Managing a funeral home comes with a unique set of financial responsibilities. This is especially true when it comes to pre-need funeral arrangements. Many funeral directors value offering their clients the ability to plan and pay for their services in advance. Pre-need funeral arrangements provide peace of mind for families and ensure future business for the funeral home.
However, the accounting behind pre-need contracts is complex. From trust accounting and revenue recognition to tax compliance and reporting, missteps can be damaging to both your finances and your reputation. At MKS&H, we help funeral professionals navigate these complexities with confidence and precision.
Why Pre-Need Planning Requires Special Financial Attention
Pre-need funeral arrangements create an agreement between the funeral home and the client to deliver services at a later date, often years in the future. The client typically pays in advance, either in full or through installments, and those funds must be managed carefully until the time of need. While this model provides cash flow today, it also creates a legal and fiduciary obligation to safeguard the funds for their intended purpose.
For funeral home owners and managers, the financial challenge lies in properly handling these advance payments. State laws often require that these funds be placed in a trust account or secured through a pre-need insurance policy. In most cases, the revenue cannot be recognized until the services are performed. This means you need robust accounting practices to ensure that the funds remain compliant, accessible, and properly tracked over the years.
Mastering Trust Accounting: A Critical Priority
One of the foundational accounting practices for pre-need arrangements is maintaining accurate and compliant trust accounts. Trust accounting ensures that the client’s money is kept separate from the funeral home’s operating funds and invested appropriately. Each state has its own laws governing trust accounts, dictating the percentage of funds to be deposited, allowable investments, reporting requirements, and timelines for disbursement.
To stay compliant, funeral homes should maintain separate ledgers for each client within the trust. These ledgers track the original deposit, interest or earnings, administrative fees (if permitted), and the current balance. This level of detail not only satisfies regulators but also strengthens trust with clients and their families. Partnering with an experienced CPA firm facilitates confidence through the implementation of reliable trust accounting systems and procedures, ensuring that your monthly reconciliations and reporting withstand audits and regulatory reviews.
Navigating Revenue Recognition and Financial Reporting
Unlike typical service businesses, funeral homes cannot immediately recognize income from pre-need contracts. According to Generally Accepted Accounting Principles (GAAP), revenue from these contracts is deferred until the funeral service is delivered. This requires careful tracking of deferred revenue on your balance sheet to ensure that your financial statements accurately reflect your obligations.
Improper revenue recognition is a common pitfall that can distort your financial position and create compliance risks. To avoid these financial and compliance concerns, death care service providers must work to develop clear policies for recording, monitoring, and releasing deferred revenue in accordance with both accounting standards and state laws. With accurate financial statements, you can make decisions that best support your business and demonstrate financial health to lenders and investors.
Understanding Tax Implications of Pre-Need Funds
Investment earnings from trust accounts may also create taxable income for your business, even though the principal is earmarked for future services. Tax treatment of pre-need funds can vary depending on the structure of the trust and the state in which you operate.
Funeral home operators must be vigilant about accurately reporting interest or dividend income and paying any applicable taxes. In some situations, trusts are required to file their own tax returns, and failure to comply can result in penalties. Experienced CPAs have a deep understanding of the tax planning and preparation needs within the funeral industry and work with funeral directors to minimize tax liability and maintain compliance.
Staying Ahead of Regulatory Changes and Audits
State and federal regulations for pre-need arrangements continue to evolve, with increasing scrutiny of trust management and consumer protections. Many states now require annual reports, independent audits of trust accounts, and strict documentation of each client’s contract and payment history. But legislative changes do not need to be an obstacle to your business’s growth and well-being.
Rather than scrambling to meet these requirements, funeral homes that adopt proactive accounting and compliance practices can face audits with confidence. Partnering with advisors who understand the funeral industry’s unique regulatory environment provides financial stability and allows you to focus on serving families.
Leveraging Professional Expertise for Long-Term Success
Attempting to manage pre-need accounting internally without specialized expertise often leads to errors and inefficiencies. Funeral homes that work with experienced accountants gain the advantage of streamlined operations, reduced risk, and improved financial clarity. MKS&H offers a range of services, from assistance with trust account management and audit preparation to tax planning and strategic consulting. Our understanding of the funeral industry allows us to deliver guidance that is not just technically sound but also practical and actionable.
We collaborate closely with clients to design systems that fit their specific needs, whether you’re a single-location funeral home or a multi-state operator. By taking the guesswork out of trust accounting and compliance, we free you to concentrate on growing your business and serving your community.
Navigate Pre-Need Financial Planning with MKS&H
Pre-need funeral arrangements are an invaluable service to offer your clients and a vital part of your business model. But they also come with significant financial and regulatory obligations that demand careful attention. By adopting best practices in trust accounting, revenue recognition, tax compliance, and financial reporting, you protect your business, meet your obligations, and build lasting trust with the families you serve.
Partnering with MKS&H ensures that you have access to financial expertise and industry-specific experience that will guide you through every aspect of financial planning for pre-need funeral arrangements. If you’re ready to strengthen your accounting practices and gain confidence in your pre-need financial management, contact MKS&H today.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
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