Funeral Trusts to Cover Funeral Costs

What is a Funeral Trust?

Paying for a Funeral: Funeral TrustA 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 pre-need 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.

You can establish a funeral trust by depositing money in an interest-bearing trust account. When you die, the trust funds are disbursed to the funeral home, cemetery, or service provider that is designated as the primary beneficiary. Many funeral homes can help you set up a trust if you have made funeral arrangements with them.

In most cases, funds remaining in the trust after funeral cost are paid, are distributed back to the estate. The pre-need contract that is associated with the trust should specify what happens if funds are left over or if the amount in the funeral trust is not sufficient to cover all costs. Unless you 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.

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.

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 into 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.

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.

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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