As more of the baby boomers are entering the nursing home, they are looking to take the stress off of their families by planning their own funerals. Many of them are wanting to pay the money up front to avoid their families having to chip in for the cost to bury them. One of the methods used is to prepay the cost of the funeral upfront with a specific funeral home. Although they might feel a great weight off of their shoulders, they might have caused their family a headache in the end.
Most of the time a person will pick out the casket and services they want, then pay the total cost upfront at a specific funeral home. This is called prepaying your funeral. Unfortunately, the cost of the funeral might go up because of inflation or the casket needs to be a special order because the casket is not made any longer. Normally, the family does not find out about these inflated cost until after the funeral is held and a bill is given to them. At that time, there is nothing the family can do especially if the contract is written with no inflation factored in. In other situations, the funeral home goes out of business or they might sell the business to a new owner that does not honor the contract.
In 2012 the Wisconsin Funeral Directors Association was sued for misappropriating the funds placed in their burial trust. Many funeral homes agreed to the settlement that they would honor the contract with their purchaser and give the purchaser 100 cents on the dollar of the contract. However, there are many funeral homes which did not sign the settlement which left the purchaser’s only recourse was to sue the funeral homes. It is very important to know where the funeral director is investing your prepaid funeral money or you could be left without any money for your funeral.
Besides the inflated cost, business being sold, contracts not honored and investments lost, you also need to remember you are locked into a specific funeral home. What if you move out of state to be near your children? You’re in a contract and might not be able to get out or get your money back. What if you don’t like that funeral home because the older owner sold out and the new owner doesn’t keep the place nice? You’re in a contract and might not be able to get out or get your money back. Being locked into a specific contract at a specific location has a lot of unknown risks.
This is not to say that many funeral directors are good and honest, there are. Some of these same funeral directors have turned to providing irrevocable funeral trust or burial insurance. For this article irrevocable funeral trust and burial insurance as the same insurance just a different name depending on who you are speaking to. Many insurance agents use the term irrevocable funeral trust while the agents for Medicaid use the term burial insurance.
Irrevocable Funeral Trust are insurance products that provide protection from creditors and a Medicaid spend down. Most states allow a person to set aside $15,000 (2018) to pay for their funeral expenses. These expenses include but are not limited to: cremation, services, casket, embalming, funeral home facilities, transportation, death certificates, musicians, clergy, flows, clothing, meals, etc.
The pros of these funeral trust:
1. Not a divestment for Medicaid or SSI and does not have a 5 year look back period.
2. Protected money from creditors.
3. Does provide a little bit of growth, tax free.
4. Not locked into one location for your funeral. You may have your funeral wherever you want it.
5. Normally pay the funeral home within 48 hours.
6. Funeral director does not know how much is in the insurance, so family will not be pressured to spend all of it.
7. Any money left over goes back to the estate, unless the person was on Medicaid and single, then Medicaid has a right to recover the money.
8. Insurance product, so it is back by the state insurance commissioner.
9. 30 day cancellation right.
10. You still can pre-plan your funeral without paying upfront to the funeral home.
11. Don’t need to worry about funeral home going out of business or selling.
12. Many plans let you make installment payments.
13. If you already have a life insurance policy with cash value that is not exempt for Medicaid purposes you may do a 1035 exchange to purchase a funeral trust.
The biggest negative is that once you put the money into these insurance products, it is irrevocable and you are not getting the money back out. However, since most of us are going to die (unless the world ends before that) we will need to pay for our funerals. It is nice to have the money already waiting, so that so our family does not need to struggle to pay for our funeral. Estate and funeral planning is one last gift to our family.