Many people have the mistaken impression that in order to preplan your funeral or the funeral of a loved one, you must also prepay it. Actually, the choice to prefund or prepay one’s funeral service is simply an option, not a requirement. Why then are there hundreds of millions of dollars now on deposit throughout Canada for prearranged funerals?
Here are several reasons why some people choose to prefund their funeral or the funeral of a loved one.
It is unusual for a consumer to willingly purchase a product or service will in advance of its use or need. However, preplanning and prefunding a funeral can be more cost-effective in the long run. Once all the products and services selected have been paid in full, the funeral home assumes the responsibility for all price increases over the period in which the prearranged contract remains in effect. In other words, the cost of the funeral is guaranteed regardless of how much the prices of the goods and services selected rise. This may also include out-of-pocket expenses such as the purchase of cemetery plots, flowers, newspaper notices, and etcetera.
Depending on the duration of the contract, this can equate to considerable savings for the purchaser. For example, assuming a modest inflationary factor of two percent annually, over a 10-year period, the purchaser will realize a savings of over $ 1,000 for a $ 5,000 funeral.
There are two basic types of prepayment options from which to choose. They are cash funded or insurance funded options. When paying by cash the purchaser may choose to pay singly lump sum payment, make regular installments over a fixed period or a combination of both. As noted earlier, when paid in full the price of the funeral is guaranteed. Some funeral homes will also guarantee the price is a significant portion (i.e. 40 percent or 50 percent) of the funeral’s cost is paid upfront, with the reasonable period not exceeding say 12 to 18 months.
Similar options are available with funeral insurance. A purchaser may pay for coverage with a single lump sum payment or choose a 3, 5, or 10-year payment scheme. Others may opt for term insurance and pay a modest monthly premium for the full term of the policy. Certain funeral insurance products have an annual growth component wherein the face value of the policy will increase yearly usually by a factor of 3 or 4 percent. These types of growth policies are accepted by most funeral homes and it assigned by the purchaser to the funeral home, the funeral home will guarantee the cost of the funeral against policy.
Funeral homes have numerous prepayment options available and will assist you in designing a payment scheme that will best suit your financial circumstances.
When a sudden or unexpected death occurs, survivors are often faced with significant financial hardships. Unless monies have been put aside or insurance purchased, funeral expenses on top of the regular monthly bills are an added burden for someone on a fixed income or a parent raising a young family. Prefunding one’s funeral helps relieve family members of the added financial burden associated with the loss of a loved one.
Before entering a resident care facility, most people choose to put their financial affairs in order. In many cases this includes the preplanning and prepayment of their funeral expenses. If surplus funds are not available prior to entering the facility, a resident is permitted to accumulate funds in a resident trust up to a fixed limit. Once the limit is exceeded some residents choose to prefund their funeral using the additional monies from their trust.
In 1995 the federal government amended the Income Tax Act to implement measures relating to prepaid funeral arrangements. The Act sets out rules which allow for a tax-free build-up of income earned in contributions made under, what is referred to in the legislation as, an “eligible funeral arrangements.”
An eligible funeral arrangements (EFA) is defined as an arrangement established for the purpose of prefunding expenses related to funeral, burial, cremation or cemetery arrangements in Canada for one or more individuals by any person licensed or authorized by provincial laws to provide these services.
In Accordance with the Act an individual may contribute up to $15,000 over their lifetime to an EFA. Any prepaid funeral arrangement that exceeds the $15,000 limit will be ineligible for beneficial treatment under the Income Tax Act.
An individual can also have more than one EFA with more than one service provider. Therefore, an individual could enter into separate agreements for funeral arrangements and for cemetery arrangements and have each qualify as an EFA. In this way the $15,000 contribution limit can be increased to $30,000.
Although the purchaser of an EFA will not receive tax deduction for amounts contributed to the EFA, the interest or income accrued in the EFA can grow on a tax-free basis.
If the EFA remains in force until the death of the purchaser, no tax will be levied on the monies paid out of the EFA as long as the funds are used for funeral or cemetery services. However, in the case where an EFA is cashed in or where surplus funds remain after the provision of the funeral or cemetery services income realized is taxable.
As income earned outside an EFA is taxable, funds inside a tax-free EFA will accumulate much faster. To illustrate, if one was to establish an EFA at age 65, contributed say $5,000 in the plan and earned 5 percent on the money for another 20 years, the amount available at the time of death at age 85 would be just over $13,000. In comparison, if an individual invested $5,000 in a GIC outside and EFA at the same rate and over the same time frame, the amount available at age 85, assuming a marginal tax rate of 50 percent, would be $ 9,000. The purchaser of the EFA would realize a tax savings of approximately $4,000 (i.e. $13,000 – $9,000).
