While difficult for most of us, planning yourfuneral can help ease your survivors' emotional burden during a stressful time,but what about their financial burden? Should youalso pay for your funeral in advance?
Pre-need planning—prepaying for a cemetery plot,the funeral service, a casket, and headstone—doeshave its benefits. It ensures that you will get the intermentyou want, provides peace of mind for you andyour loved ones, and you can pay for tomorrow'sfuneral expenses at today's prices. Also rememberthat when it comes to cemetery plots, the locationyou desire today might not be available in the yearsdown the road.
The government usually does not consider prepaidfuneral expenses when determining financial eligibilityfor government services such as Medicaid forlong-term nursing home care. Keep in mind, though,that prepaying does carry financial risks. Incidents ofbankrupt funeral homes and embezzled escrowedfunds set aside for future funerals have occurred. Toensure the safety of your funds, find out what consumerprotection your state provides in this area.
Aside from bankruptcy and fraud risks, what happensif you change your mind? You could move inthe future and want to be buried in a different location,or you may decide to go with another funeralhome in your new area. Ask if the plan allows for afull refund, or see if funds can be transferred toanother funeral home. Often you will have to pay anadministrative or penalty fee for the right to transferor cancel a funeral contract.
If you do decide to pay for your funeral arrangementsin advance, there are several prepay options.First, the funeral home can establish a trust, typically astate-regulated irrevocable trust, in which all or mostof the advance payment is invested for the future.Some states allow funeral homes to retain 10% of thepayment for current use. After its creation, an irrevocabletrust cannot be altered, modified, or revoked.You should know the financial institution administeringthe trust and receive an annual statement to ensurethat the funds are handled according to the contract.Also, find out what happens to the interest earned bythe trust. Some funeral homes receive the interest tocover administrative costs.
A second arrangement is a permanent life insurancepolicy or annuity contract. The funeral homemay be named as beneficiary, though not in all cases.It might be easier and more cost effective to simplyboost the coverage on your current insurance policy.
A third option is a payable-on-death Totten trustin which the account balance automatically passesto a designated beneficiary—usually the funeral home—immediately upon the owner's death. An accountis set up at a financial institution, and funds that aredesignated for funeral expenses transfer withoutgoing through probate.
The fourth and most flexible alternative is to simplyset up your own investment account that you earmarkfor funeral expenses. Price current expenses forthe funeral and invest that amount. Inflation of funeralexpenses typically has followed the general rate ofinflation, so adequate investing should give yourloved ones enough funds at the time to arrange for thetype of funeral you have preplanned. Unlike the otheroptions, this arrangement cannot guarantee that yourloved ones will spend the money as you wish.
This article has been produced by the Financial Planning Association (www.fpanet.org), the membership organization for the financial planning community.