So what is an irrevocable funeral trust?
Well, basically it’s a legal method to preserve up to $15,000 of your assets and that’s for a husband and wife or if you’re single, yourself, to pay for your final expenses. That’s $15,000 each that can be put in?
Now who we’re talking about protecting it from is the Medicaid spend down rules that can happen because of this thing we call catastrophic illness. Meaning you need some type of long term care. Because that is on the table for spend down. But with an irrevocable funeral trust, it’s exempt from the Medicaid spend down rules. Normally if you have a life insurance policy you have to cash that in because you cannot have cash value life insurance over about $2,000 in Pennsylvania.
So we’re saying that if I have I think it’s $1,500 face amount thousand dollars cash value that if you transfer that block of money into this or if you have money in the bank and you can transfer it and I go into the nursing home a week later, are you saying up to $15,000 for myself and $15,000 for my spouse could be exempt from the nursing home?
And that money is always going to be there to pay for your final expenses.
What if I never heard of these things? Does anybody own these? I’ve never heard of these before.
Well, they’ve been around a long time. I think because of the rules changing with Medicaid they’re becoming a more popular discussion. For example, many people don’t realize there was the deficit reduction act was passed recently and it changes some rules. Can you tell us a little bit about that, Dad? How that affected this and why it’s come up in the conversation more.
Yes, the deficit reduction act of 2005 came into effect February 8, 2006. Any assets gifted away are subject to being countable assets in determining Medicaid eligibility if made less than 5 years ago. The look back rule has been extended from 36 months (3 years) to 60 months (or 5 years). And they go by the date of the application not the date of gift. And any paid up life insurance policy must be redeemed and used to pay for expenses before you can qualify. So if you have more than $1,500 face amount or $1,000 cash value and you’re using that for part of your care you may have to spend that money unless it’s part of your total exemption that you have for a married couple. So one of the best legal ways to preserve assets, Sherri, is to pay for final expenses is by placing up to $15,000 in an irrevocable funeral trust. I know a lot of people ask me, “Well, what if the funeral only costs $8,000?” Well, you can use $8,000 for the funeral home and then the rest of it would go to your heirs. That’s subject to going through a small short affidavit, but up to $15,000 could be exempt from Medicaid. And interesting about that, if you have life insurance, it could take 2 or 3 or 4 weeks to apply and get your claim. All they need to pay this one is a copy of the funeral bill and they can pay within 24 to 48 hours. But if you go into a nursing home you may not have any money anyway to pay for it. This protects up to $15,000 for a husband and up to $15,000 for a spouse. So the total is $30,000 at the very minimum. That’s kind of the basic we do on Medicaid planning. So how does an IFT or as we like to call them, an irrevocable funeral trust, protect your assets? Tell me how that works, Sherri.
Well, typically it’s a single pay. So, for example, if someone already had a life insurance policy they could do something called a 1035 exchange, meaning they could exchange that policy whether it’s paid up or not.
What does that mean then? If they had say $10,000 of cash value they could take it from one insurance company – say XYZ Insurance Company – and transfer it over to this funeral trust.
Exactly, with no penalty and no tax consequences. That’s what section 1035 refers to is the IRS code. It’s called a 1035 exchange, no tax consequences. But it’s usually a single pay although there are some that allow an ongoing pay but typically…
Where else would this money go besides life insurance? Could they take it out of a money market? Checking account?
Sure, they could take it out of things like that. Definitely could do that. But many people have life insurance policies in existence and they’re not really doing anything for them so I’ve often seen people do that and have had people do that.
What if someone says well, I’m thinking about going to a funeral home and prepaying it ahead of time? What about that?
Well, that is an option and some of the funeral homes have these commercial carriers that we’re talking about but it’s kind of like the fox and the chicken coop. I mean, you don’t know if that funeral home is going to be around 10, 20, 30 years from now, for example.
Or what if they sell it to someone else?
Or they sell it or maybe you’re going to move. So it gives you a little more control if you actually have control of this, which you would. You don’t have to make those decisions. It can be made at the time.
So in other words let’s say they have kids in other states and they happen to move and they die in another state so then wouldn’t have to be flown back to this state, they can do it anywhere.
