With the cost of a funeral averaging around $7,000 and steadily increasing each year, every estate plan should include enough money to cover this final expense. Yet it isn’t enough to simply set aside money in your will.
Your family won’t be able to access money left in a will until your estate goes through probate, which can last months or even years. Since most funeral providers require full payment up front, this means your family will likely have to cover your funeral costs out of pocket, unless you plan for a different outcome now.
If you want to avoid burdening your family with this hefty bill, you might consider using planning strategies that do not require probate. Here are a few options:
You can purchase a new life insurance policy or add extra coverage to your existing policy to cover funeral expenses. The policy will pay out to the named beneficiary as soon as your death certificate is available. But you’ll likely have to undergo a medical exam, and may be disqualified or face costly premiums if you’re older and/or have health issues.
There is also burial insurance specifically designed to cover funeral expenses. Also known “final expense,” “memorial,” and “pre-need” insurance, such policies do not require a medical exam. However, you’ll often pay far more in premiums than what the policy actually pays out.
Because of the sky-high premiums and the fact such policies are sold mostly to the poor and uneducated, consumer advocate groups like the Consumer Federation of America consider burial insurance a bad idea and even predatory in some cases.
Many funeral homes let you pay for your funeral services in advance, either in a single lump sum or through installments. Also known as 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 such prepaid plans may seem like a convenient way to cover your funeral expenses, these plans can have serious drawbacks. As mentioned earlier, if the funeral provider buys burial insurance, you’re likely to see massive premiums compared to what the plan actually pays out. And if they use a trust, the plan might not actually cover the full cost of the funeral, leaving your family on the hook for the difference. Plus, most states have inadequate laws protecting funds in pre-need plans, putting your money at risk if the funeral provider closes or is bought out by another company.
In fact, these packages are considered so risky, the Funeral Consumers Alliance (FCA), a nonprofit industry watchdog group, advises against purchasing such plans. 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, be sure to consult with me first, as not all pre-paid funeral plans are actually Medicaid compliant, even if the funeral home says they are. Moreover, if the irrevocable trust is not set up correctly, it may violate Medicaid’s look-back period, delaying your eligibility.
Many banks offer payable-on-death (POD) accounts, sometimes called Totten Trusts, that you can set up to fund your funeral expenses. The account’s named beneficiary can only access the money upon your death, but you can deposit or withdraw money at any time.
A POD 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. However, this gives the person access to your money while you’re alive too, and it puts the account at risk from their future creditors.
Another option is 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.
With a living trust, you can change the terms at any time and even dissolve the trust if you need the money for other purposes.
To help decide which option is best suited for your particular situation, feel free to consult with me. I can put an estate plan in place that includes adequate funding to ensure your funeral services are handled just as you wish—and your family isn’t forced to foot the bill.
This article is a service of Beverly R. Davidek. I don’t just draft documents; I ensure that families and business owners make informed and empowered decisions about life and death, for themselves and the people they love.