How Irrevocable Funeral Trusts Help Medicaid Applicants Qualify for Medicaid Long-Term Care

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 called final expenses, in advance of their death. These legal agreements not only allow peace of mind knowing that funeral funds are available when needed, but they are also an invaluable Medicaid planning tool. 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

To be eligible for long-term care Medicaid, seniors in every state, but California, must meet an asset limit. This is the maximum dollar value of assets an applicant can have and be eligible. For seniors with “excess” assets, there are ways to “spend down’ assets that do not violate Medicaid’s rules. Purchasing an Irrevocable Funeral Trust is one such way, as funds that go into this type of trust do not count as assets for Medicaid eligibility purposes.

Though the Medicaid asset limit varies by states, in 2024, the limit is generally $2,000 for a single applicant. An applicant with $15,000 would not be Medicaid-eligible. However, if they pre-paid their funeral expenses by purchasing an IFT for $13,000, they would have only $2,000 remaining in countable assets. Therefore, they would be eligible for Medicaid. See asset limits by state.

The asset limit varies with one’s marital status. All assets of a married couple are considered jointly owned and are calculated towards the asset eligibility of the applicant spouse. While most states still limit the applicant to $2,000, a non-applicant spouse of a Nursing Home Medicaid or HCBS Medicaid Waiver applicant can retain a higher amount of the couple’s assets as a Community Spouse Resource Allowance. This asset allowance is a Spousal Impoverishment Rule intended to prevent the non-applicant spouse (community spouse) from living in poverty. In 2024, most states allow non-applicant spouses to retain up to $154,140 of the couple’s assets. See CSRA’s by state.

Several higher valued assets are not counted towards these limits. This includes home furnishings, wedding and engagement rings, an automobile, and generally the Medicaid applicant’s home. For home exemption, the applicant (or their spouse) must live there. If a spouse does not live there, there is a home equity interest limit of generally $713,000 or $1,071,000, depending on the state. Furthermore, if there is no spouse living in the home, and the applicant does not live there, the applicant must have an Intent to Return. See home equity limits by state.

It is extremely important that persons do not give away their belongings and cash thinking they will become Medicaid eligible by reducing their assets in this manner. Medicaid has a Look-Back Period in order to prevent this from happening. 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 a Penalty Period of Medicaid ineligibility. California is an exception and has no Look-Back Period for asset transfers on or after 1/1/24. New York is also an exception, and currently has no “look back” for long-term home and community based services. The state plans to begin phasing in a 2.5 year Look-Back Period no sometime in 2025.

For elderly persons to qualify for long-term care Medicaid, there is also an income limit. In 2024, this limit is $2,829 / month (300% of the Federal Benefit Rate) in the majority of the states for Nursing Home Medicaid or home and community based services via a Medicaid Waiver. 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 Medically Needy 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. This means 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.

Some states require a Goods and Services (G&S) Statement. This is basically an itemized list of the goods and services for which one is paying, the sum of which must match the amount of the Irrevocable Funeral Trust. In G&S states, this statement is required to prevent an “improper transfer’, or in other words, a violation of Medicaid’s Look-Back Rule. Failure to provide this statement can result in a Penalty Period of Medicaid ineligibility. In 2024, it is thought that the following states require a Goods and Services Statement: Alabama, Arizona, Arkansas, Delaware, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, South Dakota, Tennessee, Texas, Virginia, West Virginia, Wisconsin, and Wyoming.

Iowa stands apart from the other states and limits the amount of an Irrevocable Funeral Trust if no Goods and Services Statement is provided, but does not limit the amount with a Goods and Services Statement. In 2024, the state allows up to $13,125 without a G&S Statement.

Most states require that the state be named as a residual beneficiary of the trust. This means that any remaining funds after funeral and burial costs go to the state to offset the cost of care in which Medicaid paid. This is part of Medicaid’s Estate Recovery Program in which the state attempts recovery of Medicaid long-term care costs.

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 their spouse, to further “spend down” countable assets. Some states also allow one to purchase an IFT for other immediate family members, such as one’s adult children.
• 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, located anywhere 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.

• Funeral home usage
• Service charge of funeral director and staff
• Clergy fee
• Musicians for service
• Death certificate
• Printed death notices
• Embalming
• Casket / Burial vault
• Burial plot
• Headstones / Monuments
• Cemetery fees
• Hearse / Limousines
• Dressing and casketing
• Clothing
• Makeup and hairstyling
• Cremation
• Urn
• Flowers**
• Travel expenses for relatives to come to the funeral**

**Flowers and travel expenses for relatives to come to the funeral are not allowable expenses for Medicaid-compliant IFTs in every state. Persons should consult a Medicaid Planning Professional in their state to inquire if these expenses are allowed.

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?

Approximately half of the states set a maximum amount that can be put into an Irrevocable Funeral Trust. This amount often remains the same year after year, but in a few states, the limit is increased annually. While many state Medicaid agencies do not limit the amount, the carrier through which one purchases an IFT may limit the amount. For instance, some carriers limit the amount to $15,000. Regardless of the limit, it is important to deposit only a reasonable amount of money into an IFT. Funds cannot be used for anything other than funeral and burial expenses. Since most states require that they be listed as the residual beneficiary, funds that aren’t spent on final expenses will go to the state.

Irrevocable Funeral Trusts can be established for each spouse. 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. Furthermore, some states allow IFTs to be established for one’s adult children. Some of these states include Arizona, Colorado, Illinois, Missouri, and Oregon.

Max IFT Amount by State

Is Professional Assistance Needed?

It is highly recommended persons considering an Irrevocable Funeral Trust as a means to lower countable assets for Medicaid eligibility seek professional assistance. It is 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 provided, the trust won’t serve its desired purpose. In fact, it can result in Medicaid ineligibility. In addition to a lot of state-by-state variables, state-specific rules tend to change, and this is where professional Medicaid Planners can prove to be invaluable. Find a Medicaid Planner in your area.

Costs

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. 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. 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.

All of the states allow Revocable Burial Funds in very small amounts. There is an exemption for these types of funds, meaning they do not count towards Medicaid’s asset limit. This is generally up to $1,500, but may be reduced by irrevocable burial funds and the face value of life insurance policies in which the cash value is not counted.