Trust accounts are one of the most common methods of handling funds paid on a Preneed Agreement. These funds are deposited in a bank or trust company in a trust fund, which earns interest that is accrued in the account. If the trust account is invested on a commingled basis with other similar accounts, usually a higher rate for interest is earned than on current savings accounts. There are federal tax liabilities associated with the interest generated on the trust account that are generally your responsibility.
Life insurance policies may be used to fund Preneed Agreements. In some cases, a pre-existing life insurance policy’s death benefit may be pledged, or if permitted, directly assigned to the funeral home. In some states, the funeral directors may also be licensed to sell life insurance policies. You may have to answer questions about your age and health in order to qualify for life insurance. Also, you should ask the insurance sales agent if the particular policy has a fixed death benefit or if it will increase over time to cover your funeral needs. There are no tax liabilities on death benefits paid on life insurance policies.
Savings accounts may be established with funds paid on Preneed Agreements. In the past they have been set up in the individual’s name to be held jointly with the funeral home. At the time of death, the account belongs to the funeral home. Interest earned on these accounts has federal tax liabilities and is generally your responsibility.
These accounts are not irrevocable trusts. Therefore, the funds may be counted as personal assets in a review of qualifications for SSI financial assistance.
Annuities are the least common of the four methods used to fund Preneed Agreements. These are insurance-based financial instruments that earn and accrue interest and are somewhat similar to that of a Certificate Of Deposit. There are Federal tax liabilities involved with annuities, however they are deferred to the time of death.
As it is acceptable to prearrange without payment, it is also acceptable to prepay without prearrangement. Many people place funds with their funeral director to pay for their eventual funeral, without making any specific selections. In many cases, this is done to shelter assets from attachment by state agencies, or to reduce ones assets in order to qualify for Medicaid or SSI.
If the Preneed Agreement is guaranteed, the interest helps the funeral director to offset any impact that inflation may have on his or her costs. In this situation, any excess funds belong to the funeral home.
If the Preneed Agreement is not guaranteed, the interest enhances the ability of the account to accommodate your funeral. In the event that there are excess funds after the provisions for the funeral, the remaining funds will be refunded to the purchaser (if different than the beneficiary) or the beneficiary’s estate.