A funeral trust is a type of trust or account used in estate planning to set aside funds to pay the cost of final arrangements, such as funeral services, cremation, burial, and headstones. Some funeral trusts are funded with life insurance.Because there are many different types of funeral trusts and the term is often used to describe certain types of accounts used in pre-need planning, it can be difficult for consumers to get accurate information before putting money into a funeral trust. This article provides an overview of funeral trusts and issues to consider before signing a funeral contract or trust agreement.
Important Facts About Funeral Trusts
Before using a funeral trust to prepay for your final arrangements, be aware of the following:
1. The amount held in a funeral trust may not be sufficient to cover all expenses associated with your funeral services, cremation, burial, and other
memorial preferences. The amount you can place in a funeral trust may be limited. Also, the cost of funeral goods and services increases over time and may be much greater than expected when the time comes. This means your survivors may have to pay some of the expenses for your funeral and burial. It could also mean the funeral home will not be able to complete your instructions for your last wishes if the money held in trust will not cover all the costs. To find out how much various funeral goods and services cost, see can I afford a funeral.2. Many funeral trusts are promoted as tax-free. However, interest or earnings on a funeral trust may be taxable. Keep all tax forms, account statements, and related documents you receive regarding your funeral trust or prepaid funeral account. Before establishing a trust to pay funeral expenses, consult your CPA or tax preparer to determine if the type of trust you are making will generate taxable income.3. You may not be able to transfer your funeral trust or prepaid funeral account to another funeral home or have your funeral services paid for if you move to another state. Whether your funds will be transferable depends on the terms of the trust or contract. Before signing any paperwork, review it carefully to determine whether you are limited to only using one specific funeral home or having your final arrangements performed in a particular state. A good question to ask is what happens if the funeral home designated in your contract goes out of business. You may also want to ask what happens if you move for any reason.
Can Heirs Inherit From a Funeral Trust?
Funeral trusts are typically designed to hold a sufficient amount of money to pay the cost of final arrangements. In fact, the amount of money that can be put in a funeral trust is often limited. Therefore, a more common concern with funeral trusts is whether there will be enough funds available in the trust to cover the total cost of funeral arrangements and burial. It is anticipated that only minimal amounts will remain after these expenses are paid.Nevertheless, there may be excess funds in a prepaid funeral account or funeral trust in some cases. How these funds are ultimately disbursed depends on a few factors. If the deceased person that made the trust was a Medicaid recipient or received other forms of assistance, amounts remaining in the trust may be paid to the government. If the trust named another beneficiary to receive funds left in the trust after the funeral home is paid, that beneficiary may inherit the excess amount. In some cases, funds remaining in a funeral trust will be paid to the decedent's estate. To determine who has a right to these funds, review the prepaid funeral contract or trust agreement and consult an attorney.
How Are Funds in a Funeral Trust Invested?
The manner in which funds in a funeral trust are invested varies depending on the type of trust and the state laws and regulations that apply. Many funeral trusts are structured by purchasing life insurance and transferring the life insurance to the trust. In other types of funeral trusts, funds are held in a trust account at a bank or other financial institution. Some funeral trusts may be invested in bonds or similar types of securities.Before signing a contract or trust agreement to set aside money to pay your
funeral and burial expenses, get detailed information about how your trust funds will be invested. Also, ask whether you will be charged any fees, how often such fees will be assessed, and how the person selling you the funeral trust is compensated.
Do I Need a Funeral Trust?
