Revocable vs. Irrevocable Funeral Trusts: What’s the Difference?

Revocable vs. Irrevocable Funeral Trusts: What’s the Difference?

In 2017, the National Funeral Directors Association reported that the median cost of a funeral was $7,360 for viewing and burial with no vault, $8,755 for viewing and burial with vault, and $6,260 for viewing and cremation. These figured don’t take cemetery, monument, or market costs into account, nor does it factor in assorted optional charges for things like obituaries and flowers. No matter your financial situation, this is a significant expense to incur and has the potential to wreak havoc on a family’s finances, especially when the death is unexpected or improperly planned for. Losing a loved one is painful enough as it is, and the last thing a grieving survivor needs is to feel like they aren’t giving the deceased the final sendoff they deserve or desired due to high costs. Funeral expense trusts are one of the legal tools available for pre-planning and funding deathcare services.

Setting up a funeral trust ensures your final wishes are respected and helps to ease some of your family’s stress related to your final expenses so they can focus on celebrating your life. There are two primary types of funeral trusts: revocable and irrevocable trusts. Both have various pros and cons that are important to consider when determining the best choice for you.

What Is a Funeral Trust?

Funeral trusts are legally binding agreements between a person and a funeral or burial service provider. In many cases, both parties agree upon the costs at the time the trust is established, thereby effectively “locking in” that price, so even if some or all of what has been pre-funded goes up in price at the time of an individual’s death, the original price is still honored. The trust may be funded either in full at the time it is created or in scheduled installments. Within the trust, the person who is pre-planning and paying for their funeral ahead of time is the trustor (also known as settlor or grantor) while the trustee is often the funeral home or cemetery that will be providing the goods and services (or sometimes a trust company or bank). The beneficiary is the funeral home that receives the funds in the trust, though the deceased is a sort of beneficiary in that they receive the services paid for by the trust.

Funeral trusts allow an individual to not only fund their own eventual funeral but plan the details. Pre-planning gives you a level of control over what happens to you following your passing that is otherwise impossible. You can clearly specify the details of your post-mortem care, funeral, and final resting place and since you’re paying for these specific products and services, you know that’s exactly what will be provided. Do you want to be interred or cremated? If you opt for burial, where do you want a plot? What kind of headstone do you want? Are there any religious rites, obligations, or customs to consider? Do you want to be embalmed? Will there be a viewing and, if so, should it be open or closed casket? If cremated, what kind of urn do you want? Will it be buried, put in a mausoleum, or kept with a loved one? Do you want your ashes scattered? Where and by whom? There are countless details to consider, and pre-planning gives you direct involvement in the decision-making process.

Revocable Funeral Trusts

When a revocable funeral trust is set up, the trustor maintains control of all their assets in the trust. They also reserve the right to make changes to the contract terms at any time. This includes the option to dissolve the trust altogether and regain direct access to their assets to allocate elsewhere. Arguably the most notable benefit of revocable trusts is that the trustor has the freedom and flexibility to alter the terms of the trust or take their money back altogether. Of course, upon dissolving the trust, they no longer receive the previously agreed upon services and products after their death. A major drawback for many is that principal of this kind of trust is considered a countable asset and can—and generally will—negatively affect a person’s Medicaid eligibility. If receiving Medicaid benefits is a top priority, you would have to go with an irrevocable trust.

Irrevocable Funeral Trusts

As the name suggests, irrevocable trusts cannot be changed after their creation. The trustor relinquishes control over and ownership of the assets they place into the trust. The obvious negative effect of this is that you can’t touch the money you put into it should your plans change or a financial emergency occur. However, a key benefit is that since those funds effectively become the property of the trust as an entity, it is not factored into the trustor’s total wealth and assets. This can help get the dollar amount of an individual’s assets low enough that they are eligible for Medicaid. From a tax standpoint, that money has no bearing on a person’s tax liability and taxes on the trust are paid by the trustee rather than the trustor. They must file Form 1041-QFT on behalf of the trust and report its income tax liability. These trusts are particularly secure as that money can only be used to cover final expenses and is untouchable by any future lawsuits or creditors.

Making a Choice

The funeral expense planning tool that is right for you is heavily dependent on your goals and financial standing. If you determine a funeral trust makes the most sense for you, you must weigh the benefits and negatives of revocable and irrevocable trusts relative to your unique situation. Individuals interested in creating a pre-need funeral trust should consider what their final wishes are and consult with an estate or financial planner and a lawyer. Funeral homes, cemeteries, and other deathcare industry businesses should discuss the pros, cons, laws, and tax implications associated with funeral trusts before entering a trust agreement. Contact the tax professionals at MKS&H to learn more about your options.

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 a 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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