Jane Dotson
Irrevocable funeral trusts (IFTs) are a type of funeral insurance that can help individuals qualify for Medicaid by lowering their countable assets. IFTs allow individuals to pay for their funeral and burial costs in advance, providing peace of mind that these expenses will be covered. While IFTs do not affect Medicaid eligibility, there are limits to how much can be excluded when determining eligibility, and interest income from these trusts is taxable. It's important to consider the approximate cost of a funeral when purchasing an IFT, as well as state-specific limits and regulations. Some states, like New York and Michigan, do not allow IFTs for Medicaid planning. Alternatives to IFTs include final expense insurance, burial insurance, payable-on-death accounts, and savings accounts.
| Characteristics | Values |
|---|---|
| Type | Irrevocable Funeral Trusts (IFTs), Irrevocable Funeral Expense Trusts, Pre-Need Funeral Contracts, Revocable Burial Funds, Final Expense Insurance, Burial Insurance, Funeral Expense Trusts (FETs) |
| Purpose | To pay for funeral and burial costs, also known as final expenses |
| Benefits | Peace of mind, invaluable Medicaid planning tool, lowers countable assets, funds are not counted as assets for Medicaid eligibility purposes, flexibility, ease of setting up |
| Considerations | Approximate cost of a funeral, state limits, Medicaid eligibility, funeral homes, funeral goods and services, price, pros and cons, alternatives |
| Alternatives | Payable-on-death accounts, savings accounts, life insurance policies, Medicaid Safe Trust Plans |
| Companies | Forethought Life Insurance Company, Coverage.com, Krause Financial |
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What You'll Learn
Irrevocable Funeral Trusts (IFTs) help qualify for Medicaid
Irrevocable Funeral Trusts (IFTs) are a useful tool for those who want to qualify for Medicaid. They are a type of funeral savings account that allows individuals to pay for their funeral and burial costs, also known as final expenses, in advance. These legal agreements offer peace of mind that funds are available for funeral needs, and they are also invaluable for Medicaid planning.
IFTs are a way for Medicaid applicants to lower their countable assets and meet the asset limit for qualification purposes. To be eligible for long-term care Medicaid, seniors in every state except California must meet an asset limit, which is the maximum dollar value of assets an applicant can have. For seniors with excess assets, purchasing an IFT is a way to spend down assets without violating Medicaid's rules. This is because funds placed in an IFT do not count as assets for Medicaid eligibility. For example, an applicant with $15,000 in assets would not be Medicaid-eligible. However, if they pre-paid their funeral expenses by purchasing an IFT for $13,000, they would only have a remaining $2,000 in countable assets and would thus be eligible for Medicaid.
It is important to note that IFTs are different from revocable funeral trusts, which can affect Medicaid eligibility and are subject to spend-down rules. IFTs, on the other hand, do not count against the asset limit, and there are no restrictions on which funeral home can be used upon the death of the beneficiary. Additionally, IFTs do not violate the Medicaid Look-Back Period, which means there is no penalty for creating this type of trust, and they can be purchased at any time before applying for Medicaid.
However, there are some considerations to keep in mind. While IFTs can be purchased for any value set by the buyer, it is recommended to only put in as much money as is needed for funeral expenses, as any remaining funds must be given to the state to cover Medicaid costs. Additionally, about half of all states have limits on the dollar value of IFTs, and some states require a Goods and Services Statement for an IFT to be Medicaid-compliant. Therefore, it is important to consult with a professional before creating or using an IFT to ensure compliance with state-specific rules and regulations.
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Pre-Need Funeral Contracts are Medicaid-compliant
Pre-Need Funeral Contracts are agreements between an individual and a funeral home that outline the instructions for the individual's funeral upon their death. These contracts can be drawn up by people of any age and health status, and they guarantee that the necessary funds for the funeral will be available.
The main benefit of a Pre-Need Funeral Contract for Medicaid applicants is that it allows them to lower their countable assets and meet the asset limit for qualification purposes. This is because the funds placed in an irrevocable contract are not considered assets by Medicaid, as they can only be used for funeral expenses.
However, there are potential downsides to Pre-Need Funeral Contracts. One is that the buyer is locked into a specific funeral home, which may be an issue if the funeral home goes out of business or if the individual dies far from the location of the funeral home. Another consideration is that there are limits on how much money can be paid towards this type of contract.
Overall, Pre-Need Funeral Contracts can be a useful tool for individuals seeking to qualify for Medicaid, but it is important to carefully consider the pros and cons before entering into such an agreement.
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Pros and cons of using funeral trusts for Medicaid
Funeral trusts are legal agreements between a trustor, trustee, and one or more beneficiaries that establish prepayment of funeral plans and expenses. They can be beneficial in several ways. Here are some pros and cons of using funeral trusts for Medicaid:
Pros
- Peace of mind: Funeral trusts allow individuals to pay for their funeral and burial costs, or final expenses, in advance, ensuring peace of mind that funeral funds will be available when needed.
- Medicaid qualification: Irrevocable funeral trusts (IFTs) are excluded when counting assets for Medicaid qualification. This helps individuals with "excess" assets to meet the asset limit for Medicaid eligibility.
