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Pre-Planning Your Funeral or Memorial
Pre-planning your funeral or memorial is a considerate thing to do for family so they don't need to figure out what you may have wanted during an emotional time as well as coming up with the funds. If you anticipate you will need Medicaid (medical assistance) in the future, it's especially important to pre-plan, and not with life insurance. On this page we will specifically talk about Medicaid and how to protect funds for your funeral or memorial. Even if Medicaid isn't in your future, you should find these options helpful.
Protecting Assets from Medicaid Spend-down
As you may know, Medicaid Spend-down requires that you spend-down your assets to $2000 in most states ($3000 in MN, $1500 in OH, and $999 in Missouri) before you are eligible for Medical Assistance to pay for your eldercare. This does not leave enough to cover final expenses, burial, or cremation services. Even if Medicaid is not a problem for you, often families have to wait to collect on life insurance which can take several weeks.
Let's look at the options and the possible problems of each option, if any:
Life Insurance: a whole life insurance policy builds cash value and that cash-value is subject to liquidation immediately when applying for Medicaid. Cash-value typically is only about 2% of the death benefit. Death benefit minus any cash removed from the policy will go to the State upon the death of the Medicaid recipient. In other words, the State becomes the beneficiary of the policy. This was part of the Estate Recovery Act of 2005 to recover funds of the deceased that was on Medicaid benefits. This is also true for annuities.
Pre-Paid Funerals: Typically not a good idea to pre-pay a funeral home in the event of bankruptcy or other financial insolvency. There are some funeral homes that use CDs or other financial accounts, but again, the cash value is subject to Medicaid Spend-down rules. We also caution you on pre-paid contracts that some funeral homes provide. It might sound like a good deal, but read the fine print to determine the total amount you will be paying and if there is an end-date to your payments. We discovered one situation where a lady was making monthly payments that would only end on her death. If she missed a payment, the contracts was null and void.
Setting Aside Funds or a Revocable Trust: This is a big misconception that you can put funds aside in a revocable trust, a bank account in your name or someone else's name for burial or final expenses. Again, these funds are subject to Medicaid Spend-down rules, the look back period, and estate recovery rules. The maximum you can have in an account for burial is $1,500.
Final Expense & Estate Planning Trusts: These trusts are offered by an insurance company and secured by the insurance guaranty association so you cannot lose the money you are putting into the trusts. There are 2 types:
- Funeral Expense Trust: By transferring your assets to an Irrevocable Funeral Expense Trust you will help protect funds from Medicaid spend-down upon the effective date of transfer. With this Trust, funeral costs are paid first with any excess funds going to your estate. You can fund this trust with one lump sum or with a monthly premium. Deciding to utilize the monthly option, you will have to pass minimal underwriting. There is no cost to set-up or administer this type of trust. You only need to "fund" the trust by deciding how much you want to put in the trust. Each state has it's own rules on the maximum amount. Some states allow $15,000.
- Estate Planning Trust: This form of trust will exclude funds from Medicaid spend-down after 5 years. This Trust will pay funeral costs with any excess funds going to the named beneficiary or your estate. There is a maximum amount of $100,000 that can go in this form of trust. Each state has it's maximum amounts.
The Average Cost of Funerals according to the US Senate Committee on Aging is between $8,500 to $10,000. For more information and guidance, please contact us for a free, no-obligation consultation.