Life insurance and the funeral trust

There has been much discussion recently regarding the benefits of the funeral trust as an asset protection strategy.

Not to be confused with final expense insurance, the funeral trust is a unique product that combines the protection of life insurance with the security of an irrevocable funeral trust. For those not familiar with an irrevocable funeral trust, lets break down the two components. 

The first being life insurance, and not just any type of life insurance, but whole life insurance. In most instances the policy is funded thru single premium contributions, however, for non-crisis planning situations, multi-pay options are available. An advantage of funding the funeral trust with life insurance aside from avoiding probate costs and delays is that the growth on the policy is tax free.

Most states have limits on the amount of insurance that can be placed into a funeral trust that will be allowed to be considered a “countable” asset. It is important to make sure that any assets over that limit be placed in other asset protection vehicles to maximize the clients “non-countable” assets. If the client has qualified for Medicaid, any overfunding of funeral expenses will result in the proceeds being subject to recovery by the state Medicaid office.

The second component in the irrevocable funeral trust is the funeral trust itself. An irrevocable funeral trust, is a legal agreement in which an individual sets aside funds for the specific purpose of paying their funeral expenses. By doing this, the money set aside is no longer considered to belong to the individual, provided that the trust is irrevocable. By assigning the policy to the trust, the insured is effectively transferring ownership of the life insurance policy to the funeral trust and as a result, immediately protecting their assets from lawsuits and creditors as well as Medicaid spend down. 

Unfortunately, the majority of seniors do not have long-term care insurance, but will be needing some type of nursing home, skilled nursing or home health care at some point in their life. If they have assets that exceed the Medicaid qualification limits, they will be forced to spend down those assets in order to qualify for Medicaid.

The money in their savings, CD’s, money markets, traditional life insurance, annuities or other investments could be vulnerable. Funds set aside for their funeral planning could quickly disappear if they need to pay for long-term care.

Since Medicaid does not count the assets in a funeral trust as “countable” assets, these assignments can be made right up until the time the person has to enter into a nursing home, there is no “look-back” period for these transfers.

This asset protection strategy has been used in helping individuals who are in a crisis-planning situation and immediately need to qualify for Medicaid.