by Dave Kutcher
We have received a few requests for some information regarding trusts. More specifically, we have been asked about Funeral Trusts.
In essence, a funeral trust is a trust that is being set up specifically to pay for funeral and burial expenses. Nothing is ever quite as simple as we would likely prefer and so we will touch on some details and nuances below. The follow up question that tends to come pertains to Medicaid and how a funeral trust may or may not impact eligibility for Medicaid. Generally speaking, the question posed is often couched as “how can I spend my assets down in order to be compliant with and eligible for Medicaid”. If the motivation for the funeral trust is NOT gaining eligibility for Medicaid, there are other trusts and products that can be used to pre-fund funeral and burial expenses.
Pre-paid funeral plans, pre-need funeral plans, life insurance for funeral expenses and final expense insurance are names of similar products, but they are not exactly the same as IFT’s, Irrevocable Burial Trusts and IF trusts which all fall under the general heading of Irrevocable Funeral Trusts, our topic for today.
We are going to address how establishing an Irrevocable Funeral Trust is treated in terms of Medicaid eligibility, however, in keeping with the “nothing is simple” rule, not all Irrevocable Funeral Trusts are Medicaid exempt assets. And since Medicaid is a state program, every state has their own rules as to how they recognize and handle Irrevocable Funeral Trust assets in terms of Medicaid eligibility.
Purchasing an Irrevocable Funeral Trust (IFT) allows an applicant to pay in advance for an expensive item for which they or their family will have to pay for eventually. By doing so, they reduce their countable assets and can qualify for Medicaid. Because the trust is irrevocable, the asset is not counted as an asset by Medicaid. Nor does the purchase of this trust violate the 60-month asset transfer look back rules.
Almost all states impose limits on the amount of money that can be placed in an IFT. For persons whose countable assets for Medicaid exceed the limits for Medicaid, they may need to do a combination of things to lower their countable assets to a Medicaid-compliant level. As an example, if someone has income that exceeds the Medicaid limits, there might be an option to use a Qualifying Income Trust in order to bring income limits into compliance.
Besides helping individuals become Medicaid compliant, there are other benefits to IFT’s. IFT’s can help family members be assured they have the money needed to pay for an eventual funeral and burial, and it can do so without having to commit to a particular funeral home. Since the business future of a particular funeral home is not assured, the notion of having the funds available, but not specifically tied to one place, can be additional peace of mind. Some folks pre-pay funeral expenses at one funeral home only to find that the funeral home goes out of business and the money they paid may be at risk of loss.
Additional benefits include the freedom to plan the funeral details as desired and the IFT can also allow money to be used for travel expenses for family that may need to travel for the eventual funeral.
So, why might someone NOT use an IFT. Well, the first reason is that inherent in its name, the trust is irrevocable. It cannot be reversed, dissolved, changed, or used for any purposes other than the individual’s funeral and burial. If someone is NOT seeking to qualify for Medicaid, again, an IFT is probably not the best financial decision. As we mentioned early on in this article, there are many other methods for pre-paying funeral and burial costs which may be more viable from a financial perspective.
Assuming an IFT might make sense for you the following should be helpful in determining your course of action;
1. Start and complete the process BEFORE applying for Medicaid.
2. Determine if and by how much your resources are over the Medicaid asset limits in your State.
3. Determine approximately how much the funeral and burial will cost. You really don’t want to overfund the trust as this excess is recoverable by the State Medicaid program.
4. Make sure the IFT you are using will be considered legitimate in terms of the assets being exempt from Medicaid countable assets.
5. Some states require that a funeral director must certify that the amounts contributed to the IFT are justifiable for a typical funeral/burial.
6. Keep your trust documents and paperwork safe and then go ahead and apply for Medicaid.
In considering how much you can contribute to the IFT you must consider Medicaid eligibility rules including any limits set by the state. From there you would consider the potential cost of the funeral/burial that you desire. Allowable expenses when considering costs will include; caskets, vaults, hearse transportation, car and limousine services, funeral director charges, cremation, embalming, dressing and cosmetology, funeral home services, burial plot, cemetery services, headstones, obituary notices, flowers, death certificates, travel for family and a memorial service too.
It is our understanding that Alaska limits IFT assets to $1,500 which is considerably less than many other states.
The trust itself needs to be set-up in a way that it does not violate Medicaid look back. We highly recommend you seek out the expertise of an elder planning attorney or even more specifically, a professional Medicaid Planner.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. We encourage you to make an appointment and get ahead of your concerns as early as is possible. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452