- Flexibility: IFTs are more flexible than pre-need funeral contracts as they are not locked into a specific funeral home, goods, or services. Individuals can choose who handles the funeral arrangements, including relatives, other persons, entities, or funeral homes.
- Planning tool: Funeral trusts can serve as invaluable Medicaid planning tools, helping applicants lower their countable assets and meet eligibility requirements.
Cons
- Limited information: Funeral trusts are a less common mechanism for funeral planning, and information about trust management and beneficiary rights can be challenging to access. The regulations governing funeral trusts may also be less clear than those of alternative options.
- Tax implications: Interest income from a funeral trust account is taxable and must be reported on federal and state tax returns.
- State restrictions: Funeral trusts may not transfer from state to state. Funds may not be transferable between funeral homes if an individual purchases a trust in one state and later moves to another.
- Financial considerations: Purchasing an irrevocable funeral trust may not be the best financial decision for individuals not seeking to qualify for Medicaid. Other methods, such as final expense insurance or burial insurance, may be more financially prudent.
- Funeral home risks: If a funeral trust is purchased from a privately-owned funeral home that goes bankrupt or mismanages funds, the money spent on the prepaid trust may be lost.
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Funeral trusts as a financial decision
Funeral trusts are legal agreements that allow individuals to pay for their funeral and burial costs, also known as final expenses, in advance of their death. These agreements are typically made between a trustor (or grantor/settlor), a trustee, and one or more beneficiaries. The trustor creates the funeral trust, the trustee manages it, and the beneficiary is the funeral service provider.
When considering funeral trusts as a financial decision, there are several factors to keep in mind. Firstly, funeral trusts can be expensive, so it is important to ensure affordability. If you have a life insurance policy or other assets that can cover funeral expenses, a funeral trust might be redundant. It is worth exploring alternative options such as savings accounts, life insurance, payable-on-death accounts, or burial insurance.
Secondly, funeral trusts may not be the best option if you are not seeking to qualify for Medicaid. In this case, other methods like final expense insurance or burial insurance might be more financially viable. Final expense insurance, for example, builds value over time, which is a positive feature not offered by funeral trusts. However, it is important to note that for Medicaid eligibility, final expense insurance is considered a countable asset.
Funeral trusts can be a useful tool for those seeking to qualify for Medicaid. Irrevocable Funeral Trusts (IFTs) allow individuals to lower their countable assets and meet Medicaid's asset limit for qualification purposes. Funds placed into an IFT do not count as assets for Medicaid eligibility, making it a valuable option for those with excess assets who wish to become eligible for Medicaid.
It is important to understand the specific requirements and state laws regarding funeral trusts and Medicaid eligibility. While an irrevocable trust does not affect Medicaid eligibility, a revocable funeral trust can and is subject to Medicaid spend-down rules. Additionally, there may be complications with funeral trusts if you plan to relocate or are uncertain about long-term decisions, as they may not transfer from state to state.
Lastly, there are potential drawbacks to funeral trusts. The contracts can be complex, and there is a risk of misunderstanding the fine print. Transferring the trust to a different funeral provider may incur fees, and there is a chance of losing funds if the funeral home goes bankrupt or mismanages the funds. Seeking advice from financial advisors, legal counsel, or funeral professionals can help provide clarity and ensure informed decisions.
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State-specific limits on IFTs for Medicaid
Irrevocable Funeral Trusts (IFTs) are a way to pay for funeral and burial costs in advance. They are a valuable Medicaid planning tool as they allow applicants to lower their countable assets and meet Medicaid's asset limit for qualification purposes.
While IFTs do not affect Medicaid eligibility, there are limits to how much can be excluded when determining eligibility. The asset limit varies by state and marital status, but in 2025, the limit is generally $2,000 for a single applicant. Seniors in every state, except California, must meet this asset limit to be eligible for long-term care Medicaid.
IFTs are not the only way to pre-pay for a funeral. Final expense insurance, also called burial insurance, serves the same purpose as IFTs but with the added benefit of building value over time. However, for Medicaid eligibility purposes, this insurance is considered a countable asset.
It is important to note that gifting assets can affect Medicaid eligibility. Under Medicaid rules, gifting can cause ineligibility for long-term care Medicaid as it violates the Look-Back Rule. Each state has a Look-Back Period, typically five years, during which all past asset transfers are reviewed to ensure none were given away to meet Medicaid's asset limit. If a gift is received before applying for Medicaid, pushing one over the asset limit, excess assets must be "spent down" without violating the Look-Back Period.
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Frequently asked questions
An IFT is a legal agreement that allows individuals to pay for their funeral and burial costs in advance. It is a way to set aside money for funeral and burial expenses, easing the financial burden on one's family.
IFTs help lower an applicant's countable assets, aiding in meeting Medicaid's asset limit for qualification. Funds in an IFT are not counted as assets for Medicaid eligibility purposes.
Alternatives to IFTs include Pre-Need Funeral Contracts, final expense insurance or burial insurance, payable-on-death accounts, savings accounts, and more. Pre-Need Funeral Contracts are set up directly with funeral homes and specify the goods and services to be provided, while final expense insurance builds value over time.