Whether the additional income was used to enhance one’s funeral or a portion paid to the estate (where the accumulated income would be taxed) there are tax advantages to prepaying one’s funeral arrangements.
If an individual was concerned that family members would overspend on his or her funeral services or wanted to limit the cost of the funeral, preplanning and prefunding the funeral would be the best approach. Most next-of-kin or executors are extremely reluctant to alter the final wishes of a loved one.
Many people, especially the elderly who live alone or are living on a fixed income are greatly relieved when they have prepaid their funeral services in full. They feel secure in knowing family members will not be burdened with this extra expense and, more importantly, at the time of their death they will be looked after with dignity and respect.
Thousands of Canadians choose to prefund their funeral and cemetery services each year. Regardless of your financial circumstances there are many cash and insurance funded products available to suit your needs.
There are two basic types of prepayment options available. They are the cash funded or insurance funded options. In each case it is important to first identify the cost of the funeral service desired. Many funeral homes will allow the purchaser to prepay not only the funeral home’s charges but also any third party expenses such as the cemetery plot(s), opening and closing, flowers, newspaper notices, and etcetera. Some will even include the advance purchase of a monument.
When paying by cash the purchaser may choose to pay a single lump sum payment or make regular installments over a fixed period. Generally the price of the funeral service is guaranteed once it has been in full. Some exceptions do apply, particularly if a significant portion is paid up front and, the payment schedule for the remainder does not exceed a reasonable period, say 12 to 18 months.
With funeral insurance an individual may purchase a life insurance policy, the proceeds of which would be used to pay for the funeral. The funeral home would receive an assignment of the future death benefit or, in some cases, may be named as beneficiary.
There are now funeral insurance products on the market that if assigned by the purchaser to the funeral home, the funeral home will guarantee the cost of the funeral against the policy. Many different kinds of policies are available in this province. Funeral insurance plans, for the most part, are provided by specialty firms or insurance brokers licensed to sell these products. Some funeral homes actually endorse selected products.
Although offered as an option, thousands of Canadians prefund their funeral or the funeral of a loved one annually. This is not a new practice. Canadian funeral homes have been offering prearranged and prefunded funeral services for over 20 years. Even though exact figures are not officially compiled, it is estimated that funeral homes in Canada have accumulated well over $1 Billion in prepaid deposits. With recent bankruptcies, misappropriations and the uncertain investments climate we are currently experiencing, consumers are asking, “Are prepaid funeral really safe?”
As of 2000 every province has enacted comprehensive legislation governing the preneed sale of funeral goods and services. While each province has designed its own unique laws, each imposes a detailed set of procedures, requirements and safeguard to protect consumers and the integrity of prepaid funds. The following is a summary of some of the more prominent consumer protection features governing the sale of prepaid funeral deposits.
Trust is the cornerstone of regulatory requirements. Trusts are legal instruments set up to handle and manage your property. If you put your assets in a trust, you transfer legal ownership of them to the trustee, who holds the property for you or for the benefit of anyone you designate. Funeral homes selling prearranged funerals are required to place all or some portion of the prepaid funds received from consumers into trust until the services are rendered or the contract is cancelled by the purchaser. The trust fund must be established with a financial institution and kept separate from all other money controlled by the funeral home.
In most provinces funeral homes are required to maintain individual trust accounts for each contract. However, in this province a bulk trust or one trust account for all contracts is permitted. The income earned in a bulk trust is distributed equally between each contract.
How monies are invested once in trust is governed by Provincial Trustee Acts. Most funds held in trust are invested very conservatively in fixed income guaranteed investments such as GIC’s, treasury bills, government bonds, and mortgage backed securities. GIC’s purchased from financial institutions which are members of the Canada Deposit Insurance Corporation (CDIC) are covered under this insurance. Any GIC’s issued by a CDIC covered issuer are eligible for coverage. Currently, the CDIC insures depositors fully for deposits of up to $100 000 which includes accrued interest.
Under the Federal Income Tax Act, income earned on prepaid deposits used to cover funeral and cemetery expenses is permitted to build-up tax-free. Referred to in the legislation as “eligible funeral arrangements,” the allowable contribution per individual $15,000 for the provision of funeral services and an additional $15,000 for the provision of cemetery services for a total of $30,000. In order to provide greater flexibility in how these funds are invested. Trustee Acts in most provinces have been amended to include the “Prudent Investor Rule.” This allows trustees to invest in mutual funds and other types of securities.
