What is a funeral trust?
Provided By: Duane J. Silbernagel CFP®
A funeral trust is an arrangement entered into with a provider of funeral or burial
services. Prepaying funeral expenses may allow you to “lock in” costs for future funeral or burial services at an agreed-upon price. The funeral home sometimes serves as trustee (manager of trust assets), and you usually fund the trust with cash, bonds, or life insurance. A revocable funeral trust can be changed and revoked by you at any time. An irrevocable trust can’t be changed or revoked, and you generally can’t get your money out except to pay for funeral services.
Irrevocable funeral trusts may also help you qualify for long-term care benefits through Medicaid. For example, these trusts may be funded with assets that would otherwise be countable resources for Medicaid (i.e., included in determining Medicaid eligibility). They are often sold through insurance companies, in which case they are typically funded with life insurance. And you can fund the funeral trust right before entering the nursing home — there’s no “look-back” period for these transfers, unlike the case with certain other transfers that can cause a delay in the start of Medicaid benefits.
Another advantage of funding your trust with life insurance is that the trust will have no taxable income to report, because life insurance cash values grow tax deferred. Otherwise, income from trust assets may be taxed to you as the grantor of the trust, unless the trustee elects to treat the trust as a qualified funeral trust by filing Form 1041-QFT with the IRS, in which case trust income is taxed to the trust.
But what happens if you want to change funeral homes, or the facility you selected goes out of business? Does your irrevocable trust allow you to change beneficiaries (e.g., funeral homes)? Are trust funds protected from creditors of the funeral home? State laws regulating prepaid funeral trusts often require funeral homes to keep trust assets separate from their own business assets, keeping them safe from funeral home creditors. And most irrevocable trusts are transferable to another funeral home should the initial business fail or you change funeral homes.
There are expenses associated with the creation of a trust and the purchase of life insurance, and benefits are not guaranteed.
What is a pet trust?
A pet trust is an arrangement to provide for the care and financial support of your pet(s) upon your disability or death. You fund the trust with property or cash that can be used to provide for your pet based on your instructions in the trust document.
Your pet trust should name a trustee who will carry out your instructions for the care of your pet, including handling and disbursement of trust funds and turning your pet over to the person or entity you designate to serve as your pet’s caregiver. The trustee and caregiver could be the same person or entity.
As with most trusts, you can create your pet trust while you’re alive (an inter vivos or living trust) or at your death through your will (a testamentary trust). In either case, you can generally change the terms of your pet trust at any time during your lifetime to accommodate changing circumstances. If you create an inter vivos trust, you can fund it with cash or property either during your life (needed if the trust is to care for your pet if you become incapacitated) or at your death through your will. A testamentary trust is only funded after you die.
Some of the instructions to consider for your pet trust include: provisions for food and diet, daily routines, toys, medical care and grooming, how the trustee or caregiver is to document expenditures for reimbursement, whether the trust will insure the caregiver for any injuries or claims caused by your pet, and the disposition of your pet’s remains.
You may also want to name a person or organization to take your pet should your trust run out of funds. Also consider naming a remainder beneficiary to receive any funds or property remaining in the trust after your pet dies.
A potential problem arises if your pet is expected to live for more than 21 years after your death. That’s because, in many states, the “rule against perpetuities” forbids a trust from lasting beyond a certain period of time, usually 21 years after the death of an identified person. However, almost every state has laws relating to pet trusts that address this issue in particular and allow for the continued maintenance of the trust, even if its terms would otherwise violate the rule.
Note that there are costs and expenses associated with the creation of a trust.
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Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. He can be reached at (541) 614-1322 or via email at DSilbernagel@wradvisors.com.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. The article was written by an independent third party, Broadridge Investor Communication Solutions, Inc. (Copyright 2017) and is provided for informational and educational purposes only. Waddell& Reed is not affiliated with www.newslincolncounty.com website and is not responsible for any other content posted to this website. (06/17)