Irrevocable Funeral Trust for Medicaid Planning

An irrevocable funeral trust is a trust you create for your final expenses. It is a single premium life insurance policy that is offered by a select group of insurance companies. Because the policy itself is owned by the trust, it offers tax-free benefits, protection from inflation, and can be shielded from recovery by Medicaid or nursing homes.

Here are the expenses allowable for the trust to cover.

• Basic Services of Funeral Director & Staff
• Other Professional Services
• Embalming
• Other Care of Deceased
• Dressing / Cosmetology Casketing
• Funeral Home Facilities and/or Staff Services
• Viewing/Visitation
• Funeral Service
• Memorial Service
• Graveside Service
• Other Merchandise
• Clergy Honorarium
• Death Certificates
• Musicians
• Temporary Marker
• Stationery Package
• Obituary Notices
• Flowers
• Clothing
• Open/Close Gravesite
• Vault
• Alternative Container
• Outer Burial Container
• Other Services
• Transportation Equipment & Driver
• Transfer of Deceased
• Funeral Vehicle/Hearse
• Car/Limousine
• Utility/Service Vehicle
• Cemetery Charges
• Cemetery / Burial Plot
• A permanent monument in the cemetery
• Travel expenses for family members to attend your funeral
• Outstanding debts or obligations
• Hospital, doctors, legal or attorney's fees
• A repast once the services are concluded

Parameters for issuing the insurance policy.

• Guaranteed issue until 99 years of age
• No underwriting required - everyone approved
• No medical examination - everyone is accepted
• No questionnaire to complete
• You cannot be turned down for any reason (unless you are over 99 years of age)
• Maximum of $15,000 of face value for the policy

Funding options.

• Write a check for total amount of 'trust'
• Matured US Savings Bonds
• Expiring CD's or Treasury Certificates (may have tax implications)
• Exchange one or more existing insurance policies with built-up cash values
• Tax free withdrawal from most Annuities (up to 10%)

The insurance company issues the policy and transfers ownership of it into the trust. All you do is sign the trust documents and your final expense monies are locked away until you pass away.

Medicaid Rules for Funeral and Burial Trusts

State #1 Medicaid Rules
A burial insurance policy is a contract whose terms preclude the use of its proceeds for anything other than the payment of the insured's burial expense. It is an insurance product sold by a state licensed insurance company, and is typically funded with an annuity or life insurance policy.

The following are not burial insurance policies:

1. If a policy has cash surrender value to which the member has access, the policy is not burial insurance it is life insurance.
2. If a burial policy calls for any excess proceeds to be paid to secondary beneficiary (other than the deceased person's estate), it is life insurance, not burial insurance.
3. Similarly, if a policy calls for the proceeds to be paid to a private party who is expected but not legally required to use the funds for the burial costs of the insured, the policy is life insurance.

The ownership of the annuity or life insurance policy is irrevocably assigned by the policyholder to a funeral expense trust established by the insurance company. The trustee or trust administrator is required to pay all trust proceeds toward the policy holder's funeral expenses at the time of the policy holder's death. If a trust's proceeds exceed burial costs, the excess must revert back to the deceased person's estate.

A burial insurance policy is unavailable if:

1. It includes language that says it is irrevocable, and
2. It states that all of the proceeds must be used for burial expenses.

The purchase of a burial insurance policy that meets the above conditions is not a divestment because the purchaser is presumed to receive fair market value.

State #2 Medicaid Rules
16.5.3 Life Insurance Funded Burial Contracts (LIFBC)
A life insurance funded burial contract involves a person purchasing a life insurance policy on his or her own life and then assigning, revocably or irrevocably, either the proceeds or ownership of the policy to a third party, generally a funeral provider. The purpose of the assignment is to fund a burial contract.

Death benefits which exceed the actual costs of burial expenses must be paid to the insured's estate or the insured's beneficiary.

A burial contract that is funded with a life insurance policy must be in writing and must contain all of the following:

Name of funeral home and the insurer.
Statement of funeral goods and services.
Effect of canceling or surrendering the insurance policy.
Effect of changing the assignment of the policy proceeds.
Nature and extent of any price guarantees for goods and services.

The assignment option (revocable or irrevocable) chosen by the customer impacts the determination of countable asset and/or divestment amount.

16.5.3.1 Irrevocable Assignment of LIFBC
An irrevocably assigned LIFBC is an unavailable asset because the member no longer owns it.

