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What is a funeral trust?

A funeral trust is a contract you enter into with a provider of funeral or burial services. Often, the trust is entered into directly with the funeral home, which may agree to "lock in" costs for future funeral or burial services at an agreed upon price. The funeral home sometimes serves as trustee (manager of trust assets), and you usually fund the trust with cash, bonds, or life insurance. A revocable funeral trust can be changed and revoked by you at any time. An irrevocable trust can't be changed or revoked, and you generally can't get your money out except to pay for funeral services.

Irrevocable funeral trusts may also help you qualify for long-term care benefits through Medicaid. These trusts may be funded with assets that would otherwise be countable resources for Medicaid. They are also often sold through insurance companies, in which case they are typically funded with single-premium whole life insurance. Trust assets, including life insurance death benefits, are not countable resources when trying to qualify for long-term care benefits through Medicaid. And you can fund the funeral trust right before entering the nursing home--there's no "look-back" period for these transfers.

Another advantage of funding your trust with life insurance is that the trust will have no taxable income to report, since life insurance cash values grow tax deferred. Otherwise, income from trust assets may be taxed to you as the trustor (creator of the trust) unless the trustee elects to treat the trust as a qualified funeral trust by filing form 1041-QFT with the IRS, in which case trust income is taxed to the trust.

But what if you want to change funeral homes, or the facility you selected goes out of business? Does your irrevocable trust allow you to change beneficiaries (e.g., funeral homes)? Are trust funds protected from creditors of the funeral home? States have laws regulating prepaid funeral trusts that often require funeral homes to keep trust assets separate from their own business assets--keeping them safe from funeral home creditors. And most irrevocable trusts are transferable to another funeral home should the initial business fail or you change funeral homes.