A pre-planned funeral trust, or simply funeral trust, is a smart way to begin pre-paying future funeral expenses. Funerals are becoming more costly each year and through a funeral trust, your loved ones won’t have to shoulder the financial burden of paying for your funeral arrangements and burial. In this guide, we’ll talk about what exactly a pre-planned funeral trust is and why you should think about setting one up. Thinking about our mortality can be difficult and uncomfortable, but you should also think about how your surviving family members will be forever grateful that you had the foresight to pay off your own funeral expenses. If you’re interested in setting up a funeral trust, or you’re still on the fence about it, please read on.
What is the average cost of a funeral?
Before we talk about what pre-planned funeral trusts are, let’s provide some context on the financial aspects of funerals and burials. The financial cost alone can cause further burden for your family, with the typical price range expected to stay between $9,600 to $13,000 over the next few years. Oftentimes, services such as cremation and cemetery fees aren't included. That’s why it makes sense to consider the possible financial impact of your funeral on your loved ones, and plan accordingly.
With a prepaid funeral plan, you get to choose the type of service you want and lock in the present-day prices, which protects you against rising costs and inflation. After you lay out the details of your chosen plan and sign a contract, the funeral home will establish an insurance policy or trust account (revocable or irrevocable) on your behalf. This secures your monthly payments. Just like any major purchase, your payments continue until the balance on your plan is paid off. Terms are usually three to 10 years, which allows you to have a monthly payment that works with your budget.
What is a funeral trust?
Now that you know the financial elements of funeral arrangements and other end-of-life services, let’s talk about what exactly a funeral trust is.
The short answer is that a funeral trust is an arrangement entered into with a provider of funeral or burial services. Prepaying funeral expenses will allow you to lock in costs for future funeral or burial services at an agreed-upon price.
In this type of plan, a funeral home could serve as the trustee. In other words, the manager of trust assets, and you’ll typically fund the trust with cash, bonds, or life insurance.
There are two types of funeral trusts. There’s the revocable funeral trust, which can be changed and revoked by you at any time. Then there’s the irrevocable trust, which can’t be changed or revoked, and you generally can’t get your money out except to pay for funeral services.
In addition, irrevocable funeral trusts may also help you qualify for long-term care benefits through Medicaid. For example, irrevocable funeral trusts may be funded with assets that would otherwise be countable resources for Medicaid. They are often sold through insurance companies, in which case they are typically funded with life insurance. On top of that, you can fund the funeral trust right before entering the nursing home, meaning there’s no “look-back” period for these transfers, unlike the case with certain other transfers that can cause a delay in the start of Medicaid benefits.
One advantage of funding your funeral trust with life insurance is that the trust will have no taxable income to report. This is because life insurance cash values grow tax deferred. Otherwise, income from trust assets may be taxed to you as the grantor of the trust, unless the trustee elects to treat the trust as a qualified funeral trust by filing Form 1041-QFT with the IRS. If you take that route, trust income is taxed to the trust.
You might be wondering what happens if you want to change funeral homes, or the facility you select goes out of business. Does your irrevocable trust allow you to change beneficiaries (that is, funeral homes)? Are trust funds protected from creditors of the funeral home? State laws regulating prepaid funeral trusts usually require funeral homes to keep trust assets separate from their own business assets, which keeps them safe from funeral home creditors.
You should know that most irrevocable trusts are transferable to another funeral home should the initial business fail or you change funeral homes. There are expenses associated with the creation of a trust and the purchase of life insurance, and benefits are not guaranteed.
What do funeral contracts include?
Funeral contracts, which will be funded by the funeral trust, often include these services, and more:
Funeral director and staff
Other preparation of the body
Transfer of remains to the funeral home
Hearse Limousine or family car
By creating a trust with a funeral home in your local area, they will be able to help you spend down assets. They can also help you get qualified for Medicaid while giving your family peace of mind about your future plans.
Funeral trusts and taxes
When you pay for your funeral plan contract with a funeral home, you will then establish a funeral trust. Please be aware that some trusts considered by the IRS as “qualified” may be taxed. A QFT (qualified funeral trust) arises out of a contract with a funeral or burial business. The trustee files Form 1041-QFT to report the income, deductions, gains, losses, and tax liability of the QFT. Pre-need funeral trusts that don’t qualify as QFTs will look at Form 1041 for filing requirements. For advice concerning the IRS and filing requirements, consult with your accountant.
Establishing a funeral trust
When you decide on a reputable funeral home, the director can guide you in making decisions that fit your budget. They can also assist you with how your final wishes could be implemented, as well as many other details you choose to include. Making these decisions now can spare survivors many difficult decisions later and help give you peace of mind about the future. When working with a funeral director you trust, seemingly complex plans can become easier to handle. Because funeral directors help people make decisions like this daily, they understand what choices you need to make and the factors behind every decision in the planning process.
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, or find someone via the internet who deals specifically with funeral trusts and can walk you through it.
Preplanning a funeral can be a tough thing to do, especially since we have to face our own mortality while still alive and well. However, as you’ve learned from our journey today, preparing for the future is one of the selfless and thoughtful things you can do for your loved ones. Remember to always look ahead, no matter where you are in life.
One of the most important steps in pre-planning your funeral is to choose the right funeral director. Check out our guide on finding trusted funeral directors to help you get started.
Additionally, If you would like to build a life legacy that tells your story, your way and will live on after your departure, you can create a Living Timeline with Memories.