Burial Trust Funds, Funeral Trusts, and Burial Accounts Explained

What is a burial trust?

A burial trust, also called a funeral trust or burial trust account, is a legal arrangement that holds money for one purpose: paying for your funeral. You put money in now. A trustee, often chosen by the funeral home, holds and invests it. When you die, the trust pays the funeral home.

Funeral trusts are usually part of a prepaid funeral plan. The FTC notes that some state laws require the funeral home or cemetery to put a percentage of a prepayment in a state-regulated trust. The rules differ a lot from state to state.

How a funeral trust fund works

1. You choose a funeral with a funeral home and sign a prepaid contract.
2. You pay the funeral home, in full or in payments.
3. All or part of the money goes into a trust, as your state requires.
4. The trust holds and invests the money. Interest may be added to the trust or used as your contract says.
5. When you die, the funeral home provides the funeral and is paid from the trust.
6. Any money left over goes where the contract and state law say, such as to your estate.

Example (hypothetical): A man prepays a $6,000 funeral and his state requires the money to be placed in trust. Years later, the trust holds more than the original amount because of interest. After the funeral, the contract says any extra goes to his estate. Ask how your contract handles this before you sign.

Revocable vs. irrevocable funeral trusts

An irrevocable trust means you cannot get the money back if you change your mind. Talk with an elder law attorney or your state Medicaid office before you set one up.

Example of state rules: what New York requires

State rules for money paid ahead to a funeral home differ a lot. New York's Department of Health publishes a consumer guide that shows what strong state rules can look like. Under New York's rules, as that guide describes them:

• The funeral home must deposit your money within 10 days, and tell you where it is deposited within 30 days.
• Interest is reported to you each year, and you owe income tax on it, because it is still your money.
• With a revocable agreement, you can withdraw the money and interest at any time, with no processing fees or early withdrawal penalties.
• Irrevocable agreements are generally for people applying for Medicaid or certain SSI-related benefits. That money cannot be refunded, and any money left over after the funeral goes to the county, not to your estate.
• If the funeral home is sold, you must be told in writing. If it closes, your money must be returned with interest or moved to another funeral home you choose.

Your state may work differently. Ask your state insurance department, attorney general, or funeral board which agency oversees funeral trusts where you live.

Burial accounts: what banks offer

A "burial account" is usually a regular bank or credit union account that you set aside for funeral costs. Many people set one up as a payable-on-death (POD) account. The FDIC describes these as accounts where the owner directs the bank to pay the money to one or more named beneficiaries when the owner dies. They are also called Totten trust or "in trust for" accounts.

Many banks and credit unions let you add a POD beneficiary to a savings account or certificate of deposit. Ask your bank for its POD or beneficiary form. Some people also label the account for burial so it is clear what it is for.

• Pros: Set up through your own bank or credit union. You can spend or move the money any time. The money usually passes to your beneficiary without probate.
• Cons: Your beneficiary is not legally required to spend it on your funeral. The money generally counts as your asset for Medicaid unless it meets your program's burial fund rules.

Tell your beneficiary what the money is for, and keep a note with your important papers.

Medicaid, SSI, and money set aside for a funeral

Medicaid and SSI limit how much money and property a person can have. In general terms:

• An irrevocable funeral trust or burial contract is often not counted toward those limits.
• A revocable trust or a POD account is generally counted, because you can still get the money.
• SSI and many state Medicaid programs also let a person set aside a limited amount as a burial fund, with conditions. Burial spaces, such as a plot, are treated separately.
• The details, including dollar limits, differ by program and state.

How SSI treats burial funds. Social Security's rules for SSI let a person exclude up to $1,500 set aside for burial, and up to $1,500 for a spouse. Key conditions from Social Security's operations manual:

• The money must be clearly set aside for burial, cremation, or related costs.
• It must be kept apart from money that is not for burial. If it is mixed with everyday savings, the exclusion does not apply.
• The $1,500 limit is reduced by the face value of certain life insurance on the person, and by money in an irrevocable trust, burial contract, or other irrevocable burial arrangement.
• Interest earned on excluded burial funds can also be excluded, even if the total grows past $1,500.

See SSI burial funds for how SSI treats burial money. Because the rules are complex, check with your state Medicaid agency before you move money for Medicaid purposes.

Taxes on a funeral trust

Money earned by a funeral trust, such as interest, is generally taxable. Who pays the tax depends on how the trust is set up.

The IRS allows some funeral trusts to elect to be taxed as a qualified funeral trust. To qualify, the trust must come from a contract with a funeral or burial provider, and its only purpose must be paying for funeral or burial services or property. The trustee then files a special return, Form 1041-QFT. Ask the funeral home how its trust is taxed, and talk with a tax professional if you have questions.

Funeral trust vs. burial account vs. burial insurance

A funeral trust is usually not right for you if you might move, you are not sure which funeral home you want, or you may need the money for other things. A POD account is not right for you if you need the full amount available now but have not saved it yet. Compare preneed insurance and is burial insurance worth it?.

Questions to ask before you set up a funeral trust

1. Is this trust revocable or irrevocable?
2. How much of my payment goes into the trust?
3. Who is the trustee, and how is the money invested?
4. What happens to the interest, and who pays tax on it?
5. Can I move the trust to another funeral home if I move?
6. What happens if the funeral home closes or is sold?
7. What happens to money left over after the funeral?