related to your end-of-life planning. While the process can be lengthy and detailed, it’s relatively straightforward. Before finalizing the funeral trust, you’ll have to submit payment.

Tips for setting up a funeral trust

• Research relocation regulations: Before opening your funeral trust, it may be beneficial to confirm that the trust can be transferred to a new state if you relocate. If you move across state lines, be sure to change the trustee and beneficiary to the new funeral home you will use.
• Choose a reputable funeral home provider: Online reviews or local word-of-mouth recommendations may help you find a reputable funeral home. This step may help ensure that your funeral trust covers the agreed upon services after your death.
• Determine how much your funeral will cost: You might consider cross-referencing your state’s limitations on funeral trusts with the estimated cost of your funeral. Your chosen funeral home should be able to help you estimate the cost of your burial or cremation and services.
• Compare various methods of funding a prepaid funeral trust: Cash, savings bonds, CDs, payment plans, or final expense insurance (burial life insurance) may be used to fund a prepaid trust.
• Confirm that proceeds from the trust will be accepted as payment: Most funeral trust experts recommend double checking that your chosen funeral home will accept the funds from the trust as payment for services.
• Consider consulting an attorney: An elder law attorney may help consumers understand the legalities and tax requirements involved in funeral trusts.
• Make sure loved ones are aware of your plans: It may be a good idea to provide your executor and all your heirs with a copy of the trust as well as contact information for the funeral home and beneficiary if they are different.

Alternatives to funeral trusts

Although funeral trusts may be helpful, if you’re on the fence, you may want to consider these alternatives:

Payable-on-death account

Money can be invested into a bank or credit union account for the purpose of covering funeral expenses. The account owner can name at least one beneficiary (and trustee). You retain control and can withdraw funds while you are alive, but beneficiaries can claim and withdraw funds for funeral expenses after your death.

Final expense insurance or burial insurance

Burial insurance is a form of whole life insurance that may be purchased from an insurance company to cover funeral expenses. Beneficiaries can use the money to pay for funeral expenses and for other final life expenses. Comparing quotes from several different companies or speaking with a licensed insurance agent may help you find a policy to fit your needs.

Savings account

Another alternative is to open a savings account earmarked exclusively for funeral expenses. You can deposit funds to save up enough to cover funeral expenses, burial costs and services. Extra funds may help your family pay for additional and unexpected expenses and account for inflation. You may wish to consider designating a trusted beneficiary who can withdraw the money immediately to finance your funeral.

Frequently asked questions

• • Who can set up an irrevocable funeral trust?

    Any competent adult 99 years or younger and of legal age can establish a funeral trust. You can open a trust for immediate family members such as parents, siblings, spouses, children or stepchildren. You can also open such a trust for yourself.

  • Can a funeral home be a life insurance beneficiary?

    Typically, life insurance companies do not allow you to list a funeral home as a beneficiary. With a standard life insurance policy, you may be able to request funeral home assignment paperwork from your insurer. This paperwork would be completed by you and the funeral home of your choice. When your life insurance policy pays out, the insurance company sends a check for the designated amount to the funeral home. However, with a funeral trust, you can bypass this complication. Funeral trusts are much smaller than most standard life insurance policies and are designed to have funeral homes as beneficiaries.

  • Are funeral expenses tax deductible in a trust?

    Funeral expenses are not deductible on your personal taxes, but if the expenses are fully paid from the trust and an estate funded this trust, the taxes may be deductible from that estate’s taxes. In general, funeral costs are not tax deductible for individuals.

  • What is the difference between a revocable and irrevocable funeral trust?

    The difference between a revocable and irrevocable trust stems from whether or not you have the ability to freely change the plan once it has been made. Under a revocable funeral trust, you can make changes to your contract at any time and even choose to cancel it entirely in order to retain control of your assets (though you will typically have to pay a fee in order to dissolve the trust). An irrevocable trust, by contrast, cannot be changed or canceled without the consent of all the named beneficiaries and court approval.