Prepaying Options
The chart below, created by Lisa Carlson, founder of the Funeral Ethics Organization (FEO), is a handy summary of options for prepaying for funeral or other final expenses. Money can be set aside, in advance, in a variety of ways.
NOTE: Direct payment to a funeral home for “pre-need” contracts is not allowed in Massachusetts. Although funeral directors can advise and help with the set-up of some of these prepay options, no money is to be paid to the funeral home or funeral director. Checks must be made payable to the trust fund, or insurance company, or bank. Be sure to obtain and keep a copy of the contract.
Prepaying for a Funeral
[This chart is based on Lisa Carlson’s 2012 chart.]
| Options | Pros | Cons |
|---|---|---|
| Pay on Death Savings Account or Bank CD | You have total control of the funds. Can easily change plans or use for emergencies. Can make time payments easily. | Asset for Medicaid purposes. You must declare interest on tax return. Penalty to cash CD prior to death. |
| Qualified Funeral Trust | If irrevocable, it won’t be an asset for Medicaid. The trust pays taxes on the interest. | There is no guarantee fund to protect against embezzlement. Taxes may be paid on interest that otherwise wouldn’t be taxed if you are low-income. |
| Master or Simple Trust | If irrevocable, it won’t be an asset for Medicaid. You are supposed to receive an annual report of the interest earned which will serve as reassurance your funeral funds are safe. | No guarantee fund to protect against embezzlement. You will have to declare the interest on your tax return. Can be converted to insurance without your permission. (See below.) |
| Funeral or Life Insurance | Easily portable. If the funeral home is the beneficiary, this won’t be considered an asset for Medicaid eligibility. The insurance company pays the taxes. | If you need to cancel, you may not get back more than half you paid. If paying over time, you may pay twice the face value. There may be a 30-day delay in receiving funds for which the funeral home may charge an extra fee. |
Cautions about Pre-Need Contracts
For a frank discussion of problems that can arise with pre-need contracts, see the “Preneed Sales” chapter (pages 80-93) in this book:
by Joshua Slocum and Lisa Carlson (Upper Access, 2011).
These authors wrote, “In our experience, people who prepay for their funerals usually leave their children less prepared to deal with death than those who don’t prepay – especially compared to families that make funeral planning an open discussion where survivors are empowered to navigate the funeral transactions.” (p. 91)
“It always pays to plan ahead; it rarely pays to pay ahead.”
“There is one situation in which it may be a good idea to prepay. If you’re applying for Medicaid, all states allow you to prepay for a funeral in order to shelter some money from consideration for Medicaid eligibility. This is known as ‘spend-down.’ You have to exhaust your own money (to a certain degree) before Medicaid will kick in to pay for various medical expenses. But the amounts you can shelter in a prepaid funeral vary by state, so be sure to ask Medicaid what the limits are.” (p. 92)