Irrevocable Funeral Trusts are used to legally exempt money that is intended for funeral, cemetery, cremation or other allowable expenses from counting as a resource for Medicaid. This usually occurs when someone enters a nursing home or has other very expensive medical needs that will soon exhaust all their assets.
Failure to set up a funeral trust can result in losing these assets to a nursing home or medical bills and could cost your family thousands of dollars. There is no cost associated in setting one up. They can be set up through a specific funeral home or set up independently with no funeral home selected.
Since there is no look-back requirement with a funeral trust, the trust should be revocable until you apply for Medicaid assistance in most cases. Indiana residents are an exception to this since Indiana doesn't allow revocable funeral trusts and must all be irrevocable. There are alternate solutions that may be a better choice for Indiana residents. Every family has a different situation and we customize plans for your exact circumstances.
People usually pay money into a funeral trust from other assets they have that will count as a resource for Medicaid. If you have CD's, stocks, bonds, cash-value life insurance or money in a checking or savings account over the limit allowed by Medicaid (usually $2,000) it will count as an asset and must be spent to pay your own way in a nursing home before you qualify for Medicaid assistance.
It's important to completely fund your funeral trust BEFORE you spend all of your assets down paying a nursing home or medical bills. People tend to put off this part of their estate planning until they get to the very end of their money and often cost themselves thousands of dollars in assets that they could have protected.
If you have a lot of assets and especially if there will be a community spouse (one spouse in a nursing home and another living at home) it is important to work with a team of advisors including an attorney, a tax advisor, and an insurance agent. ALL of your team members should be experienced with funeral trusts and Medicaid as there are many attorneys that do NOT specialize in this area and there are very, very few insurance agents that are truly knowledgeable and experienced with Medicaid and funeral trusts.
Question: Our advisor told us to just put a set amount of money in an Irrevocable Funeral Trust. Should we get a price quote from our funeral home? What happens to the extra money if we overfund the trust?
Answer: In most states, if you overfund the funeral trust and you have been on Medicaid assistance, the excess money will be paid to Medicaid, not your beneficiary. Medicaid will require the beneficiary to be your estate and Medicaid is first in line for the estate assets. You are much better served to get an exact price quote for the exact funeral or cremation you select. The funeral home will usually give you a written price guarantee that if you pay the exact funeral price into the funeral trust, it will be price guaranteed at that funeral home forever. There is no need to overfund the trust. You may want to allow some extra funding for flowers, musicians, clergy, etc. which is not included in the funeral cost. Your funeral director or trust agent can advise you on what you should allow for these items.
Question: What if we set up a funeral trust at a funeral home but later decide to use a different funeral home?
Answer: Any insurance funded funeral trust can be transfered from one funeral home to any other funeral home at any time at your request. There are no fees for a transfer and no loss of policy benefits. You do need to clarify with the new funeral home whether or not they will honor the price guarantee of the original funeral home.
Question: We attended a seminar and they told us everyone should have the protection of an irrevocable funeral trust just in case we ever go on Medicaid. Is this advisable?
Answer: Usually not. There is no advantage to making a funeral trust "irrevocable" prior to applying to Medicaid. You should leave it revocable.
Question: We have been advised to pay the cash surrender value of our existing life insurance policies into a new Funeral Trust policy using a 1035-Exchange. Is this a good thing for us to do?
Answer: It COULD be but it is very frequently abused just to get a commission to your new agent. What you need to understand is that you will lose the death benefit of the old policy. You want to know exactly how much death benefit you will be losing. If you are trying to qualify for Medicaid right away it may make sense to 1035 the old policy and lose the death benefit since the excess benefit will go to Medicaid anyway. But if someone is trying to get you to 1035 it now "just in case you MIGHT need Medicaid someday" you are likely getting very bad guidance. If you are ever in this situation, you should talk with the agent at your funeral home that handles Funeral Trusts and show them exactly what you are doing. Most funeral homes have an agent that is VERY experienced with these trusts and can give you good advice. You are also welcome to call me. Do not let anyone pressure you into a 1035 exchange unless you fully understand the reason for it and how much death benefit you will lose on your old policy.
Question: At the seminar, they said their funeral trusts were safer than the ones offered by the funeral homes. They said the funeral home could easily steal our money or not allow us to transfer to another funeral home if we decided to.
Answer: Those are scare tactics that overly aggressive insurance agents use to get you to make a quick decision. The insurance funded funeral trusts that funeral homes use is the exact same one that you can buy from the seminars or from insurance agents who work with an attorney. They are all equally safe. You need to make sure the check you write is always made out to the insurance company not a funeral home, insurance agent, or attorney. You should recieve a copy of your insurance policy which shows the amount you have paid in within 2-weeks. The big disadvantage of the seminar agents is that they can NOT offer a price guarantee like the funeral home can. That price guarantee can save you a lot of money and gives you more protection with no additional cost. I always advise families to select a funeral home and we co-ordinate a price guarantee that is tied to their funeral trust.
Question: We checked with a funeral home about doing an irrevocable funeral trust and they said they use a bank trust rather than an insurance trust. Is that just as good?
Answer: Usually not. A bank trust can subject you to taxes on the growth even though you won't recieve the interest. An insurance trust grows tax-free and the death benefit is paid out tax-free (under current tax law.) With a bank trust many people's money is often co-mingled and can be troublesome if you decide to transfer later. With the insurance funded trust, you own the individual policy and you have more control over that policy. With the insurance trust, you can even choose to pay it over several years if you need to as opposed to the bank trust always requiring a single payment in full.
How Important is a Price Guarantee?
When setting up an Irrevocable Funeral Trust, a price guarantee is VERY important if the insured is likely to live several years or more. It is less of a concern if the death is most likely to happen within two years or less.
A price guarantee will not cost you anything extra and just adds an additional benefit to your trust. The price guarantee has often saved our client families fifteen-hundred dollars or more in addition to the normal growth of the trust itself.
You should make certain that your funeral trust has a clear price guarantee in writing and that you and your attorney fully understand ALL terms and conditions.
If your Funeral Trust Provider won't offer a written price guarantee, you should research further before you settle for a non-price guaranteed funeral trust.
With a non-price guaranteed trust, you will want to pay close attention to the stated rate of growth of the death benefit (not the cash value) and look for a growth rate of 3.50% or higher. The current growth rate should be clearly spelled out for you on the contract itself.
Please contact me at (800) 673-5309 if you have any questions about protecting your family's assets with a funeral trust.
I have personally set up over 3,000 funeral trusts since 1996, and I am one of the most experienced agents in the United States with this unique planning tool.
There is no cost or obligation when you call us with questions about irrevocable funeral trusts.
-J Scott Burke
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