The Value of Irrevocable Funeral Trusts
in Protecting Burial Expenses
by Charlie Taggart

Signed into law in 2006, the newly revised Deficit Reduction Act (DRA) has significantly reduced and curtailed opportunities for senior citizens effectively to reposition their assets, if they, expectantly or un-expectantly, become confined to long-term care in a nursing home facility.

 Qualifying for Medicaid and custodial care requires Medicaid to investigate if the applicant has the financial capability to pay for his or her own care. Although there are some noteworthy exceptions and exclusions that your qualified attorney can explain to you, an applicant’s assets -- auto, stocks, bonds, CD’S, bank accounts, old paid up insurance policies with cash values in excess of $1,500.00, and any number of other valuable financial resources -- might have to be liquidated and the monies “spent down” for care and custodial expenses, before Medicaid benefits provide any assistance.  Any sources of regular income such as pensions and monthly social security benefits might also have to be assigned to the institution providing the care.  

Moreover, the DRA extends the so-called “look back rule” from 36 months (three years) to 60 months (5 years). With very limited exceptions, seniors that might have transferred assets without fair consideration (i.e. – most notably, made gifts) during the five year period just prior to being admitted or confined to a long-term care or nursing home facility may become disqualified from Medicaid benefits for that period of time that the so transferred assets would have paid for nursing care. Medicaid reviews any assets disposed of during the five year look back period as potentially countable assets still belonging to the individual.

Before the DRA era, the government looked back for only three years (five years in the case of trusts) and then counted the period of potential disqualification from the date that the transfer was made, as opposed to the date that confinement begins. The formula that the DRA uses to calculate the period of disqualification is also more draconian, eliminating the so-called “half-a-loaf” rule that, in the past would have allowed the family to save half of the assets that the government might otherwise have reigned into the calculus.

Happily, assets that are deposited into a reasonable Irrevocable Funeral Trust that funds a pre-arranged funeral plan with a licensed funeral director remain protected and not counted by Medicaid, even if the trusts was established during the 60 month look back period.

However, it has been my experience that most families visit their funeral directors to establish burial reserve trusts far later than they should. The referral or recommendation often comes from a social worker, just before an individual enters a nursing home. Consequently, we neither see the incapacitated senior nor truly know his or her true wishes and desires in terms of funeral arrangements and the costs of same.  The family, already in a state of alarm, is often confused and overwhelmed. And, even worse, planning might have been so limited that there are precious little assets left to fund an appropriate trust.

Needless to say, persons entering nursing homes will rarely, if ever, qualify for a single premium life insurance policy that is the preferred and most economical vehicle for funding a funeral trust. In such cases, we recommend the use of a valuable annuity to cover funeral expenses – annuities offer an attractive interest rate that is tax-deferred.

I am not an attorney and offer the above comments about the DRA for informational purposes and to alert you to important issues that seniors and their families must face. I am, however, a licensed funeral director and a fraternal life insurance counselor and agent. As such, I urge all of our seniors and their families to visit with their funeral directors for pre-need planning sooner rather than later. Early planning offers the entire family peace of mind and significant savings, emotional and financial.

I also urge all of our readers to visit with qualified estate planning attorneys, who can not only explain the above concepts and exceptions to you in more detail, but can also assist you in developing a comprehensive strategy. Again the savings and peace of mind can be quite significant.