If you are setting up an estate plan, in addition to covering the distribution of your assets, you should make arrangements for handling funeral expenses. You also need to examine how to deal with the potential need for payment of long-term care. One way to do this is with an irrevocable burial trust.
Paying for Funeral Costs
There are basically three ways to pay for funeral expenses:
- Funeral arrangements are made after an individual dies and are paid out of the person's estate or life insurance or, if the estate does not have sufficient assets, by relatives. Some companies sell insurance policies commonly called funeral expense, final expense, or burial insurance, but these are not the same as a burial trust.
- An individual makes and pays for funeral arrangements in advance through a pre-paid or pre-need funeral plan. With this arrangement, you commit to having the services handled by the funeral home where you purchased the plan, which can be a drawback if you move far away or the funeral home goes out of business.
- The individual sets up a burial trust, in which they place funds to cover funeral expenses.
Burial Trust Basics
A trust is a legal document, commonly called a trust agreement or contract, by which a person sets aside a specific amount of money to be used for a certain purpose. In the case of a burial trust, that purpose is to pay for funeral expenses. The person creating the trust is called the grantor, trustor, or trust maker. The trust document designates a person, called the trustee, to hold and manage the trust funds.
If the trust agreement allows the grantor to cancel or remove money from the trust, it is called a revocable trust. An irrevocable trust does not permit the grantor to cancel or change it.
One benefit of a burial trust is that it relieves your family from having to deal with arranging for payment of funeral expenses. If it is an irrevocable burial trust, it can also help you qualify for Medicaid benefits in the event long-term care is needed.
The possible disadvantage to an irrevocable burial trust is that you need to have the funds available to put and keep in the trust. For example, if you decide you need $10,000 for funeral expenses, you must put $10,000 into the trust and can no longer access it for other purposes.
One consideration in estate planning is the potential need for long-term care. As with burial expenses, the options for long-term care are to do nothing and deal with the situation if and when it arises, or to plan in advance. Those who choose to do nothing are effectively betting that they will die before the need for long-term care arises. If you choose to plan ahead, you can either purchase long-term care insurance or set up your estate plan so that you can qualify for Medicaid payment of long-term care costs.
Medicaid payment of long-term care is only available to people with limited income and assets. The Medicaid qualification rules, which are complex, limit the amount of funds that can be placed in a burial trust and vary from state-to-state. Therefore, it is important to obtain professional estate-planning assistance.
As of 2019, an individual may have no more than $2,000 in assets in order to qualify for Medicaid. However, not all types of assets are counted. For example, a primary home, car, burial plot, and pre-paid funeral package are not countable assets. Neither are assets in a properly created irrevocable trust.
With more than $2,000 in countable assets, you have two options:
- Spend the excess on long-term care until you have only $2,000 left, then apply for Medicaid. The excess money goes to the nursing home, which leaves nothing available for funeral costs.
- Place the excess in an irrevocable trust, which removes them from what Medicaid rules consider countable assets. This can be done with one or more irrevocable trusts. For example, suppose you have $100,000 in excess assets. Because funeral expenses won't cost that much, you might put $10,000 in an irrevocable burial trust and the remaining $90,000 in an irrevocable living trust for the benefit of your descendants.
Setting Up an Irrevocable Burial Trust
An irrevocable burial trust is fairly simple to set up. However, to successfully accomplish its goals, the trust must comply with Medicaid eligibility rules, so you may wish to consult with an estate-planning professional.
Some insurance companies and funeral homes will offer to set up a burial trust, with themselves as the trustee, but this is often not a good idea. An insurance company will likely charge a hefty fee for serving as trustee. With a funeral home as trustee, you risk being charged high prices for funeral costs, as well as the potential loss of your money if the business declares bankruptcy or goes out of business. The funeral home's trust agreement may also make itself the beneficiary, meaning your family is not free to choose another funeral home.
An irrevocable burial trust is not for everyone, but for some it may be the best way to pay for funeral expenses—and to help qualify for those ever-important Medicaid benefits.