Funeral Trusts and Payable on Death Accounts

What you need to know about trusts to cover funeral costs

Paying for a Funeral: Funeral TrustA trust is a good way to set aside money for your funeral costs. A Funeral Trust is created in connection with a contract for pre-arrangements with a funeral home or cemetery. That is when you are contracting in advance for funeral or burial services. Whereas a Payable on Death Account (POD) is one you can set up with your bank. A POD account does not have to be associated with a funeral contract.

What is a Funeral Trust?

A funeral trust, or qualified funeral trust, is a special financial vehicle that allows you to set aside money for anticipated funeral costs. When you establish a trust, you make arrangements with a cemetery or funeral home to provide services upon death. The beneficiary of the trust is the funeral service provider. Funeral trusts are commonly used to finance preneed contracts.

Funeral trusts are subject to certain rules set down by the Internal Revenue Service. According to the IRS:

  • The trust arose as a result of a contract with a person engaged in the trade or business of providing funeral or burial services or property to provide such services.
  • The sole purpose of the trust is to hold, invest, and reinvest funds in the trust and to use those funds solely to pay for funeral or burial services or property to provide such services for the benefit of the beneficiaries of the trust.
  • The only beneficiaries of the trust are individuals for whom such services or property are to be provided at their death under the contracts described [above].
  • The only contributions to the trust are contributions by or for such beneficiaries’ benefit.
  • The trustee makes or previously had made the election to treat the trust as a QFT.

How Do I Set Up a Funeral Trust?

Typically, a funeral home or cemetery will help you set up a trust when you are entering into a contract with them. You can open an individual trust account with a bank and deposit your money in a savings account or certificate of deposit. Bonds or life insurance may also be used to fund the trust. When you die, the trust funds are disbursed to the funeral home, cemetery, or service provider that is designated as the primary beneficiary.

An alternative to an individual trust is a professionally managed master trust program. Master trust programs operate in a fashion to mutual funds. Money is pooled and invested in relatively safe instruments, such as U.S. government bonds. Your funeral home may participate in a master trust program, and they can assist you.

Interest income from a trust account is normally taxable and must be reported on your income tax return. One advantage of funding with life insurance is that the growth of your insurance policy is not taxable.

Funeral Trusts: Important Considerations

Be sure to find out what happens to any funds remaining in the trust after funeral costs are paid. Are they distributed back to the estate, or does the funeral provider, as beneficiary, keep them? The preneed contract that is associated with the trust should specify what happens if funds are leftover or if the amount in the funeral trust is not sufficient to cover all costs. Typically, if your contract has a guaranteed price, the funeral provider can keep any excess of the trust over the cost of the funeral. If your contract is not guaranteed, then any excess most likely goes to your estate. However, if you do not have a fully guaranteed price, your estate or your family will likely be responsible for paying any balance that remains after the trust funds are disbursed.

There are a number of factors to consider when establishing a funeral trust. Should the trust be revocable or irrevocable? What effect will the trust have on your ability to collect benefits under Medicaid or other social service programs? Will the trust have any impact on social security eligibility?

While setting up a funeral trust is not difficult, it is important that you understand all the financial implications. You should also be sure that you are aware of the specific requirements in your state since laws vary by state. You should be sure to consult your financial advisor or a skilled attorney or as your funeral director or cemetery professional for help in setting up the trust or for a referral to someone who can help.

Most funeral industry professionals are honest, caring individuals who just want to help people when they need it most. Unfortunately, there are instances when consumers have been taken advantage of by unscrupulous individuals. Be sure to do your homework on the funeral professionals with whom you will be working. Some ways to do that are to look for online reviews, check with your local Better Business Bureau, talk to friends and family, and contact your State Attorney General’s office.

What are Payable on Death Accounts?

Also, know as Totten Trusts, a payable on death (POD) account is a convenient way to transfer money for payment of your funeral costs. You can set up a POD account with your bank, or you can convert an existing account. As the account owner, you need to fill out the required paperwork and name a beneficiary of the POD account. Your bank will keep a record of the paperwork and beneficiary.

The POD account beneficiary does not have any control over the account while the account owner is still living. Upon the account owner’s death, the beneficiary can access the funds to pay for the funeral. Since the bank has the account paperwork, this is a simple process. A significant advantage of a POD account is that it avoids probate. If circumstances or considerations change, a POD account is revocable by the account owner during her/his lifetime.

Be aware that there can be complications when making a minor the beneficiary of your POD account. It is always a good idea to consult with your lawyer or financial advisor about the considerations when setting up a POD account.

Funeral Insurance is a popular alternative to a funeral trust. Various types of funeral insurance policies are available from highly rated insurance companies and many offer fixed payment plans.

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