ARE PREPAID FUNERALS A SCAM?

Are pre-paid funerals a scam? The American Association of Retired Persons (AARP) thinks so. And, in a November 2002 Scam Alert to its members, AARP told its members so. States the AARP: “AARP advises consumers to preplan but not to prepay.”

Now, I know that a lot of people like the AARP and trust the AARP’s advice. So, what I’m going to say may offend some people – I think the AARP is wrong, at least as far as New Jersey goes.

When I help people plan for Medicaid eligibility, I often advise them to purchase an irrevocable prepaid funeral fund. An irrevocable prepaid funeral fund is an “exempt resource” for purposes of Medicaid eligibility. What that means is, you can own an irrevocable funeral fund (say worth $6,000) and the fund will not affect your eligibility for Medicaid benefits – notwithstanding the fact that you cannot own more than $2,000 in assets and qualify for the Medicaid program.

The fund must, however, be irrevocable. In this instance, that means that the person who established the fund cannot revoke the prepaid funeral and redeem their money. For Medicaid planning purposes, once you set up the fund, that’s it; you cannot get your money back.

Well, I don’t know about you, but if someone told me that I had to give someone thousands of dollars for something that I might not – and hope not to – use for years, I’d be a bit nervous. What if the funeral director goes out of business, won’t I lose my money? Worse yet, what if the funeral director decides to take my money on vacation with him; surely, I’m out of luck? According to the November AARP Scam Alert, the answer is “yes.” But in New Jersey, in most instances, the answer is “no.”

That’s because many funeral directors in New Jersey participate in the New Jersey Prepaid Funeral Trust Fund. The program is commonly known as “Choices.”

From a practical standpoint, a person can go to a funeral director, choose the services that he or she wishes, obtain estimates for those services, and place an appropriate amount of money in the Choices prepaid funeral fund. The Fund manages and invests the money until the funeral director withdraws the money after your death.

The money will be there. In fact, the money earns interest. And, since your money is pooled with all of the other money that has been deposited in the Fund, I’ve heard that the interest is as high as 5%. That’s not bad by today’s standards.

As I mentioned, my experience with prepaid funeral funds is in the context of Medicaid planning. Since death is an inevitability that few of us like to think about but that all of us must face at some time, purchasing a prepaid funeral fund is a good idea for most Medicaid plans. A person can convert thousands of dollars into an exempt resource by purchasing a prepaid funeral fund, hastening his or her eligibility for Medicaid and purchasing a necessary item at the same time.

In order to be an exempt resource for purposes of Medicaid eligibility, the funeral fund must be irrevocable, meaning that the person cannot revoke the funeral fund and redeem the money that they placed in the fund. But Choices has revocable and irrevocable plans.

If you weren’t seeking to qualify for Medicaid, you would not choose an irrevocable fund. In fact, unless you anticipate eligibility for Medicaid in the near future, you cannot make your Choices prepaid funeral fund irrevocable. So, most Choices funds are revocable. That means that the person who set up the fund can revoke it and can redeem the money that they placed in the fund – plus interest – any time they want.

AARP might think that all prepaid funeral funds are a bad idea. I know that’s not true – unless you consider a protected fund that earns 5% interest and that you can revoke at any time to be a bad idea.