Table of Contents
What are Irrevocable Funeral Trusts?
Irrevocable funeral trusts (IFTs), or differently phrased, Irrevocable Funeral Expense Trusts, allow persons to pay for their funeral and burial costs, also known as final expenses, in advance of their death. They are legal agreements that not only allow peace of mind knowing that funeral funds are available when needed, but they are also an invaluable Medicaid planning tool. Essentially, IFTs provide a way for Medicaid applicants to lower their countable assets and meet Medicaid’s asset limit for qualification purposes.
How Funeral Trusts Help Persons Qualify for Medicaid
In order for seniors to be eligible for long-term care Medicaid, there is an asset limit. This is the maximum dollar value of the assets an applicant can have and be eligible. Fortunately, there are ways to “spend down’ assets that do not violate Medicaid’s rules. Purchasing an irrevocable funeral trust is one such way. Funds that go into this type of trust do not count as an asset for Medicaid eligibility purposes.
The Medicaid asset limit in most states, in 2019, it is $2,000 for a single applicant. A single Medicaid applicant with $15,000 would not be Medicaid eligible. However, if they pre-paid their funeral expenses but purchasing an irrevocable funeral trust for $13,000, they would have only $2,000 remaining in countable assets and would, therefore, be eligible for Medicaid.
Medicaid’s asset limit varies by state and with one’s marital status. While most states have a $2,000 asset limit, some exceptions are Connecticut ($1,600), New York ($15,450), Mississippi ($4,000), and Missouri ($3,000). Married couples with just one spouse applying for long-term care Medicaid are able to retain a higher amount of assets due to the Community Spouse Resource Allowance. This spousal allowance is intended to prevent spousal impoverishment. As of 2019, most states allow non-applicant spouses, also called community spouses, to retain up to $126,420 of the couple’s joint assets. Note that several higher valued assets are not counted towards these limits, including the Medicaid applicant’s home, if he/she (or his/her spouse) lives in it, home furnishings, wedding and engagement rings, and an automobile.
It is extremely important that persons do not simply give away their belongings and cash thinking they will become Medicaid eligible by reducing their assets in this manner. Medicaid has a rule in place, the look-back period, in order to prevent this from happening. In a nutshell, transferring assets for less than fair market value within 5 years (2.5 years in California) of one’s Medicaid application date can lead to Medicaid ineligibility for a period of time.
Note that in order for elderly persons to qualify for long-term care Medicaid, there is also an income limit. As of 2019, this limit is $2,313 / month (300% of the Federal Benefit Rate) in the majority of the states. Unfortunately, IFTs do not help persons with excess income to meet Medicaid’s income limit. Some states, which are called medically needy states, allow persons to “spend down” their income on medical bills and long-term care expenses until the income limit is met. Other states, called income cap states, allow persons to deposit income into a Miller Trust, also called a Qualified Income Trust. The funds in this type of trust do not count towards Medicaid’s income limit.
How Funeral Trusts Work (Detailed)
To be Medicaid compliant, meaning a funeral trust won’t count as an asset for eligibility purposes, the trust must be irrevocable. Stated differently, the funds in the trust cannot be refunded, nor can the trust be cancelled or changed. As far as Medicaid is concerned, the funds in this type of funeral trust no longer belong to the applicant. Once the Medicaid beneficiary passes away, the funds are used to pay for funeral, memorial, burial, and other final expenses.
In some states that allow IFTs, a Goods and Services Form (basically an itemized list of what is being paid for) is also required in order to prevent an “improper transfer’, or in other words, a violation of Medicaid’s look back rule. In states that require this form, if it is not provided, there may be a penalty period of Medicaid ineligibility. As of 2019, Alabama, Arizona, Florida, Illinois, Iowa, Kansas, Kentucky, Massachusetts, Missouri, Nevada, New Hampshire, Tennessee and West Virginia are all states in which Good and Services forms are necessary.
Most states require that the state be named as a residual beneficiary of the trust. This means that if there are any funds remaining after funeral and burial costs, they will go to the state to offset the cost of care in which Medicaid paid.
Benefits of Funeral Trusts
There are several benefits to purchasing an Irrevocable Funeral Expense Trust, some of which have already been discussed above.
- They turn countable assets into noncountable assets for Medicaid eligibility purposes. Not only can an Irrevocable Funeral Trust be purchased for the Medicaid applicant, but also for immediate relatives, such as spouses and children, further allowing “spend down” of countable assets.
