Why do people pre-fund their funerals?

Nationally and in Minnesota, pre-payment (pre-funding) of a portion or all funeral costs is a growing trend. There are both emotional and financial benefits to pre-funding.

The facts that we are mortal and that funerals cost money should not surprise anyone. Yet, funeral professionals meet daily with next of kin who are not prepared to deal with the financial impact of a loved one dying.

Indeed, the funeral establishment's charges are important to consider and plan for, but many people fail to plan adequately for all the other expenses involved with a loved one dying. For example, there are cemetery expenses, marker or monument expenses, and travel and lodging expenses. There are also expenses for flowers, food, music, obituaries, and other items. All these expenses occur at a time when the decedent's income has stopped and life insurance benefits are not yet paid. Many people say they feel better after they've completed their pre-arrangements, knowing this burden has been removed from their loved ones.

What common mistakes do people make when pre-funding?

• The most common mistake people make when pre-funding their funeral is failing to follow through. Most people would agree that it is a good idea to ensure that this inevitable expense is taken care of. Yet, many of the people who get started with the process fail to act on pre-funding until it is too late. Medical problems that are common with advancing age can erode one's finances and affect one's eligibility for a complete slate of pre-funding options.
• Handling the pre-funding without the help of a funeral professional is another common mistake. The law is very clear about what constitutes a pre-paid funeral plan. Attempting to finding ways to pre-fund a funeral without the help of a funeral professional can lead to the worst-case scenario: your funds won't be there at the time of your death. So-called burial plans, or final expense plans, typically do not provide to you ALL the benefits and protections that you deserve when planning for your funeral expenses.

Why is it important to hold my pre-funded funeral in a trust?

Whether you place your prepaid funeral funds in a bank, life insurance policy, or annuity, or utilize an insurance assignment, these funds should be held in a trust. The purpose of a pre-funding trust is to safeguard your funds. A properly structured trust helps to prevent the assets from being liquidated by lawsuits, unscrupulous individuals, or bankruptcy filings. These unfortunate circumstances affect individuals, banks, insurance companies, and funeral establishments. To be most effective, the trust should be set up irrevocably. Only your funeral professional has the tools and the expertise to set up your funeral trust properly.

Who selects the funding vehicle for pre-arranged funeral?

By law (MN Statute 149A.97 Subd. 3a(4)), your funeral provider must disclose to you that pre-funding options include both funeral trusts and pre-need insurance policies. However, your funeral provider is not required to hold an insurance license. Your funeral provider may offer a guaranteed price or offer only with funding vehicles that they have researched, since the funeral provider wants what you want: adequate funds to cover the present and future costs.

What happens to the funds?

In the case of funeral trusts, the money goes into an interest-bearing, government backed account in your name at a bank, savings and loan associations, or credit union. The interest is taxable to you. The financial institution issues IRS Form 1099 to you at the end of each year.

In the case of "pre-need insurance," you purchase a life insurance policy or annuity with a face value sufficient to pay for the funeral. Such a policy should be an increasing benefit ("growth") policy, so the death benefit grows to keep pace with inflation, just as the interest on a funeral trust will grow to counter inflation. The growth on a life insurance policy typically is tax-free, and the growth on an annuity policy is generally tax-deferred.

Do I have to pre-fund when I pre-plan?

No. You may pre-plan without pre-funding, or pre-fund without pre-planning. Your funeral provider will work with you to pre-plan your funeral to the level of detail that you wish. You may choose to pre-fund your plans fully, partially, or not at all. Your funeral provider will also explain how your choices may influence your eligibility for Medical Assistance or other programs.

Do I have to pay all at once?

No. You may spread your payments out over time. If you choose to pre-fund using a bank trust or a flexible or fixed annuity, your estate or next of kin will be responsible for the balance if you die before your plan is fully funded. Price guarantees, if any, typically will become effective when your plan is fully funded.

If you are young and healthy enough to qualify for a fully insured pre-need life insurance policy, the insurance company will pay the balance due, and any price guarantees are effective immediately.

What is the difference between a Revocable and an Irrevocable pre-arrangement?

The revocability of your plan refers to the pre-funding of your funeral. A revocable plan allows you to un-fund your pre-arrangement at any time and spend the money as you wish. If your revocable pre-arrangement was funded with a bank trust, your principal plus all interest will be refunded to you. If your revocable pre-arrangement was funded with an insurance policy or annuity, the cash surrender value, less surrender charges, will be returned to you.

Most people choose to make their pre-funding irrevocable because they want to do what they can to ensure that the money will be there to pay for their funeral in the future. Irrevocable funds cannot be withdrawn for any reason prior to the death of the person for whom the pre-arrangement was made.

Irrevocability protects your funds from bankruptcy, lawsuits, and unscrupulous individuals, powers of attorney, or conservators. Irrevocability also gives you the maximum exemption for your funds if you are applying for Medical Assistance or other forms of public assistance.

What about going on Public Assistance?

Public assistance laws change periodically, but they typically take into account that at least some, if not all, funeral expenses may be pre-paid. Determining which rules apply depends upon which public assistance program you are applying to (Medical Assistance, SSI, General Assistance, etc.) and your particular circumstances.

To receive the maximum exemption, careful consideration needs to be given to the type of pre-funding mechanism that is selected. Particular attention needs to be paid to the timing of the pre-funding and to the exact circumstances of the applicant so as not to disqualify the applicant from public assistance programs. Your funeral professional can expertly guide you through this process.