To protect investors against losses of securities and cash balances due to the financial failure of a brokerage house or any firm in the self-regulatory system. The Canadian Investor Protection Fund (CIPF) was established. CIPF provides coverage up to a maximum of $1,000,000 on the aggregate of a client’s general account. It does not cover customers’ losses that result from changing market values regardless of the cause of such loss.
Also referred to as an Assurance Fund, Claims Fund or Guaranty Fund, it is used to compensate consumers that have paid preneed funds to a funeral homes that is later unable to perform the contract. It provides a mechanism to reimburse the consumer or to pay a substitute funeral home to provide the goods and services purchased by the consumer. Contributions to the fund are made solely by funeral homes and sellers licensed to sell prepaid funerals. In this province the rate of payment into the fund is 1% of the net amount deposited in trust by a funeral home annually. For example, if a funeral home deposits $250,000 in its prepaid trust in one year, its contribution to the Compensation Fund is $2,500 (i.e., 1% of $250,000).
Funeral homes receiving prepaid funds generally must deposit them into a trust fund within a prescribed period of time. In addition, some provinces require the funeral home or financial institution receiving the trust funds to confirm the deposit of the funds in writing to the purchaser.
The purchaser many cancel the prepaid contract at any time with written notice to the funeral home. In most cases the funeral home must refund the full amount plus any accrued income, less a small cancellation fee, generally 10% of the principal amount, to a maximum of $250.
In the event a purchaser of a prepaid contract must relocate to another province or simply wishes to use another funeral home, funds may be transferred from the original funeral home to another without jeopardizing its tax-exempt status within the trust or triggering the cancellation of the contract. Another option is to leave the funds with the funeral home and have the new funeral home bill the original funeral home at the time of need. This funeral services arranged in the new location will be similar to those chosen at the original funeral home.
Each funeral home and satellite operation must submit an audited financial statement of its trust to the Minister or Regulatory Board overseeing the legislation annually. Also if requested, funeral homes must provide to a buyer a statement of the amount of prepaid funds including accrued income held in trust for the purchaser.
Prearranging and prefunding funeral services are integral components of every funeral home’s daily operations. Over 30% of today’s funerals have been prefunded. The funeral profession cannot afford to tarnish or jeopardize the integrity of this product. Notwithstanding the numerous consumer protection measures established under legislation and by self-regulated organizations, the industry members stand vigilant over the conduct of its members and will do all it can to maintain the trust bestowed upon our profession by the families we serve.
The option to prearrange and prefund your funeral or the funeral of a loved one has been offered by Newfoundland funeral homes for over twenty years, but until recently Newfoundland was the only province in Canada without definitive legislation regarding this practice. The notoriety ended on December 20, 2000, when the prepaid Funeral Services Act and Regulations were proclaimed by the Lieutenant Governor in Council, thus bringing into force the first major piece of legislation relating to the funeral industry since 1975, when the Embalmers and Funeral Directors Act and Regulations were enacted.
The new Prepaid Funeral Services Act and Regulations is a comprehensive piece of legislation, which enhances the integrity of the prefunded product and offers valued consumer protection. In developing this legislation, Government consulted with a number of organizations including all licensed funeral homes, the Newfoundland and Labrador Funeral Services Association, Board of members of the Embalmers and Funeral Directors Board, Consumers Association of Canada (Newfoundland) Canadian Association of Retired Persons, Newfoundland Chapter, and the Seniors Resource Centre, Newfoundland Chapter.
Although some industry members did not agree with everything in the legislation, most agree it was long overdue and would provide the comfort and protection consumers purchasing prefunded funerals would expect. The following is a brief synopsis of some of the major components of the Act and Regulations.
Recognizing millions of dollars in prefunded funerals have already been collected by funeral homes throughout the province, the legislation requires all monies collected prior to the Act coming into force to be deposited into a trust account.
The above referenced monies are the principal amounts only and do not include any income earned nor disbursements made such as the payment of a cemetery plot or HST. Those funeral homes who have not trusted these monies in accordance with the Act have five years to pay the full amount into a trust account and must pay at least 20 per cent of the balance per year.
Where extenuating circumstances may exist and the Minister is of the opinion payment into the Trust as noted above would cause hardship to a funeral home, the amount of money to be paid and the time required to make the payments may be adjusted.