- They do not violate Medicaid’s look-back period. Therefore, there is no penalty for creating this type of funeral trust.
- They do not restrict which funeral home can be utilized upon the death of the trust beneficiary. Any funeral home, in any location, in the United States is an option.
- Relatives can make funeral arrangements as they see fit, as in most cases, arrangements are not pre-specified.
- Relatives of the deceased do not have pay for burial and funeral costs.
- They cover all funeral and burial expenses.
What Expenses can be Paid with a Funeral Trust?
Funds in a funeral trust can cover a wide variety of final expenses. This list may not be exhaustive of all ways in which funds can be used.
- Funeral home usage
- Service charge of funeral director and staff
- Clergy fee
- Musicians for service
- Death certificate
- Printed Death Notices
- Casket / Burial vault
- Burial plot
- Headstones / Monuments
- Cemetery fees
- Hearse / Limousines
- Dressing and casketing
- Makeup and hairstyling
- Travel expenses for relatives to come to the funeral
Do all States Allow Funeral Trusts?
All states, but two, allow Irrevocable Funeral Trusts as a means to lower countable assets for Medicaid eligibility purposes. These states are Michigan and New York. While IFTs are not available for this purpose, Irrevocable Pre-Need Funeral Agreements (or Pre-Paid Funeral Contracts) are permissible.
Is There a Max Amount / Practical Limit?
While not all states limit the amount of money that can be put into an Irrevocable Funeral Trust, it’s important to deposit only a reasonable amount as the funds cannot be used for anything other than funeral and burial expenses. And remember, most states require that they be listed as the residual beneficiary, which means that funds that aren’t spent on final expenses will go to the state.
Generally speaking, most states set the limit for IFTs at $15,000. However, some states set a lower figure. For example, in 2019, Connecticut allows up to $8,000 and Nebraska only permits $5,212. Remember, an Irrevocable Funeral Trust can be established for each immediate member of one’s family up to the maximum allowed amount.
Typically, an elderly couple applying for Medicaid, would establish two trusts, each for around $10,000 – $15,000. These trusts would lower the couple’s countable assets for Medicaid purposes by $20,000 – $30,000.
Is Professional Assistance Needed?
It is highly recommended that any person considering an Irrevocable Funeral Trust as a means to lower countable assets for Medicaid eligibility seek professional assistance. It’s extremely important to know the rules surrounding this type of trust in the state in which one resides. For instance, if too much money is put into the trust or if a Goods and Services Agreement is required, but is not completed, the trust won’t serve its desired purpose. In fact, it can result in Medicaid ineligibility. There are a lot of state-by-state variables, and this is where professional Medicaid planners can prove to be invaluable. To find a Medicaid planner in your area, click here.
Generally, there is no charge to set up an Irrevocable Funeral Expense Trust. For persons who are applying for long-term care Medicaid with the assistance of a Medicaid planner, this service is often included at no extra cost as part of their Medicaid planning package. In some cases, there may be a nominal fee if a Goods and Services Agreement is required.
IFTs Vs. Non-Refundable Pre-Need Contracts & Revocable Burial Funds
In addition to Irrevocable Funeral Trusts, there are also Pre-Need Funeral Contracts, which are also Medicaid-compliant, given they are non-refundable (irrevocable). Pre-Need Funeral Contracts are established with a funeral home, whereas IFTs are not. With “pre-need” contracts, purchasers choose which services and goods they want, such as a wood casket over a metal casket, and the price that is paid when the contract is purchased is generally guaranteed. The buyer is locked into the funeral home or funeral home company where the contract was purchased. Potential cons are if the funeral home goes out of business prior to one’s passing, or if one dies far from the location of the funeral home, particularly if the cost to transfer the body is not built into the contract. All in all, Irrevocable Funeral Trusts are more flexible, as persons are not locked into a specific funeral home, goods, or services. However, prices are not guaranteed. Rather, the funds are deposited into the IFT and final expenses will be paid upon the person’s passing.
It is not uncommon for persons to purchase both a “pre-need” contract and an Irrevocable Funeral Expense Trust. For instance, a cremation contract is a type of “pre-need” contract and one might purchase this in addition to an Irrevocable Funeral Trust in order to pay for a memorial service.
It is important to note that some states also allow Revocable Burial Funds in very small amounts. Put differently, these states offer an exemption for these types of funds, meaning they do not count towards Medicaid’s asset limit. For example, California Medicaid (Medi-Cal) allows up to $1,500, in addition to accumulated interest.