25 Apr We are thinking of pre-paying our funerals. What are the options?

Q. We have four adult children and we would like to spare them the difficult decisions associated with planning our funerals. We can afford to pre-pay for the expenses involved now and want to know if this is the best decision financially.
— Planning ahead

A. This is a very important planning decision.

The death of a loved one is certainly one of the hardest emotional moments in our lifetime, especially when it is a parent.

That you are considering pre-paying for your funeral expenses is a generous gesture which may ease the burden on your children when the time comes, but it’s important to understand exactly what your alternatives are, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said in New Jersey, there are a few options for prepaying for a funeral.

You can create a trust account directly with a funeral home, either with a lump sum or installment payments, she said. The account can be revocable, which means that all contributions including interest can be withdrawn upon demand, Mott said.

“This type of agreement can also be transferred to another funeral home without penalty, which is an option to consider as it reduces the risk associated with a home going out of business,” she said. “You may want to ask if the home places the funds in the New Jersey Prepaid Funeral Trust Fund, which is a comingled trust that is designed to meet all state and federal requirements.”

An irrevocable trust is used for Medicaid applicants and recipients, she said. The funds must be used for funeral expenses and can not be refunded. However, the funeral home can be changed if desired, Mott said.

The next option would be to purchase funeral insurance.

“This may be called pre-need insurance and it would be sold by a funeral director who is licensed to do so,” she said. It is a form of whole life insurance that could require installments to be paid to an insurance company. Funeral insurance would provide a direct payment of expenses to the home when you pass.”

You can also use an existing life insurance policy to cover the potential expenses, Mott said.

“In essence, the policy would be assigned to the funeral home,” she said. “This process is a legal transfer of ownership and the funeral home becomes the owner. The policy proceeds would be assigned either revocably, which would allow for funds to be returned if not used, or irrevocably which would make the State of New Jersey the primary beneficiary for a Medicaid applicant.”

Any funds not used for funeral expenses in an irrevocable assignment go to the state, she said.

You’ve indicated that you have the funds available to cover the payment for one of these alternatives, which is an important factor for anyone considering this investment, Mott said. Funds that may be needed for an emergency or to meet living expenses shouldn’t be used if there is risk of a financial burden as a result, she said.

When you look at the contracts and policies it’s essential to understand all of the terms. Ask:
· If you move, change your mind or want to cancel, will all the funds be returned to you?
· What does the plan cover?
· How does the Trust operate in terms of the interest that is applied and will all that money be available to your survivors when the time comes to pay for your funeral expenses?
· Will the amount you put towards the funeral costs cover everything in the future? What happens if there isn’t enough?
· What are the protections if the home is no longer in business when you pass? Is the money transferable?

You could also use a Payable on Death account, which could be set up at a bank.

“These accounts do not need to go through probate which allows for the funds to be readily available when needed. Upon creation, a beneficiary or multiple beneficiaries would be placed on the account,” she said.

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This story was originally published on April 25, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.