What Are Prepaid Funeral Expenses?

Prepaid funeral expenses are funeral home expenses that are arranged and paid for in advance of a person's death. These expenses include all charges assessed by a funeral home for services but typically exclude cemetery or crematory expenses, clergy expenses and the costs to obtain a death certificate. A person can handle these expenses by paying the funeral home directly in advance or setting up a savings account with the funeral home as the beneficiary. Many jurisdictions provide tax breaks and other considerations for the prepayment of funeral expenses and regulate the process to prevent abuse.

Many people choose to make arrangements for their eventual death in advance. This allows a person to decide how he would like his funeral to proceed and removes the stress of making these decisions from loved ones at the the time of bereavement. Funeral homes have capitalized on this desire by offering two ways of making these decisions in advance. Individuals can preplan a funeral or prepay it. A preplanned funeral is simply a written plan expressing a person's wishes that is kept on file at a selected funeral home, while a person actually doles out money for the prepaid funeral option.

Some jurisdictions regulate prepaid funeral expenses to prevent abusive sales tactics and misleading promises. The types of difficulties with prepaid funeral expenses that can arise in unregulated situations include funeral homes going out of business before outstanding prepaid obligations can be honored and never returning the money, substituting inferior merchandise as a result of rising costs and never informing the family that the expenses have been prepaid at the time of death. Public policy in many jurisdictions supports the standardization of the prepayment process so people are not left without recourse at the time of death and the elderly are not bilked out of money for insufficient arrangements.

A properly regulated process for prepaid funeral expenses in situations where the person decides to pay the funeral home directly often requires the home to place the money in an interest-bearing savings account, with the person as the beneficiary. The funeral home is required to report the establishment of the account to the governing jurisdiction. It must also send a report on the status of the account to the beneficiary and the tax authorities yearly. This enables the jurisdiction to take possession of the money in case it is never claimed and the tax authorities to require the beneficiary to pay taxes on the interest. Typically, most jurisdiction allow taxpayers to deduct the principal balance in the account from income.