There are several different ways to pre-finance a funeral involving caskets, vaults and other articles of merchandise incidental to a funeral service, but not including grave lots, grave spaces, grave memorials, tombstones, crypts, niches, and mausoleums:
1. Pre-arranged funeral agreement: This is when the money to pay for the funeral is placed into a bank, credit union or savings and loan association in the name(s) of yourself (the purchaser of the merchandise or services) and the seller. In this scenario. the money is in your control (100%) and prior to death can only be withdrawn by the purchaser (you). The money and interest is 100% yours until such time that death occurs. Once death occurs the seller may withdraw the amount of the funeral bill once a verified statement and certified copy of the death certificate are furnished to the financial institution. Any remaining balance in the account goes to the estate of the purchaser unless assistance has been involved - in which case any remaining balance belongs to the Estate Recovery Unit of the Division of Health Policy and Finance. If you choose to withdraw any or all of the money (principal and/or interest) prior to death, the contract is generally considered null and void.
Some things to consider with this arrangement include:
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Taxes on the interest earned, no matter what type of account your money goes into (savings, certificate of deposit...), in most cases (unless other arrangements have been made with your provider) you are responsible for paying income tax on earned interest. You should receive statements from the bank (probably quarterly), and at the end of the year you will receive a 1099 I.R.S. form, and you will need to report interest earned on the account to the l.R.S. and State Tax Officials. When you sign a contract on this kind of account, your social security number will be requested by the financial institution trusting the money. There may be a few tax-exempt contracts, but the greater majority require paying tax on interest earned.
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Although in most instances you do have to report the interest earned for tax purposes, you do control the money and account. Should a financial crisis occur you would be able to withdraw money from the account at anytime. However, if the money was invested in say a two (2) year certificate of deposit (CD) and you withdraw money before the full two year period was up, you would pay the appropriate early withdrawal penalty.
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Revocable/lrrevocable: Revocable contracts are refundable to you (the consumer) anytime prior to death. Irrevocable contracts cannot be refunded, but they work to your advantage if you are under S.R.S. or Social Security assistance. Irrevocable contracts can exempt up to $7,000 as an asset. If certificates for merchandise (casket / outer container) are purchased, additional monies can also be sheltered to not count as assets. Be sure you understand what kind of agreement you're purchasing. so you know what options are available!
2. Pre-need money deposited in a trust:
This is very similar to the pre-arranged funeral agreement. The larger funeral providers and/or state associations will sometimes set up their own trusts. Often times these trusts may draw better interest rates as many individual accounts are invested collectively in a single fund maintained by the corporate trustee. Once again reasonable costs of administering the trust may be imposed against individual accounts. Often times pre-need trust accounts are irrevocable, a term that we will be defining for you later. One of the possible advantages with a trust is that certain types have tax exempt provisions.
3. Cemetery merchandise contracts/trusts:
These contracts can include: burial vaults, grave liners, grave boxes, urns, memorials, markers, vases, memorial vases, tombstones, lawn crypts, niches and mausoleum spaces and all merchandise commonly sold or used in cemeteries. Items not included under cemetery merchandise include: caskets, grave lots, grave spaces, burial or interment rights, developed or existing lawn crypts, mausoleum spaces or niches. Cemetery merchandise contracts are very different from the previously mentioned 100% protected agreements. They are offered by cemeteries, funeral home/cemetery combinations or third party sellers affiliated with a cemetery. Unlike the 100% trust requirement of funeral agreements the minimum funding requirement on cemetery merchandise contracts is 110% of the wholesale cost FOB to the cemetery corporation of the cemetery merchandise covered in a prepaid merchandise contract. Two of the positive things about these contracts is that they generally guarantee prices and do not require interest reporting. If you should move to another state or more than 150 miles from the designated cemetery, you may cancel your contract. By doing so, you face the possibility of receiving only 85% of your original investment. You would lose all interest as well as 15% of the original investment. In addition if you purchase an item such as a vault for $500, it may have only cost the cemetery $100 (wholesale). Your refund would only be $110 (110% of $100 and not $550 (110% of $500). These factors also should be considered! Cemeteries selling caskets must trust monies at 100%.
4. Insurance:
Insurance products (general whole life policies, annuities...) can be used as a means to finance funeral contracts in the state of Kansas. When using insurance to finance a funeral, you have an insurance policy for a certain amount of money that is used to finance a contract for the actual funeral. It is important to look these policies and contracts over carefully as there are many different kinds available. When using an insurance policy to pre-finance a funeral, you want to make sure that the price of the pre-arranged contract is guaranteed! In other words, the amount of the insurance policy plus the interest earned (which will generally list a funeral home as the beneficiary) should equal the amount of the funeral contract as it costs once death occurs. That contract should guarantee all prices at a set amount, otherwise you may end up paying much more at the time of need. If you purchase an insurance contract and sign an agreement with a funeral provider that does not guarantee costs, you could end up paying two (2) separate mark-ups! The word guaranteed can be confusing as it generally means that the amount of the policy, including all earned interest, should guarantee that no additional funds on your behalf should be necessary. In other words, the earned interest guarantees that all increased funeral costs will be covered by the policy. Any additional purchases or changes of merchandise/services previously not selected will obviously result in increased costs - amending the guaranteed aspect of the agreement.
Two words to become familiar with in the area of pre-financing a funeral are: revocable and irrevocable.
1. A revocable contract allows you to withdraw your principal and interest and to cancel at any time, and
2. An irrevocable contract is one that cannot be canceled, although its benefits can be transferred to any provider of your choice anytime prior to need. Irrevocable contracts were originally established to aid people under S.R.S. subsistence. The maximum level of an irrevocable account was established by statute at $7,000 plus the cost of a casket and outer container/um. For people under S.R.S. subsistence up to $7,000 may be placed in an irrevocable account, and that money should not count against you as a resource. Irrevocable contracts are not refundable, but you may move them to the funeral provider of your choice anytime prior to death. Merchandise, such as caskets and outer containers/urns, can go above the $7,000 limit. Revocable contracts can be canceled anytime by simply withdrawing money from the account.