In order to determine what monies have been collected by a funeral home prior to the proclamation of the Act, each funeral home will have to submit audited financial statements to the Minister of Government Services and Lands, under whose jurisdiction the – Act is administered Audited statements must be submitted to the Minister no later than 90 days after the end of the funeral home’s fiscal year.
For those funeral homes having a fiscal year end of December 31, 2000 the reporting date would be no later than March 31, 2001. Further, for those funeral homes who have not trusted these monies, the first deposit of 20 per cent of the unfounded amount must be deposited in trust prior to the anniversary date of the proclamation of the Act, that being December 20, 2001.
Anyone wishing to be a “seller” of prepaid funeral contracts must first apply to the Minister in writing for a license. The application must include a copy of the proposed prepaid funeral contract, other records and documents as outlined in the regulations that must be maintained as part of the seller’s duties and a fee.
Once a funeral home or branch operation is licensed as a seller or prepaid funeral contracts, individual licenses for staff members operating within these establishments will not be required in order for them to sell prefunded funerals.
As licensing fees are not established in the Regulations, they had not been finalized at the time the Act and Regulations were proclaimed. A proposed “Fee Schedule” has been prepared by Government and it based on 1/10 (one tenth) of one per cent of the dollar value of existing prepaid funerals held by a funeral home in the year prior to license renewal, with the fee not to exceed a cap of $1000. For example if a funeral home has $200,000 in prepaid funerals, its fee will be $200,000 x 1/10 per cent (0.001) = $200, but if a funeral home has $1,500,000 in prepaid funerals, its fee will be $1,500,000 x 1/10 per cent (0.001) = ($1,500) $1,000 are fees capped at $1,000.
Licensing fees must be paid annually. Therefore, under the current proposal, fees will vary from year to year because they will be based on the previous year’s totals. Further discussions between Government and industry respecting this matter are anticipated.
One of the key components of this new legislation for the consumer is the establishment of an assurance or compensation fund. The fund will be known as the Consumer Protection Fund for Prepaid Funeral Services and used to pay claims arising out of a prepaid funeral contract against a seller. As an example, this fund would be used to compensate consumers in the case of misappropriate or loss of funds by the funeral home.
The Assurance Fund will be funded by funeral homes or sellers of prepaid funeral contracts only. The amount paid by each funeral hone or seller is based on a percentage of the net amount of a prepaid funeral contract deposited in trust. In other words, the amount required to be placed in trust will exclude the amount paid to a church, place of worship, or non-profit organization for the cost of a cemetery plot and any commissions, administration fees and taxes paid.
As per the regulations, the rate of payment into the Fund has been established as 1 (one) per cent. The following example illustrates how the Assurance Fund assessment is calculated:
Cost of the prepaid funeral contract (including HST) $5750 Less Harmonized Sales Tax (HST) (i.e. 15% of $5000) $ 750 Sub Total $5000 Less Cost of Cemetery plot (estimated) $500 Less Administration Fee ( 10% of $5000) $500 Net Amount to be deposited in Trust $4000 Amount to be held into Assurance Fund (1% of $4000) $ 40
However, payments into the Assurance Fund, for those funeral homes which do not have all of their prepaid funeral funds placed in trust prior to the proclamation of the Act are based on higher rates depending on the percentage of prepaid funeral funds held in trust. For example, is a funeral home only has between 0% to 20% prefund its retroactive prepaid funeral funds put in trust, the rate of payment into the Fund will be 5%; between 20% and 40% the rate is 4%; between 40% and 60% the rate is 3%; between 60% and 80% the rate is 2%; and more than 80% the rate is 1%.
With references to the above noted illustration, the Assurance Fund assessment for a funeral home with less than 20% of the retroactive prepaid funeral funds put in trust will be $200 (i.e. 5% or $4000 = $200). Therefore, it is to a funeral home’s advantage to pay 100% of its retroactive prepaid funds, into trust as quickly as possible even though, as earlier noted, it has at least five years to pay the balance.
It is important to clarify no money is required to be paid into the Assurance Fund by funeral homes for prepaid funds collected prior to the proclamation of the Act and Regulations. Payments into the fund must be made on a “go forward” basis. A funeral home only pays assessments on prepaid funeral contracts sold after the proclamation at a rate of assessment between 1% and 5% depending on the percentage of prepaid funds held in trust, as noted earlier.
