WHAT IS A PREPAID FUNERAL AND SHOULD I HAVE ONE?

A prepaid funeral is when a person and/or that person’s family pay for funeral services and related costs while the person is alive.  For many individuals, dealing with the financial aspects of the funeral and burial process is simply one more element of comprehensive estate planning.   When someone passes away, there is an exhaustive list of things that the decedent’s family will need to take care of to properly settle the decedent’s estate.  The amount of work involved can be challenging even when the decedent’s estate is financially modest.  So prepaying funeral costs can be a way to make that part of the process easier to deal with.

Sometimes, the prepayment only involves paying a certain amount of money in the present day that will be set aside for goods and services to be selected after the individual passes away.  Other times, the prepayment may also be accompanied by a selection of goods and services picked out in the present day, for example, making a decision on a particular casket or cremation urn.  The more details that are sorted out in the present day, the fewer details that will need to be dealt with by the decedent’s loved ones after death.  Most typically the cost of goods and services are not guaranteed by a funeral home.  Rather, the amount set aside for future burial costs will be applied when the time comes.  Depending on the amount that was set aside, they may be no additional costs to be paid by the family or there may be some additional amounts due if the costs of goods and services exceeds the amount that the decedent prepaid.

Unlike many types of discretionary spending, funeral and burial costs are expenses that will need to be paid sooner or later.  According to the National Funeral Directors Association, the median cost of a funeral as of 2012 was $7,045 (see http://nfda.org/about-funeral-service-/trends-and-statistics.html#fcosts).  People are living much longer than they used to and the cost of care has increased dramatically.  That means many individuals nowadays are outliving their assets.  Prepaying for funeral costs can be a way to make sure there are funds available for the type of funeral and burial the individual would like to have.  It can also ensure that the decedent’s loved ones are not financially burdened by the costs involved.

When someone needs to qualify for Medicaid, the financial eligibility rules are very strict.  All assets that are “countable” under the Medicaid rules will be tallied to consider whether or not the Medicaid applicant’s assets are small enough to qualify for benefits.  A single unmarried individual in Connecticut who applies for Medicaid may only have $1,600 in countable assets to qualify.  In that context it is quite valuable indeed that the Medicaid rules will allow $5,400 to be put into an irrevocable burial fund.  Such an irrevocable burial fund is really a single-premium insurance policy and can be set up by a funeral director or by insurance companies that carry that sort of policy.  As an insurance policy the fund will earn interest and will effectively be protected from inflation.

Since the $5,400 may be set aside in an irrevocable burial fund, the funds cannot be later taken out and used for anything else.  Additional amounts beyond $5,400 may also be deposited into a revocable burial fund.  Although those amounts could later be accessed for other purposes, those amounts may or may not be countable as Medicaid assets depending on the laws of a particular state.

When someone applies for Medicaid and their countable assets are higher than the maximum allowed under the Medicaid rules, they will need to “spend down” their assets down to the level where they will be Medicaid eligible.  Although there is always the option to simply write a large check to the nursing home to accomplish the spend-down, we will often advise that part of the spend-down should be taking care of a prepaid funeral if that is not something the Medicaid applicant has already done.

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