Pre-Need Trust Agreements
An alternative to funeral insurance
If you're funeral planning, you might look into a trust agreement to pay for the costs. Trust accounts are usually covered by a monthly payment, which is invested in a fund that increases in value over time. A big advantage to trust accounts is that they're structured to keep relative pace with inflation (although this is not guaranteed).
Disadvantages of Trust Accounts
The disadvantage of trust accounts is that you need to be certain they're paid in full. If you're making payments toward a trust account and you die before the account is paid in full, your family or someone else will have to cover the remainder of the funeral costs . On the other hand, you may find a funeral home that will guarantee the full amount, regardless of what you deposit.
A second concern with trust accounts is that the yearly interest may be taxable. You may receive a form 1099 from your trust fund company or taxes may be taken out directly.
The biggest concerns are dealing with inflation and other changes. Some useful questions to ask concerning your pre-need trust are:
- What happens if I choose a funeral director who goes out of business?
- How is my money protected over the years?
- What happens to my money if relatives do not know about the pre-paid plan and organize my funeral independently?
The California Consumer Guide to Funerals makes the following suggestions, but they apply to all states and all pre-need insurance for funerals:
- Ask for a guaranteed price plan. This protects you and your family from future price increases. With a non-guaranteed price plan, your survivors may have to make up the difference in cost. However, even with a guaranteed price plan, some items or services will probably have to be paid at the time of need. Obtain a written estimate of these additional 'at-need' charges so you and your family will know what to expect when they come up.
- Make sure the funds in your pre-need trust increase in value. Find out where the money is being invested and who the trustees are. You may be required to report interest as income on tax forms. Also, be sure the plan includes a written provision stating what will happen with any remaining trust fund earnings.
- Find out if you have to pay the entire amount into the trust up front , or if you can pay over time. Ask if there's a penalty for late payments.
- Ask if your funeral planning arrangements can be transferred to another funeral home or if the cemetery will buy the property back if you move or change your mind.
To guarantee prices of cemetery goods, such as a vault or a grave marker , buy them and have the cemetery store them until they are needed. Make sure the purchase contract specifies manufacturer and model of the items you purchase, as well as any inscriptions and descriptions of materials used. While you're funeral planning, obtain the address of where the goods are stored, and get it in writing.