What Is a Funeral Trust?

What Are the Types of Funeral Trusts?

Funeral trusts are specialized financial agreements designed specifically to cover the costs associated with end-of-life arrangements.

There are a few types of funeral trusts that individuals can establish:

Revocable Funeral Trusts

A Revocable Funeral Trust allows the person who sets it up, known as the grantor, to make changes, amendments, or even terminate the trust if they wish.

Characteristics: Flexibility to modify or dissolve. Funds are considered part of the grantor's estate. Money can be accessed or refunded to the grantor, but it may be subject to taxes or claims by creditors.

Irrevocable Funeral Trusts

Once an Irrevocable Funeral Trust (also known as an Irrevocable Burial Trust) is established, the grantor cannot make alterations or access the funds. These funds are earmarked exclusively for funeral expenses.

Characteristics: Ensures money is exclusively used for funeral and burial costs. Not considered part of the grantor's countable assets when evaluating Medicaid eligibility or estate taxes. Will help provide peace of mind as the funds are safeguarded from creditors and legal judgments.

Preneed Funeral Trusts

A Preneed Funeral Trust is typically set up through a funeral service provider. The grantor selects and pays in advance for funeral and burial services, and the provider holds the funds in trust until needed.

Characteristics: Funds are used according to the pre-arranged agreement. It can be either revocable or irrevocable, depending on the terms agreed upon with the service provider. Offers the advantage of price-locking funeral services at current rates, potentially hedging against future inflation.

Totten Trusts (or Payable-On-Death Account)

While not a traditional funeral trust, a Totten Trust is often used for similar purposes. It's a bank account that becomes accessible to a named beneficiary upon the death of the account holder.

Characteristics: Easily set up at most banks. Beneficiaries can directly access funds without going through probate. Provides a simple way to earmark money for funeral expenses without creating a formal trust.

When choosing a funeral trust, it's important to consider factors such as financial situation, estate planning goals, Medicaid considerations, and personal preferences.

How Do Funeral Trusts Work?

Funeral trusts are financial tools designed to set aside funds for funeral and other end-of-life expenses. Here's a breakdown of how they work:

1. Establishment: An individual (often referred to as the "grantor" or "settlor") sets up a funeral trust either independently or through a funeral service provider. The trust is a legally binding agreement that specifies how the funds should be used upon the death of the grantor.
2. Funding: The trust can be funded using various means, such as cash, life insurance policies, or other financial assets. Once funded, especially in the case of irrevocable trusts, the money is earmarked explicitly for funeral expenses and cannot be easily accessed for other purposes.
3. Growth: Depending on the terms of the trust and where the funds are held, the money in the funeral trust might earn interest over time. This can help offset inflation and rising funeral costs, ensuring enough funds are available when needed.
4. Accessing the Trust: Upon the grantor's death, the funds in the trust are used to pay for funeral and burial expenses. If the trust was set up through a funeral service provider (preneed funeral trust), the provider typically carries out the services as per the pre-arranged agreement and then draws from the trust to cover the costs.
5. Surplus Funds: If the trust contains more money than required for the funeral expenses, the remaining amount is typically distributed to the estate or a named beneficiary. The specifics can depend on the terms of the trust and local regulations.
6. Tax Implications: Funeral trusts may have tax implications, both in terms of the income they generate (if any) and with estate taxes. For example, irrevocable funeral trusts are generally not considered part of an individual's estate for Medicaid or estate tax purposes. This can benefit individuals looking to reduce their taxable estate or qualify for Medicaid.
7. Protection from Creditors: In many jurisdictions, irrevocable funeral trusts are protected from creditors. This means that even if the grantor has outstanding debts, the funds in the funeral trust can't be accessed by creditors and are reserved solely for end-of-life expenses.
8. Revocation or Changes: If the funeral trust is revocable, the grantor can make changes, withdraw funds, or dissolve the trust entirely. However, this might expose the trust to creditors or disqualify the individual from certain benefits like Medicaid. Irrevocable trusts, once established, cannot be changed or revoked, ensuring the funds' security.

Remember, it is important to take the time to research setting trusts within your estate plan thoroughly. Depending on your needs and financial situation, you can use different types of trusts. Consider all available options, evaluating your financial objectives, family, and personal preferences.

What Expenses Are Covered by a Funeral Trust?

A funeral trust is specifically designed to cover the costs associated with end-of-life expenses. Here's an overview of what a funeral trust typically covers:

Essential Funeral Services: Funeral directors and their staff offer services for funeral planning, including permit filing, certificate preparation, and coordination with the cemetery or crematory.

Preparation of the Deceased: Embalming, washing, dressing, grooming, and restorative art are all part of preserving the deceased.

Funeral Ceremony/Service: Facilities and equipment can be rented for viewing, visitation, funeral, and memorial services, as well as for graveside services.

Transportation: The service involves transporting the deceased to the funeral home and providing a hearse or other vehicle to transport the body to the funeral site or cemetery. Service vehicles like limousines or flower cars are also offered.

