Q: I just set up a burial trust to take care of funeral expenses when I die. I am 80 years old but in good health, so I don't expect to go anytime soon -- though you never know! My question involves how that burial trust should be invested. I'm assuming savings accounts are the best vehicle for this kind of thing because the money is available at any time, but I hate to think of the money earning so little interest. The longer I live, the more ground it will lose to inflation.
A: Certainly, savings accounts are a natural solution for a burial trust -- as you say, their ready availability makes them a good fit for this type of need. As you point out though, the disadvantage is that savings account rates are extraordinarily low at this time. It may be a less conventional solution, but you might also want to consider a CD instead of a savings account.
Right now, according to FDIC averages, five-year CD rates are more than 10 times greater than rates on savings accounts. So, suppose you found a five-year CD with a penalty for early withdrawal equivalent to six months' worth of interest. Five-year CDs earn in about a month what average savings accounts earn in a year. So, as long as the burial trust was not needed for at least seven months, you would come out ahead with the five-year CD, even after paying the penalty.
Whichever vehicle you choose, be sure to shop around for the best CD rates or savings account rates available. Choosing the right bank can make as much of a difference in the rate you get as choosing the right deposit vehicle.
In some cases, there is an alternative to setting up a burial trust. Some states allow deals between funeral homes and their customers in which the customer pre-pays funeral expenses. Obviously though, you would want to make sure you are dealing with a reputable funeral home with a thriving business, so you can be confident that the arrangement will be honored when the time comes. Obviously, you should look over the contract carefully, and provide a copy to your executor or a close family member.
The benefit of this is that it effectively removes the inflation risk -- by paying up front, you lock in the cost of the funeral. The drawback is that paying up front means that the funeral home, rather than your burial trust, gets the benefit of any interest earned between now and when you die. Whether the benefit outweighs that drawback largely comes down to whether you think inflation will continue to exceed deposit rates over the remainder of your life.
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