If a member has chosen irrevocable assignment of his/her LIFBC the burial space exemption (See 16.5.4 Spaces) may apply, depending on the nature of the contract. Any portion of the contract that represents the purchase of a burial space is exempt and has no effect on the burial funds exclusion (See 16.5.5 Burial Funds).

If the face value of the burial funds portion of the contract exceeds $1,500, it offsets the burial fund exclusion described in 16.5.5.

If the face value of the burial funds portion does not exceed $1,500, determine the cash surrender value (CSV) of the LIFBC at the time that it was assigned and proceed in the following order:

1. Apply the CSV to burial spaces.
2. Apply the burial fund logic described in 16.5.5 Burial Funds to any remaining CSV.
3. Apply the CSV to any itemized goods or services, not accounted for by items #1 and #2 above, purchased at fair market value .
3. Apply divestment policy to any remaining CSV (17.13.2 Trusts).

State #3 Medicaid Rules
B. Irrevocable Burial Arrangements
Follow these steps for each individual to determine if there is an irrevocable arrangement as specified in 1, 2, or 3 below. Deduct any irrevocable burial arrangement from the person's $1,500 burial exclusion.

1. Irrevocable trust/contract
A trust, contract, insurance policy or annuity with a funeral home, bank, insurance company, etc. that lists the a/r or financially responsible spouse/parent as the beneficiary.
a. Irrevocable means neither the depositor/purchaser nor the funeral home/bank can withdraw the funds or change the contract.
NOTE: Even though a court, including a magistrate, can revoke an irrevocable contract, the contract remains irrevocable and is excluded until it is revoked.
b. View a copy of the contract to verify that it is irrevocable, the name of the beneficiary and the face value received in exchange for funds.
c. Do not require that the contract include a listing of goods and services to be provided unless the information is needed for evaluation for transfer of assets (MA-2240, Transfers of Assets) if it appears assets may have been transferred without equal compensation.
2. Irrevocable designation of beneficiary
This is an irrevocable designation of an insurance policy making it payable to a funeral home or to the estate of the deceased for purposes of funeral expenses. This action must prevent the person from accessing the cash surrender value. Irrevocable designation of beneficiary to the funeral home is preferable to designation of the estate as beneficiary or absolute assignment.

IRA Estate Planning Options

IRA Inheritor's Trust
By Steven M. Ratner
Law Offices of Steven M. Ratner
June, 2006

There is an estimated $13 trillion held in Individual Retirement Accounts and other qualified retirement plans in the United States. The owners of these plans are faced with a great challenge: How to best "stretch out" the distributions from these plans in order to minimize income taxation and also how to provide asset protection for their loved ones.

Proper planning can provide staggering results. A large fortune can be amassed by allowing the assets in the plan to grow tax free over the life expectancy of your beneficiaries.

Take the following example: Grandfather dies at age 80 with a $100,000 IRA. Grandfather names his grandson, Charlie (age 5), as the designated beneficiary. If Charlie takes only the required minimum distributions over his lifetime (a "stretch out"), and we assume an 8% rate of return on the IRA, Charlie can expect to receive a total of $7.3 million in annual distributions over his 76 year life expectancy (as taken from the IRS life expectancy tables).

Many parents and their advisors mistakenly believe that such a "stretch out" will occur automatically. They assume that their children will take only the required minimum distributions and will seek professional advice to make the stretch out happen.

Unfortunately, this is not always the case. Often, beneficiaries mistakenly cash out the plan earlier than required. This can happen for two reasons: Lack of financial discipline or simply not understanding the benefits of deferring withdrawals. When an IRA is cashed out too early, a "blow out" occurs (rather than a stretch out) and this can be a huge family disaster.

A better alternative is the IRA Inheritor's Trust. Instead of your IRA being paid directly to your children, the IRA Inheritor's Trust is named as the beneficiary. The trustee of the trust can then ensure a proper stretch out by taking only the required minimum distributions.

The IRA Inheritor's Trust can also provide your children with protection from the loss of the IRA to a spouse in divorce, or to lawsuits and creditors, or even the beneficiary's poor spending habits.

Until recently, it was not clear that the IRS would allow the use of such a trust as a beneficiary of an IRA. Fortunately, the IRS recently issued a ruling (called PLR 200537044) that approved of the use of a trust as the beneficiary of an IRA. This ruling provides a roadmap that tax professionals can follow in drafting trusts as the beneficiary of an IRA.

In summary, the benefits of the IRA Inheritor's Trust are two fold: First, the trust allows for the "stretch out" of your IRA distributions, and second, it allows you to provide your loved ones with protection from creditors, divorce or improvidence.