A funeral trust is one of many available options for setting aside funds to pay funeral expenses. Whether a funeral trust is right for you depends on several factors, including your reasons for making an estate plan, your financial situation, and how much control you want to exercise over your final arrangements. If you are considering making a funeral trust, here are some issues to consider before signing a contract or giving money to a funeral home:1. If you need to qualify for Medicaid or another form of assistance to pay the costs of nursing home care, a funeral trust is one way to set aside money for your last wishes without having those funds be counted as an asset when determining your eligibility for such assistance. However, the rules for qualifying are complex. See Medicaid Planning. Only a licensed attorney familiar with the laws of the state where you are domiciled can advise you on whether a funeral trust will comply with applicable eligibility requirements.2. If there may not be enough funds left in your estate to cover the cost of your funeral arrangements, one potential way to address the problem is putting money into a funeral trust. Nevertheless, there are disadvantages. If you are considering paying for these expenses in advance, read our article about
prepaying for funerals.3. If you do not have a relative or next of kin you trust to handle your final arrangements, a funeral trust is a way to ensure that the funeral home you have selected will be paid. If you do not want your children or other heirs to be responsible to pay your final expenses, setting up a funeral trust is a step you can take to eliminate this burden.4. If you are concerned that funds in your estate may not be immediately available to pay for your funeral and burial, due to probate or a will dispute, a funeral trust or prepaid funeral account is a way to address that concern. One of the advantages of this type of trust or prepaid account is that the funds you set aside should be available within a few hours or days to pay the cost of funeral arrangements. This means your funeral service can proceed as planned, even if your estate has to go through probate.
Can a Funeral Trust be Canceled?
One of the most common questions about funeral trusts is whether you can get your money back from this type of trust or whether money in a funeral trust account can be refunded. The answer depends on whether the funeral trust is irrevocable or revocable.Many funeral trusts are set up as irrevocable trusts so the assets do not count as an asset for purposes of Medicaid eligibility. One of the disadvantages of irrevocable trusts is the person making the trust cannot get funds back from the trust if they want to cancel it later. This means there are no refunds. An irrevocable funeral trust cannot be changed. You should not establish an irrevocable funeral trust unless you are certain you will not need the money or want to make changes to your funeral arrangements in the future.Some funeral trusts or prepaid funeral contracts are revocable. Review the trust agreement or contract and applicable state laws carefully to determine whether it can be revoked. To find state statutes on funeral trusts, go to
trust law. If the funeral trust is revocable, amounts held in the trust can typically be refunded, less any applicable fees.
How to Get a Funeral Trust
There are several places you can go to get information on making your funeral trust. The most common place is a funeral home or mortuary. When you go to the funeral home to make your final arrangements, let the funeral director know you are interested in discussing your options for paying in advance.Another way to start the process of making a funeral trust is to contact your state funeral directors association. This type of organization usually offers information on the state requirements for funeral trusts or pre-need accounts as well as the names of companies that can act as trustee of the trust.If you have already decided to make a funeral trust, you will need to sign paperwork and make payments to fund the trust. Rather than signing any documents immediately, the best practice is to take them home, read them thoroughly, and obtain professional guidance before signing. In addition, make sure you get receipts and account statements for any money or assets you transfer to a funeral trust or prepaid funeral account.Before signing any trust agreement or funeral contract, consult an estate planning lawyer to learn your rights and obligations. Finding an attorney. An attorney can advise whether the proposed funeral trust is valid under the laws of your state and will accomplish your estate planning goals.
Who Serves as Trustee of a Funeral Trust?
The choice of trustee for a funeral trust will depend on how the trust is structured or arranged. For example, if the funeral trust is funded with a life insurance policy, the insurance company may serve as the trustee. If the assets in the funeral trust are held at a bank, the bank may serve as trustee. In some funeral trusts, a trust company may be the trustee. If you have questions about the role of a trustee in a funeral trust, consult an attorney.
Laws Applicable to Funeral Trusts
Note: The term funeral trust is used to describe several different types of trusts, prepaid funeral contracts, and funeral expense accounts. Therefore, the information on this website may not describe your specific funeral trust or funeral expense product. Also, there is no uniformity in state laws regarding funeral trusts and prepaid funeral contracts. The federal and state laws and regulations applicable to your specific funeral trust may be different than those discussed on this website.