A pre-paid funeral plan allows you to organize and pay for your funeral up front at today's cost. They are a way of investing against future funeral costs that have historically been rising significantly higher than inflation. To help relieve your family of some of these decisions, an increasing number of people are planning their own funerals, designating their funeral preferences, and sometimes even paying for them in advance. In fact, many elder law attorneys advise prepayment as a way to invest in assets that will not be countable by Medicaid or SSI.
TRUST ACCOUNTS: (Irrevocable or Revocable)
Trust accounts are one of the most common methods of handling funds paid on a Preneed Agreement. These funds are deposited in a bank or trust company in a trust fund, which earns interest that is accrued in the account. If the trust account is invested on a commingled basis with other similar accounts, usually a higher rate for interest is earned than on current savings accounts. There are federal tax liabilities associated with the interest generated on the trust account that are generally your responsibility.
Life insurance policies may be used to fund Preneed Agreements. In some cases, a pre-existing life insurance policy's death benefit may be pledged, or if permitted, directly assigned to the funeral home. In some states, the funeral directors may also be licensed to sell life insurance policies. You may have to answer questions about your age and health in order to qualify for life insurance. Also, you should ask the insurance sales agent if the particular policy has a fixed death benefit or if it will increase over time to cover your funeral needs. There are no tax liabilities on death benefits paid on life insurance policies.
Prepayment is not a requirement of prearrangement. It is quite acceptable to make your selections or preferences known to your funeral director without paying in advance. However, there are very sound reasons as to why you may want to prepay for your funeral arrangements.
• By prepaying for your funeral arrangements, you further reduce the stress placed on loved ones by eliminating the financial burden at the time of your death.
• In funding your prearrangement, you insure that the money is available to carry out your choices at the time of need. If nursing home care should become necessary, it could deplete much or all of your assets.
• Another advantage to prepayment is that you may secure a "Guaranteed Agreement" which would lock in the cost of part or your entire funeral at today's prices.
PRENEED AGREEMENT GUARANTEES
The funeral associated with a Preneed Agreement may be required in ten days, ten months, or even ten years. Hopefully the interest earned on the trust or insurance funding will equal or exceed any rise in costs for the funeral services or merchandise.
• If the Preneed Agreement is guaranteed, the interest helps the funeral director to offset any impact that inflation may have on his or her costs. Under a "Guaranteed Agreement", the funeral director may not seek additional payment when the actual cost of the guaranteed services and merchandise exceed the funds in the trust account for such services and merchandise. Should the funds exceed the costs, the excess belongs to the funeral director.
• If the Preneed Agreement is not guaranteed, the interest enhances the ability of the fund to accommodate the funeral. The purchaser would be liable for any additional expenses when the actual cost of the funeral services and merchandise exceed the funds in the trust account. Any excess funds after the provisions for the funeral will be refunded to the purchaser (if different than the beneficiary) or the beneficiary's estate.
OTHER PREPAYMENT OPTIONS
As it is acceptable to prearrange without payment, it is also acceptable to prepay without prearrangement. Many people place funds with their funeral director to pay for their eventual funeral without making any specific selections. In many cases, this is done to shelter assets from attachment by state agencies or to reduce ones assets to qualify for Medicaid or SSI.