Funeral Merchandise: A casket or burial vault, an urn for cremation, memorial or grave markers, funeral programs, prayer cards, and guest books are all components of a funeral service.

Cremation Services: The most basic crematory services include providing a cremation container or suitable casket and renting facilities for a memorial service, if not held at a funeral home.

Burial Expenses: The cemetery plot or crypt, opening and closing of the grave, grave liners or burial vaults if required by the cemetery, and the endowment care fee for the upkeep of the cemetery plot.

Floral & Additional Memorialization: At the funeral service, gravesite, or other memorial locations, you can commemorate loved ones with flowers, memorial or tribute videos, online memorials or obituaries, and memorial jewelry or keepsakes.

Miscellaneous Expenses: Death certificates, food or catering for a post-service gathering, and obituary placement in newspapers or other media outlets.

Other Pre-specified Arrangements: Some people have specific wishes or cultural/traditional requirements. The trust can be set up to cover these unique expenses, provided they are specified when setting up the trust.

It's essential to work closely with a funeral director or provider when setting up a funeral trust to ensure all potential costs are considered. This helps in making sure the trust is adequately funded to cover all desired services and merchandise without leaving a burden on the family or loved ones.

Pros: What Are the Benefits of a Funeral Trust?

Funeral trusts come with various benefits that can help individuals and their families navigate the challenges and costs associated with end-of-life planning. Here are some of the primary benefits of a funeral trust:

1. Financial Security:

• Price Lock-In: Many funeral trusts allow you to lock in today's prices for funeral goods and services, protecting against future price inflation.
• Guaranteed Services: Upon death, the funeral services and merchandise specified in the trust agreement are guaranteed to be provided, regardless of whether their cost has increased.

2. Ease for Loved Ones:

• Reduced Burden: Having a funeral trust in place reduces the emotional and financial burden on family members during stressful times.
• Predefined Wishes: It ensures an individual's wishes are met, preventing potential disagreements or uncertainties about final arrangements.

3. Flexibility:

• Transferrable: If you move or change your mind about the funeral home, many funeral trusts can be transferred to different funeral providers.
• Choice of Services: You can tailor the trust to your needs and wishes, from basic arrangements to more customized services.

4. Financial and Legal Advantages:

• Medicaid Consideration: In many states, funds in irrevocable funeral trusts are not counted as assets when determining Medicaid benefits eligibility.
• Protection from Creditors: Funds in irrevocable trusts are typically protected from creditors, ensuring that the money will be used for its intended purpose. 

5. Professional Guidance:

• Expert Advice: Funeral directors or financial planners who assist with setting up funeral trusts offer expert advice on the various costs and considerations, helping individuals make informed decisions.
• Regulated Oversight: Funeral trusts are typically overseen by state regulations, ensuring security and professionalism.

6. Tax Considerations:

• Tax-Free Growth: The interest earned on a funeral trust is generally tax-free as long as it remains in the trust and is used for funeral expenses.
• Avoidance of Probate: Funeral trusts, especially irrevocable ones, typically bypass the probate process, ensuring funds are immediately available for funeral expenses.

7. Liquidation Upon Need:

• Prompt Payout: Funeral trusts are designed to be liquidated promptly upon the beneficiary's death, ensuring that funds are available when needed without delays.

Cons: What Are the Drawbacks of a Funeral Trust?

While funeral trusts offer several benefits, they also come with potential drawbacks. Here are some of the primary drawbacks of a funeral trust:

1. Lack of Flexibility:

• Irrevocable Trusts: Once you establish an irrevocable funeral trust, you generally cannot change or cancel it, even if your circumstances or wishes change.
• Fixed Allocation: The funds set aside in the trust are specifically for funeral expenses, meaning they can't be used for other pressing needs unless the trust is revocable.

2. Financial Concerns:

• Interest Rates: The interest earned on the funds in a funeral trust might be lower than that achieved through other investment avenues.
• Potential for Overfunding: It's possible to deposit more money into the trust than what the actual funeral costs will be, potentially leading to overfunding. While excess funds might be returned to the estate or beneficiaries in some cases, this process can be complex and may not always be guaranteed.
• Fees and Commissions: Setting up and managing the trust may come with administrative fees or commissions, which can reduce the overall value of the trust.

3. Provider Risks:

• Business Insolvency: If the chosen funeral home goes out of business, there might be complications in transferring the trust to another provider or getting a refund.
• Service Quality: Prepaying doesn't always guarantee the quality of services in the future. The funeral home's standards or ownership could change over time.

4. Legal and Regulatory Concerns:

• Varied Regulations: Regulations concerning funeral trusts can vary by state, potentially leading to confusion or complications, especially if you move to a different state.
• Potential Tax Implications: While the interest earned in a funeral trust is generally tax-free, there might be tax implications in some circumstances or states.

