Can I Designate IRA Funds to Pay for My Funeral?

Save your family heartache by making funeral arrangements while you're still alive.

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It costs a small fortune to undertake funeral details, even with a modicum of pomp and circumstance. From preparing a body for burial to casket selection, it is easy to see why cremations are on the rise, but there is no alternative for traditionalists. Cover your own funeral expenses upfront by stating your exact wishes on paper and earmarking individual retirement arrangement funds specifically for your funeral.

Funerals Are Expensive

According to the National Funeral Directors Association, a conservative guess for underwriting a funeral in the U.S. was around $6,500 in 2009, but the cost is probably closer to $10,000 or more, since a cemetery plot, headstone and miscellaneous expenses wrapped around the solemn occasion aren’t factored into the NFDA estimates. Extras associated with holding a funeral and celebrating a life well lived can drive up the tab substantively, especially when vulnerable families, left without specific instructions, are subject to sales pitches from staff more interested in making a profit than final arrangements.

Hardship Distributions

Amid the Internal Revenue Service’s laws, guidelines and protocols are rules governing “Hardship Distributions.” According to the IRS, distribution from a retirement plan can be undertaken if there’s “an immediate and heavy financial need” -- like underwriting funeral expenses -- as long as the disbursement is limited to only the amount needed to “satisfy that financial need.” If the IRA in question is maintained by an employer, a request for money comes under “safe harbor” regulations, but this is where things can get dicey: according to the IRS, only elective contributions – not IRA growth earnings – can be disbursed if funds are requested from an employer-maintained account.

IRA Checkbook Control Trust

Among products offered to investors looking for unique IRA options are iTrusts. These are special purpose trusts, say analysts writing for financial resource Accuplan, and they fit under the self-directed IRA umbrella. iTrusts are sometimes called Checkbook Control Trusts: You set aside funds in the checkbook IRA for funeral expenses and name either a relative willing to assume responsibility for paying funeral bills or a funeral home as beneficiary. As your own investment manager you have direct control over the account, so hassles are minimized. Contribution amount limits and tax breaks match mirror IRA products. Set up correctly, maintenance fees associated with an IRA Checkbook Control Trust are minimal. Just make sure you advise your family of this IRA’s disposition.

Totten Trusts

Totten Trusts were named for a 1904 New York court decision that ruled anyone can open a bank account as a trustee and funds can’t be touched until the trustee dies. Totten Trusts are essentially revocable trusts that help owners skirt probate while giving immediate access to funds to pay for final expenses. Tottens are typically set up at banks. You name a mortuary or relative as beneficiary, but neither has withdrawal power while you're alive. That stated, if you get into financial hot water, creditors can go after these funds. This alternative to having a separate IRA account to cover final expenses may not attach tax shelter benefits, but all it takes is a copy of your death certificate to get funds into the hands of people handing your arrangements.