With the cost of a funeral averaging between $7,000 and $12,000 and steadily increasing each year, you should consider including enough money to cover this final expense in your estate plan. Simply setting aside money in your will to cover your funeral expenses might not be sufficient, as it can create unnecessary burdens for your loved ones.
Although you can leave money in your will to pay for your funeral expenses, your family won’t be able to access those funds until your estate goes through the court process of probate, which can last months or even years. Since many funeral providers require full payment upfront, your family might have to cover your funeral costs out of pocket. To avoid that burden for your family, you can use estate planning strategies that do not require probate. While you should meet with us to find the solution best suited for your situation, the following 5 options are the most common.
1.Traditional Insurance
You can purchase a new life insurance policy or add extra coverage to your existing policy to cover funeral expenses. Unlike money left in your will, an insurance policy does not go through probate, and it will pay the death benefit to the named beneficiary as soon as your death certificate is filed with the insurance company.
2.Burial Insurance
In addition to traditional insurance, you can purchase burial insurance, which is specifically designed to cover funeral expenses. It is also known as “final expense,” “memorial,” and “preneed” insurance, and these policies do not require a medical exam. Keep in mind that frequently, you’ll pay more in premiums than what the policy actually pays out.
Due to the hefty premiums and the fact such policies are sold mostly to vulnerable people, consumer advocate groups like the Consumer Federation of America consider burial insurance a bad idea and even predatory in some cases.
If you have any type of insurance to cover your funeral, it’s important that your family knows about it. Far too often, insurance policies are never cashed in because the family didn’t know they existed, so make sure your family knows about any insurance you have and how to locate the paperwork.
3.Prepaid Funeral Plans.
Many funeral homes let you pay for your funeral services in advance, either in a single lump sum or through installments. Through these pre-need plans, the funeral provider typically puts your money in a trust that pays out upon your death or buys a burial insurance policy with itself as the beneficiary.
While prepaid plans may seem like a convenient way to cover your funeral expenses, these plans can have drawbacks. If the funeral provider buys burial insurance, you’re likely to see massive premiums compared to what the plan pays out. If they use a trust, the plan might not actually cover the full cost of the funeral, leaving your family to pay for the difference. Many states have inadequate laws protecting funds in such plans, putting your money at risk if the funeral provider closes or is bought out by another company.
These plans are considered so risky, the Funeral Consumers Alliance (FCA) advises against purchasing them. The only instance where prepaid plans are a good idea, according to the FCA, is if you are facing a Medicaid spend down before going into a nursing home. This is because prepaid funeral plans funded through irrevocable trusts are not considered a countable asset for Medicaid eligibility purposes.
If you’re looking to buy a prepaid funeral plan in order to qualify for Medicaid, consider consulting with a lawyer first, as not all pre-paid funeral plans are actually Medicaid compliant, even if the funeral home says they are. If the irrevocable trust is not set up correctly, it may violate Medicaid’s look-back period, which can delay your eligibility.
4.Payable-On-Death Accounts
Many banks offer payable-on-death (POD) accounts, sometimes called Totten Trusts, that you can set up to fund your funeral. The account’s beneficiary can only access the money upon your death, but you can deposit or withdraw money at any time.
A POD account does not go through probate, so the beneficiary can access the money once your death certificate is issued. POD accounts are FDIC-insured, but such accounts are treated as countable assets by Medicaid, and the interest is subject to income tax.
Another option is to simply open a joint savings account with the person handling your funeral expenses and give them rights of survivorship. This gives the person access to your money while you’re alive too, which puts your money at risk if the person goes into debt or gets sued and their creditors come after your account to pay the other person’s debt. There are other options that avoid this risk and allow you to pay your funeral expenses.
5.Living Trusts
We can work with you to create a customized living trust that allows you to control the funds until your death and name a successor trustee, who is legally bound to use the trust funds to pay for your funeral expenses exactly as the trust terms stipulate. This will mean you won’t need to buy a pre-built trust from a funeral provider.
With a living trust, you can change the terms of your living trust at any time, and you can even dissolve the trust if you need the money for other purposes. If you need an irrevocable trust to help qualify for Medicaid, we can create that type of trust as well, while ensuring the trust stays compliant with Medicaid’s requirements.
If you are interested in creating a trust to cover your funeral expenses, meet with us to discuss the options that are best suited for your intended purpose, budget, and family situation.
Use Estate Planning to Avoid Burdening Your Family
With so many different options to choose from, we can help you find an estate planning vehicle that is best suited for you and your family. Together, we can develop a planning strategy that includes adequate funding to ensure your funeral services are handled in the exact manner you desire—and your family won’t be forced to foot the bill.