With the cost of a funeral averaging $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 years.
Since most funeral providers require full payment upfront, this means your
family will likely have to cover your funeral costs out of pocket, unless you
take proper action now.
If you want to avoid burdening your family with this hefty bill, you should use
planning strategies that do not require probate. Here are a few options:
Insurance
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 “preneed” 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.
Prepaid funeral plans
Manyfuneral 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 cover the full cost of the funeral, leaving your family on the hook for the difference.
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.
Payable-on-death accounts
Many banks offer payable-on-death (POD) accounts which can be used 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.
Living trusts
A customized living
trust 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. Alternatively, if you need to qualify for Medicaid, an irrevocable trust helps ensure you stay compliant with all of Medicaid’s requirements.
Don’t needlessly burden your family
To help decide which option is best suited for your
particular situation, consult with your trusted legal advisor.
Dedicated to empowering your family, building your wealth and defining your legacy,