Monies paid into the Fund shall be invested in accordance with the Trustee Act. Administration costs and expenses may be paid out of the Fund. Otherwise all interest, dividends and other income earned must remain in it. The Fund will be subject to an annual audit.
Monies received by funeral homes for prepaid funeral services must be placed in a trust fund established with a financial institution and kept separate from all other money controlled by the funeral home. A funeral home need only maintain one trust account, as individual trust accounts are not required for each contract.
The funds deposited in trust must be held in trust for the buyers and beneficiaries of prepaid funeral contracts and invested in investments authorized by the Trustee Act. In order to provide more flexibility in how these funds are invested, the Government also amended the Trustee Act to include the “Prudent Investor Rule”. The actual amount required to be placed in trust will exclude the amount paid to a church or cemetery committee for the cost of a plot and any commissions, administration fees and taxes paid. Each funeral home must submit an audited financial statement of their trust fund to the Minister of Government Services and Lands annually. Also, if requested, funeral homes must provide to a buyer a statement of the amount of prepaid funds including accrued income held in trust for the buyer.
The legislation has been established certain restrictions on how funeral homes may solicit prepaid funeral contracts. Funeral homes are not permitted to call or telephone or contact a person cared for or residing in a hospital, long term care facility or personal care home without having received a specific request from the institution in which the person or persons are residing. As no other solicitation restrictions appear in the Act or Regulations, telephone, door-to-door and direct mail solicitation at one’s residence or place of business is permitted. Furthermore, there are no restrictions in the manner in which funeral home may advertise prepaid funerals.
A buyer may rescind a prepaid funeral contract without a penalty or reprisal by providing a written notice to the funeral home not more than 10 days after entering into the contract. A buyer may also rescind a prepaid contract if it is determined the funeral home was not licensed to sell prepaid funerals at the time the buyer entered into the contract; it does not provide the buyer with a copy of the executed contract, or it does not comply with the Regulations. A buyer cannot rescind prepaid contracts entered into before the proclamation of this legislation.
The buyer may cancel the prepaid funeral contract at any tome, provided the funeral home is given written notice prior to the intended date of cancellation. The funeral home can charge a cancellation fee of 10% of the money paid under the prepaid funeral contract to a maximum of $250. Not more than 15 days after receiving the cancellation notice, the funeral home must refund to the buyer the funds paid to the funeral home or placed in trust, including income accrued on the money, less the cancellation fee. For tax purposes, T-5 information slips showing the amount of income accrued in the trust will be issued by the funeral home to the buyer. Where the buyer and the beneficiary are not the same person, the funeral home must notify the beneficiary or personal representative in writing of the cancellation.
Funeral homes are permitted to charge an administration fee or commission. The fee cannot exceed 10% of the cost of the contract. For example, if the cost of the prepaid funeral contract, excluding HST is $5000, the funeral home may charge an administration fee or commission of $500 (i.e. 10% of $5000). These fees and commissions are not normally deposited into the trust account, but rather disbursed to the funeral home. They would be in addition to trust administration fees ordinarily charged by a financial institution and paid out the trust fund to the trust administration.
Legislation does stipulate the information that the seller must include or disclose to the buyer in a prepaid or disclose to the buyer in a prepaid funeral contract, but does not limit the types of contracts offered by the seller. In addition to an insurance contract, funeral homes may offer either a guaranteed or non-guaranteed pricing contract. Under a guaranteed contract, once all the funeral good and services have been all paid in full, the funeral home guarantees the cost of the funeral and this assumes the responsibility for all price increases throughout the duration of the contract. With a non-guaranteed contract, funeral services are provided by the funeral home at prevailing retail prices determined at the time of death. Excess income, if any, accrued in the trust will be paid to the estate of the buyer. Additional funds required because of increased costs or other shortfall will be paid by the estate of the buyer.
A prepaid contract must be written in plain language and include itemized HST and any cost of the funeral goods and services purchased, the date of execution, the names and addresses of the funeral home or seller, the buyer and, if applicable, the beneficiary, a statement that the contract can be cancelled and the amount of the cancellation fee, instructions about embalming if requested, a statement about the substitution of goods and services and disclosure of any good and services and disclosure of any administration fees and commissions.
Like any new legislation, there will be a period of adjustment for funeral homes to revise their documents, apply for licensing, have audited financial statements prepared and make any necessary administrative adjustments needed to meet compliance requirements. Nevertheless, this new legislation now provides consumers purchasing prefunded funerals with the protection they would expect.