5. Opportunity Costs:

• Alternative Investments: The funds in a funeral trust might have been invested elsewhere, potentially yielding higher returns or serving other financial needs.

6. Emotional Factors:

• Premature Decisions: Making decisions about funeral arrangements well in advance can be emotionally challenging and might not reflect one's wishes closer to the end of life.

7. Potential for Misunderstanding:

• Complex Contracts: The terms and conditions of funeral trust contracts can sometimes be complicated. There's a risk of misunderstanding the fine print or overlooking certain clauses, leading to unanticipated outcomes.

8. Transfer Challenges:

• Transfer Fees: While many funeral trusts are transferable to different funeral providers, there might be fees associated with such transfers.

When considering a funeral trust, it is essential to understand the benefits and potential drawbacks fully. Seeking advice from financial advisors, legal counsel, or funeral professionals can provide clarity and help in making informed decisions.

How Much Does a Funeral Trust Cost?

The cost of establishing a funeral trust depends on various factors, including the type of trust, the specific services and products selected, the funeral service provider's pricing, and additional fees or charges. Here are the typical costs associated with funeral trusts:

Initial Funding: The primary cost associated with a funeral trust is the amount of money you decide to fund it with. This amount should ideally cover the projected costs of the desired funeral and burial or cremation services. According to the most recent data from the National Funeral Directors Association, the average funeral with burial is $7,848, and funeral with cremation is $6,971.¹

Administrative Fees: Some trusts may have setup fees, maintenance fees, or other administrative charges. These fees can vary based on the trust provider and the type of trust (revocable vs. irrevocable trust).

Interest & Investment Earnings: While the funds in the trust may earn interest or other investment returns, the rate might be lower than other investment opportunities. In some cases, a portion of the interest may be taken as administrative fees by the trust manager or funeral service provider.

Inflation & Future Costs: It's essential to consider the potential rise in future funeral costs due to inflation. What may seem sufficient to cover funeral expenses today may fall short in the future. Some funeral trusts might offer inflation protection plans, but these could come at an additional cost.

State-Specific Costs: Each state may have regulations regarding funeral trusts, including potential taxes, fees, or other costs associated with establishing and maintaining the trust.

Insurance Premiums (if applicable): Some funeral trusts are funded using life insurance policies. In such cases, there would be premiums associated with the insurance policy.

It's essential to shop around, get multiple quotes, and understand the detailed breakdown of all costs when considering a funeral trust. Consulting with funeral directors, financial advisors, or legal professionals can help ensure transparency and make an informed decision.

Are There Alternatives to a Funeral Trust?

Yes, there are several alternatives to a funeral trust that individuals can consider for pre-planning and funding their end-of-life arrangements. Here are some of the other options:

Prepaid Funeral Plans: A contract between an individual and a reputable funeral home provider where services and goods are selected and paid for in advance. While similar to a funeral trust, the funds are directly tied to a specific funeral home or provider.

Life Insurance: Some people opt for a life insurance policy, either term or whole, to cover funeral expenses. There are also specific "final expense insurance" or "burial insurance" policies to cover funeral and burial costs. If you list the funeral home as the beneficiary, the insurance company will pay the funds directly to the funeral home.

Payable-on-Death (POD) Accounts: Also known as a "Totten Trust," this is a type of bank account that allows an individual to set aside money for a beneficiary (like a funeral home) that becomes available upon the account owner or holder's death.

Savings Accounts: A simple approach where individuals save money in a dedicated savings account for funeral expenses. This method requires discipline to ensure the necessary funds are available when needed.

Veterans Benefits: Veterans in the U.S. may be eligible for burial benefits through the Department of Veterans Affairs, which can cover burial or cremation costs, a grave marker, and a burial plot in a national cemetery.

State Assistance: Some states offer assistance programs for those who cannot afford to pay for their funeral. Eligibility and the extent of help can vary widely.

The best alternative to a funeral trust for you will depend on your individual needs and circumstances. It is a good idea to speak with a financial advisor or estate planning attorney to discuss your options and choose the best alternative.

Is a Funeral Trust Right for You?

Whether or not a funeral trust is right for you depends on your individual needs and circumstances. Here are some factors to consider when making your decision:

1. Your Financial Situation: Funeral Trusts can be expensive, so it is important to ensure you can afford to fund the trust. If you have a life insurance policy or other assets, a funeral trust might be redundant.
2. Alternative Options: Consider other ways to handle funeral expenses, like savings accounts, life insurance, or payable-on-death accounts.
3. Desire for Pre-planning: Reflect on the importance you place on having funeral details and payments arranged ahead of time. If you have specific wishes for your funeral, a funeral trust can help you ensure that your wishes are carried out.
4. Mobility and Stability: If you're likely to relocate or are uncertain about long-term decisions, you'll want flexibility in your funeral arrangements.

Sources:

1. National Funeral Directors Association Statistics. https://nfda.org/news/statistics
2. The FTC Funeral Rule. https://consumer.ftc.gov/articles/ftc-funeral-rule