Since the onset of Covid, the death care industry has experienced an uptick in preneed sales.  As witnessed recently on the Bankrate website, the financial planning industry has taken notice.  Bankrate is a website that provides comparisons of various financial products, and recently posted an article titled “The pros and cons of funeral trusts”.  The article opens with a reference to the IRS code section defining a qualified funeral trust and discusses the advantages of a trust for final expenses.  Noting the risks of the conventional preneed contract, the article recommends a do it yourself approach to setting up a funeral trust.  We have long been a proponent of the financial industry offering a trust based product for final expense purposes.  This would be a preneed alternative that many small death care operators would welcome.   What mom and pop funeral home wouldn’t like to avoid the hassle of filing annual reports and monitoring state law compliance?  A final expense trust product could also be attractive to churches and hospices.  But the Bankrate article fails to grasp certain complexities of the preneed transaction that doom the DIY funeral trust.

Costs are the first hurdle to establishing a DIY funeral trust.  As the Bankrate article suggests, we agree that an independent trustee is needed.  Back in 2013 we explored the costs of individual funeral trusts.  We found a few boutique trust companies that offered up such types of trusts, but all charged minimum set up fees and/or minimum annual fees.   While most financial planners have trust templates for standard estate planning purposes, the funeral trust is a different animal.  As the Bankrate article hints at, an individual may have to seek the assistance of an attorney.  That means the trust instrument may cost several hundred dollars.  Between the trustee and a drafting attorney, the DIY funeral trust could cost more than $500 to set up.

The Bankrate article glosses over the challenge of investing a small trust account.  We addressed this same issue when posting in response to a 2018 New York Times article about funeral planning.  Like so many funeral home preneed trusts, fees will eat up small investment funds.  To be economically viable, financial institutions must embrace the funeral trust concept and offer it as one of their products.  As with the funeral master trusts we have written numerous times, the independent funeral trust will need economies of scale and diversification.

While the Bankrate article gave lip service to IRC Section 685, the DIY funeral trust can never satisfy the qualified funeral trust requirements.  Section 685 provides the death care fiduciary substantial tax reporting advantages that are key to administrative efficiencies.  The following hyperlink displays some of our posts on Section 685.  The DIY funeral trust is in essence a grantor trust under the tax code.

The Bankrate article includes comments from a financial advisor who acknowledges her industry is not geared to providing final expense products.  She suggests that accordingly, financial planners tend to build funeral expenses in as part of the overall estate plan (rather than set up a specific trust).  We saw similar advice in article a few years ago and posted about frequent estate planning mistakes and the need for a final expense trust (When a Will will be too late.)

The DIY funeral trust may seem a safer alternative to the cons of the conventional preneed trust: the lack of portability, poor refund rights, and vulnerability to fraud.  An independent funeral trust program could provide individuals the means to preplan and prepay their funeral and burials without being obligated or committed to a particular funeral home or cemetery.  But such a program would have to provide consumers the documents, fiduciary and legal services and expertise to carry out their funeral and burial decisions. This is too much to ask of a DIY funeral trust.