Upon the death of a loved one, one of the most immediate, pressing concerns is often how the family will pay for his or her funeral expenses. This guide is designed to address common misconceptions and to provide guidance from an estate planning attorney’s perspective.
Faulty Solution: I have named my child as a payable-on-death (POD) beneficiary of my bank account or a direct beneficiary of my life insurance policy.
- If you have named any individual as a POD beneficiary of a bank account or a direct beneficiary of a life insurance policy for the purpose of providing immediate access to funds for your funeral, here are several factors to consider:
- The named beneficiary will have no access to your bank account or life insurance proceeds until an official death certificate has been obtained. An official death certificate is the only document most financial institutions can accept as legal evidence of your death.
- After a person dies, it can take anywhere from one day to a few weeks for the official death certificate to be completely processed. Turnaround times vary by location, type of death and when the person died.
- Most funeral homes require payment before the funeral service. Note that some funeral homes (but not all) may accept an assignment of your life insurance policy, made when your beneficiary arranges your service.
- Based on the above, family members are often required to come up with a large payment which cannot be paid back until the death certificate has been obtained.
- Be aware that the individual you have named as your beneficiary is under no legal obligation to use this money for its intended purpose and could simply walk away with the account balance.
Faulty Solution: I have named my child as a co-owner of my bank account.
Frequently, in his or her later years, a parent will add a trusted adult child as the co-owner of his or her bank account(s). The purpose of this arrangement is usually to allow the child to assist the parent in managing his or her finances, signing checks, etc. Often, the intent is not for this child to inherit the entire balance of the account upon the parent’s death to the exclusion of the other children. There are numerous potential issues with this arrangement, some of which are outlined below.
- Gifting – When you add your child (or anyone else) as the co-owner of your asset, you have just legally gifted them half the value of the asset. Presently, you can gift up to $15,000 per year per beneficiary without incurring any gift tax consequences. If the value you have “gifted” is greater than this amount, then you are legally required to file a gift tax return and incur any gift tax consequences associated with the transfer.
- Creditor Issues – Once your child (or anyone else) becomes the co-owner of your account, half of your account will then become subject to the claims of that person’s creditors. Therefore, if the co-owner gets sued or files for bankruptcy, then half of your account could end up in the hands of his or her creditors. Your account could even become an issue within your child’s divorce proceeding.
- Final Expenses – Even if your intent is for the money in your account to be used to pay your funeral expenses after your death, the child you have named as a co-owner of your account is under no legal obligation to use this money for its intended purpose. He or she could simply walk away with the account balance, leaving the other assets in your estate to pay for these expenses, resulting in a “windfall” for that child.
Faulty Solution: I have a financial power of attorney naming my child as my agent.
A power of attorney is only effective during your lifetime and immediately ceases upon your death. Therefore, as soon as you die, the agent named under your power of attorney will no longer have the legal ability to write checks or to otherwise access your financial accounts for any purpose, including for the purpose of paying for your funeral expenses.
In the event your accounts are subject to probate, regardless of whether or not you have a valid will in place, the personal representative (“executor”) of your estate will have no access to these accounts until the court has issued an order (known as “Domiciliary Letters”) authorizing your personal representative to access your accounts and to pay your debts and expenses.
Incomplete Solution: I have a revocable living trust.
A fully funded revocable living trust, combined with all corresponding ancillary estate planning documents, can be a wonderful and effective estate planning tool used to avoid guardianship during any period of mental incapacity, to avoid probate upon your death and to protect the assets left to your beneficiaries when necessary or advisable. However, a revocable living trust likely will not avoid the dilemma of funding your funeral after your death. In most circumstances, cash needs cannot be immediately met for funeral arrangements. Life insurance takes a week or two to pay out, and many banks will place a freeze on assets until they receive evidence of qualification from the successor trustee. Meanwhile, the funeral is pending and family members are often required to come up with a large payment which cannot be paid back until the death certificate has been obtained.
Perfect Solution: I have a prepaid funeral plan.
A prepaid funeral plan can be a highly effective solution to the funeral funding dilemma. A prepaid funeral plan can offer peace of mind, protect your finances and ensure your final wishes will be carried out.
Perfect Support: Authorization for Final Disposition and Memorial Instructions
Finally, don’t overlook the importance of an Authorization for Final Disposition – a legal document authorizing a designated individual to make funeral arrangements on your behalf. You should also include with your other estate planning documents a statement of your personal wishes as to burial or cremation services. Planning a loved one’s funeral can be a difficult task. However, a solid estate plan combined with an effective solution for funding your funeral can provide peace of mind for you and the ultimate gift for your family when the time comes.