Protect Your Pre-Planning Funds

Many seniors worry about leaving their families to plan and pay for a funeral at a time when they are already stressed and grieving. One way to resolve the issue is to pre-plan and pre-pay for funerals through a solution called a pre-need trust.

However, ensuring that the funds you set aside are protected and sufficient when the time comes is not always straightforward. Seniors need to educate themselves about potential pitfalls in the process - and aim some pretty pointed questions at the funeral director they work with.

Ask the Questions

• Malone reminds consumers that pre-paid funeral expenses are an investment. He recommends these important questions:
• Who will be holding my money?
• Is the money held in a trust or an insurance policy?
• Who is the trustee or insurer and what is its financial strength?
• What interest will my account make?
• What is your cancellation policy and what fees are associated?
• Is my account portable to any funeral home without penalty?
• Is my account flexible?
• Are the prices guaranteed? If yes, what does the guarantee cover?
• Is the person you're meeting with a licensed funeral director or a pre-need counselor?
• What happens if the funeral home goes out of business or changes owners?

Nothing is sacred

With a pre-need trust fund, seniors pay a funeral home in advance for funeral services and associated costs. The money is invested, and the funeral home uses the return on that investment to offset any inflation of costs.

However, a recent scandal involving the Illinois Funeral Directors Association (IFDA) has brought to light the potential for seniors to lose the money they pay for funeral pre-planning.

Through poor planning and serious mismanagement, the IFDA fund has experienced severe losses that may affect as many as 50,000 families. Many of those families may not know about the losses until their loved one dies, and they may discover that they owe substantial amounts of money during their time of need.

Steps to a new service

The Illinois scandal has made consumers more aware that they need to be careful about how they invest their pre-planning money. Darren Malone, President of Fidelis Funeral Consultants in Illinois, emphasizes: "Pre planning does make sense and protects families. But it is particularly important to educate yourself about potential dangers and pitfalls.”

Malone is a third-generation funeral director, was educated as a mortician and worked as a funeral director for nearly 18 years. Fidelis Funeral Consultants is an independent firm that specializes in insurance trusts for funeral pre-planning. The firm works directly with individuals instead of through a specific funeral home to set up the trust. Fidelis is unique among financial services because of Malone's expertise in the funeral business and ability to accurately predict funeral costs.

What to plan for

According to AARP and the National Funeral Directors Association, families in the United States have invested about $25 billion in pre-funded funeral accounts. More than 21 million people have pre-paid and pre-planned funerals.

Typically, these plans cover all or part of funeral wishes and expenses such as:

• the funeral, memorial or service
• merchandise items including casket, vault or urn
• cash advances for expenses such as cemetery and crematory fees, obituaries, flowers, clergy honorariums, soloist or organist, death certificate and setting fees
• collection of information needed for death certificate, cemetery information and military documents

In the United States, the average funeral costs around $6,800. Costs depend on the type of service, merchandise and cash advances the individual selects. Some funerals can cost $10,000 or more.

Pre-planning helps families avoid these high costs in more ways than one, says Malone. Even if families expect that their loved one's insurance or estate will cover funeral expenses, those funds might not be immediately available at the time of death. Probate or delay in issuing a permanent death certificate can halt the payment of insurance and other investments for months, or even years.

In such cases, families would have to pay out-of-pocket for a funeral and other expenses while waiting for the distribution of these assets. Pre-funding alleviates concerns about these possible delays and makes insurance and investments that much more valuable.

Seniors who are applying for Medicaid must dispose of any remaining financial assets. One way they can use remaining assets is to set up an irrevocable funeral trust. This option is unknown to many families who may miss the opportunity to pre-pay funeral expenses.

Safer harbors?

Although insurance trusts for funeral pre-planning can giveseniors peace of mind, there are still risks. Malone explains that very few federal regulations govern these trusts, and state laws vary, are ineffective or offer little protection to consumers.

Here are some common pitfalls to watch for:

Limited guarantees - If a fund loses money or doesn't grow at the rate of price increases, funeral homes will generally cover their guaranteed services and merchandise but not cash advance costs. Families can end up owing money.

No guarantee - Many funeral homes offer no guarantees against going out of business or other financial changes. If a trust was set up through a financial service, those funds would be safe, but in changing funeral homes, expenses may be higher than anticipated.

Trusts can lose money - As with any investment fund, there is a risk that the fund may lose money - even money set aside in a trust with a financial service.

No refunds with Medicaid - If families set up an irrevocable trust to pre-pay funds and divest assets when applying for Medicaid, those funds cannot be refunded. The funds can be used only to pay funeral costs upon the death of the trust owner. If funeral costs are lower than expected, the state can claim any leftover funds.

No refunds from funeral homes - When Medicaid is not an issue and the trust is not irrevocable, families may be able to get a refund - but usually at a significant cost. Depending on state law, families may receive only pennies on the dollar. In some states, funeral homes may legally keep all the interest accrued in the account if there is a cancellation or the funeral costs are less than expected.

There are also many real-life examples of theft, misappropriation and deception. Examples include bait-and-switch casket schemes, funeral homes keeping all the money in the account at death, unlicensed pre-need sales personnel, or huge surrender and cancellation fees.

In the end

Although Malone strongly recommends that consumers educate themselves about funeral pre-planning, he also supports those who want to spare their families the stress of planning a funeral. He assures seniors: "When pre-planning and funding is properly done, it can be one of the greatest gifts that can be left to surviving family members.”

For More Information

As the President of Fidelis Funeral Consultants, Darren Malone is licensed in the state of Illinois. He welcomes any questions and will gladly refer readers to representatives of National Guardian Life (Fidelis' insurer), who can answer questions about setting up a trust in other states. You can contact Malone personally at darrenmalone15@hotmail.com.