Avoiding the Pitfalls
Funeral Policies, Other Life Insurance and Medicaid
By Tracy Speck Neisent

Even the seemingly simplest of issues in a Medicaid plan are ticking bombs for those who are unfamiliar with the intricacies of Oklahoma Medicaid law and rules. One such trap for the unwary is the funeral policy. This article will discuss Oklahoma Medicaid treatment of funeral policies and alert practitioners to the dangers lurking in the shadows of the DHS Medicaid manual with regard to funeral contracts.

Medicaid is the government program which pays for at-home care and nursing home care for eligible persons. To be eligible for Medicaid for long-term care, a person must meet several criteria: medical eligibility, income eligibility and financial eligibility. Through strategic Medicaid planning, people can preserve much of their life’s savings without going broke paying the nursing home before they become eligible for Medicaid. With proper legal assistance, assets can often be arranged or re-arranged in such a way that the financial eligibility requirements are met.

Not all assets are “countable” for Medicaid purposes. Funds set aside for burial, properly structured, are considered “exempt.” Because pre-paying the funeral and burial costs convert countable assets (cash) into exempt assets, purchasing a pre-paid funeral contract is a common strategy utilized in Medicaid planning. Although this may sound like a simple matter, much caution must be given to the structure of the pre-paid burial contract in order to comply with the Medicaid eligibility requirements.

Title 56, Oklahoma Statutes Section 165(2) sets forth the exemptions for Medicaid qualification purposes for life insurance policies and funeral expenses. First, Section (2)(a) provides that $1,500 cash value of life insurance policies for funeral expenses are exempt. Second, Section (2)(b) provides that $7,500 in an irrevocable funeral contract is exempt.

The Oklahoma Administrative Code (“OAC”), Title 317, Chapter 35, sets forth the policy for the Department of Human Services (“DHS”) to follow for determining Medicaid eligibility. The OAC reiterates and expounds on the state statute with regard to the funeral funds. First, the OAC provides that revocable burial funds not in excess of $1,500 are excluded as a resource if the funds are specifically set aside for the burial arrangements of the individual or the individual’s spouse.

Any amount in excess of $1,500 is considered as a resource. Therefore, a person could have paid-in $1,500 on a revocable burial contract, and this $1,500 is exempt. If a person has paid-in $1,700 on a revocable burial contract, then $1,500 is exempt and the extra $200 is counted as a resource against the maximum resource amount.

Next, the OAC provides that up to $7,500 in an irrevocable funeral policy is exempt. Typically pre-paid funeral contracts are created in one of two ways. Either the funeral home holds the funds in a trust account or a life insurance policy is purchased to fund the funeral contract. Either way, the contract must be made irrevocable in order for the pre-paid funeral to be exempt for Medicaid purposes. Take note, however, that under Oklahoma law the client has 30 days to revoke the irrevocable election. Therefore, the $7,500 irrevocable funeral policy is not an exempt asset for Medicaid purposes until the 30 days has passed.

If the funeral home is holding the funds in trust, the contract with the funeral home must be made irrevocable. If there is an underlying life insurance policy funding the contract, the life insurance contract must be made irrevocable. Caution should be taken to insure that the proper irrevocable election form is used. Most life insurance companies have their own specific forms which they require. Thus, a generic form for irrevocable election which is provided by the funeral home may not satisfy the requirements of the life insurance company.

When the face value of the pre-paid irrevocable burial contract exceeds $7,500, the client is ineligible for Medicaid. What do you do if a client has a $8,000 irrevocable funeral contract? Contact the funeral home and/or the life insurance company and reduce the face value. Although the contract is irrevocable, this practitioner has not had a refusal by a funeral home or life insurance company to reduce the face value after informing them of the maximums set forth by Oklahoma law. If reducing the face value also reduces the cash value, a return of premiums paid may be made to the funeral
contract owner.

One issue that arises is that a client will arrange for and pre-pay for a $7,500 funeral. The funeral home will invest the $7,500 into a single premium life insurance policy with a face value of $7,650. This too will cause the owner to be ineligible and the face value will need to be reduced.

Although the casket, funeral and incidentals can be extremely expensive, there are funeral homes which offer reasonable rates on these services. The client does not have to spend $7,500 on a funeral. The client can make arrangements for a $3,000 funeral. Alternatively, arrangements can be made for cremation, which in Oklahoma costs less than $1,000. Cremation is becoming more popular. See the statistics at www.cremationassociation.org.

If the client has extra funds which need to be spent down as part of the Medicaid plan, the client can make arrangements for a $3,000 funeral (or $1,000 cremation) and fund it with $7,500. The excess funds not used on the funeral after the client’s death will be paid to the beneficiary under the irrevocable contract. Standard language on these contracts often pays the excess to the client’s estate which would make the excess subject to a Medicaid lien. Instead, the contract needs to be thoroughly reviewed and changed to make a family member the beneficiary of any unused funds.

Cemetery lots for the individual and family members are also exempt assets for Medicaid eligibility. Prepaying for opening and closing of the grave is also exempt in addition to the $7,500 irrevocable funeral policy.

The biggest trap that people fall into is that they will have a $7,500 irrevocable funeral policy and other life insurance policies. If the face value of the irrevocable funeral contract plus the cash value of all other life insurances totals more than $7,500, the client is ineligible for Medicaid. For example, a client has a $7,500 irrevocable funeral policy and a $10,000 face value life insurance policy which they have been paying on for several years which has accumulated a cash value of $1,200. Although the logical treatment of this situation would be simply to count the $1,200 cash value of the life insurances toward the Medicaid beneficiary’s exemption amount of $2,000, that is not how the DHS policy reads. Instead, the client is strictly ineligible.

To remedy the situation, the cash value of the policy must be withdrawn so that the total face value of the funeral contract plus the cash value of the additional life insurances is below the $7,500 threshold. Alternatively, a loan can be taken against the policy to reduce the cash value, yet caution must be taken that there is not remaining cash value even after taking out a the maximum loan. Often the maximum loan amount is less than the total cash value of the policy which typically leaves trace amounts of cash value even after fully exhausting the loan.

Another alternative is to change the owner of the life insurance policy with cash value. However, gifting penalties may apply to the transfer to the extent of the amount of the cash value of the policy at the time of the transfer.

Once a funeral contract, with no more than a $7,500 face value, is made irrevocable, accumulations within the funeral contract can grow beyond the $7,500 and still remain exempt for Medicaid purposes.

Medicaid is complex and tricky. Although Medicaid eligibility is subject to federal law, federal regulations, federal policies, state laws and state regulations, there are many “unwritten” rules which DHS applies. Navigating through Medicaid eligibility is a minefield for the unwary. The greatest of caution must be taken with each and every aspect of a client’s Medicaid plan.

About the Author

Oklahoma City lawyer Tracy Speck Neisent was certified as an elder law attorney by the National Elder Law Foundation in 1999. Her practice areas include elder law, Medicaid planning, Medicaid appeals, planning for preservation of government benefits when an inheritance or personal injury settlement is received, special needs trusts, estate and tax planning, trusts, wills, guardianships, probate, estate administration and litigation involving these areas of law. She received her J.D. from OU in 1993.