Exactly. And sometimes these prepaid plans that people do, sometimes they have some gotchas in them. You have to read the fine print. You really have to be buyer beware of what you’re getting involved in. So, we just find it’s better for people to maintain control and have an outside entity and not have the two colluding together, just to keep things neat.
So tell me again how this irrevocable funeral trust works?
Well, it’s 100% protected from Medicaid spend down. The funds are totally safe and secure, just like they would be with any other. The funeral home is paid first. The balance of the money is returned to the estate, and it has inflation protection, usually it’s simple interest. It gives you peace of mind.
If you’d like more information on these irrevocable funeral trusts, call Legacy Financial Strategies toll free at 800-264-4963. So, listen to this very important message I’ve prepared for you.
What we’ve been talking about is irrevocable funeral trusts. For those that are just tuning in, you might say what in the heck is an irrevocable funeral trust? So, Sherri, before we give the definition of an irrevocable funeral trust, explain why most people get one of those.
Well, it’s very simple. They want peace of mind. So basically I think if folks want peace of mind, they should look into it. If they don’t, then don’t pursue it.
So if you want more information about how they work, you want to call our toll free number 800-264-4963.
So what is an irrevocable funeral trust? Just as a refresher. Basically it’s a legal method to preserve up to $15,000 per person in a couple unit, so husband and wife, or if you’re a single person, $15,000 of your assets to pay for your final expenses. It’s protected from spend down that can occur because of going into a nursing home and creditors of any kind. So it’s 100% exempt from the Medicaid spend down that can happen.
That’s important. You may be forced if you have a life insurance policy to cash it in. Because you’re allowed to keep $1,500 face amount and $1,000 cash value. If it has more than that, it’s part of the process of spending down your assets. I don’t make these rules. These are the rules the government has. So, if you’d like to be able to protect that funeral home, one of the things is to set up an irrevocable funeral trust.
I’d like to mention too that by default, we talk about rules, if you don’t have any planning in place with regards to this issue, these are the rules that you’re under. Everyone is under these rules. These are the rules that our elected officials have made for us. So all we can do is live within them and do the best we can inside the rules that are allowed. And one of the things that is allowed that nearly everyone should take advantage of is an irrevocable funeral trust. And let’s talk a little bit about why. Dad, can you tell us how is an irrevocable funeral trust better or different than say for example a traditional whole life or pre-need funeral that you can do, or a savings CD or savings bonds or traditional annuities even. Can you address some of that?
Well, an irrevocable funeral trust, let’s talk about from law suits, is it protected from law suits? And the answer is that in an irrevocable funeral trust it is. How about savings and CD’s, are they protected from a law suit? Absolutely not. You might have car insurance but if you get sued for more than the car insurance they’re going to come after it. Whole life insurance, yes, limitations on that. Now let’s talk about protection from creditors. Is an irrevocable funeral trust protected from creditors? Yes. Savings bonds? Yes. Savings in a bank or CD? No it’s not. Let’s talk about protection from current taxes. Is an irrevocable funeral trust protected from current taxes? Yes. Savings bonds? Yes. You get a 1099 where you take the interest out or what interest they’re paying you or maybe you have to pay them, but anyway…
Or if you don’t take the interest out.
You have to pay taxes on that money regardless and of course traditional annuities, they’re protected from that. But savings on CD’s are not. How about for spend down? We covered that already. Irrevocable funeral trusts are exempt. Savings bonds are not. Savings or CD’s are definitely not. Traditional annuities are not. Whole life insurance unless it’s irrevocable is not. Pre-need funeral home bank trusts. They are, of course. All right, Sherri, how about some other… what about protection from probate? Are irrevocable funeral trusts protected from probate?
Yes, they are. As long as the total amount is going for final expenses. There may be… Someone might say well, it’s not going to cost me $15,000 for a funeral. Who knows what it’s going to be in the future. But let’s say it’s not. Say it’s $8,000 or $9,000. There may be a small amount if it doesn’t all go to final expenses that would actually go through probate. A very short process. The risk to the spend down to the life insurance policy would be more significant. Savings bonds? Yes, they’re protected from probate. CD’s? No. Traditional annuities? Yes, because they have a named beneficiary. Traditional whole life insurance? Yes. Pre-need funeral home bank trusts? Yes.
If you’d like to get more information about irrevocable funeral trusts, call Legacy Financial Strategies toll free at 800-264-4963. We’ll give you some information about irrevocable funeral trusts and how they compare to other types of savings vehicles out there.
We mentioned this briefly in the other segment that we did, but let’s talk about why an irrevocable funeral trust might be a better choice than a prepaid funeral expense plan with a funeral home.
Well, as I mentioned, the main reason people get an irrevocable funeral trust is peace of mind. Let me give you some examples. Number 1 is safety and security. You can be 100% certain that all the money is placed in your irrevocable funeral trust. We like to call them IFT’s. It will be available when you need to pay for your final expenses. And for those who are just tuning in, all they need is a copy of the funeral bill. They don’t even need the death certificate. And they can be paid within 24 to 48 hours. I don’t know of any regular insurance policy that can do that. Portability is huge. Many of you like to travel, and you can’t count on where you’re going to die.
And I have plenty of clients – and I’m sure you do, too – that spend part of the year here and part of the year in Florida. They don’t know where they’re going to pass away.
So in this particular plan – an irrevocable funeral trust – you’re not obligated to use a specific funeral home to provide for your final ceremonies. You have flexibility. You can use that funeral home but you don’t have to. It’s a lot more portable. Number 3 is flexibility. You’re not obligated to spend the entire preset amount for your final expenses. Any excess will go back to your estate. This money also can be used for luncheons and dinners, and whatever else you want to have. And it’s there available. Have you ever been to a funeral home and they’re worrying about they haven’t got the money. Who’s going to pay for it? It becomes very awkward. This is paid within 24 to 48 hours. All they need is the funeral bill. They don’t even need to have the death certificate. And also, number 4, instant availability in the event that your assets are tied up in non-liquid assets, moneys will be available for your final expenses. We’ve already covered that. But you may say I already have insurance, why do I need a funeral trust.
That’s a good question and I get that question a lot. I think you cannot afford not to have this type of insurance. For example, suppose you do have insurance. Let that insurance be for the surviving spouse, your spouse or other family members to keep up with ongoing household and medical expenses. Let this be ear marked for final expenses. In my opinion, this makes the irrevocable funeral trust that much more valuable for the life insurance policy. In other words, that’s ear marked for the spouse to continue on. This is ear marked for final expenses. And really they work together.
All right, so they want one of these irrevocable funeral trusts, where can they get it?
They can give us a call here, 1-800-264-4963. And what we do is we give a complimentary consultation. Or you can call for the information. But it’s best if you come in. We don’t charge you for that. We can explain this in detail. Right here at Legacy Financial Strategies we do offer these irrevocable funeral trusts. And we don’t represent any specific carrier. We’re independent here. That’s important. So we shop the marketplace to see what’s the best out there at the current time. And it does change periodically. So it’s important that you’re dealing with somebody independent like ourselves, because we don’t have a shingle with any specific company outside of our office.
Explain some of the expenses that these irrevocable funeral trusts cover. There are so many here.
Oh, it’s just on and on. Basic services of the funeral, director and staff, other professional services, embalming, care of the deceased, dressing, cosmetology, casketing.
Let me stop you there, Sherri. When I graduated from Youngstown State University in Psychology, although I had more hours in Business than psych, but my degree is in psychology, my senior year I took a course on the study of death and dying. I did a whole report on cremation. It’s quite enlightening. Back in 1976 when I graduated, when I was interviewing different funeral homes and so forth, they wanted to know why I wanted to know all this information. I told them it was for a research paper I was doing. So we do know quite a bit about this information. So go on and explain what the other services are.
So, funeral home facilities and/or staff services, memorial services, a permanent monument in the cemetery, clergy, death certificates, musicians for the funeral, temporary marker, care of the deceased, stationery package, obituary notice, flowers, clothing, viewing and visitation, funeral services, cremation, outer burial container, transportation equipment and driver, transfer of the deceased, funeral vehicle, hearse/car/limousine, utility service vehicle, cemetery charges, a re-pass once the services are completed, graveside service, and caskets.
One thing I didn’t see in there was a wake. I suppose if someone wanted a wake that could be counted also.