Funeral prepayment often leaves consumers vulnerable

Kim Curtis

Friday, Aug. 13, 1999 | 4:37 a.m.

SAN FRANCISCO - Many people choose to prepay for their funeral in an attempt to relieve their families of the burden.

One common method of prepayment is to a funeral director, who may invest the money in the California Master Trust, which is a subsidiary of the California Funeral Directors' Association. The trust, which paid out $9.8 million for 4,262 funerals last year, is audited annually by an independent firm and a report is filed each year to the state Department of Consumer Affairs.

Here's how it works: A consumer can prepay with one installment or multiple payments for three, five, 10 or more years. With a single payment, you're covered from the day of acceptance. With multiple payments, a preneed trust is usually limited to the amount paid plus interest minus any administrative fees.

A funeral director is required to deposit 100 percent of your money into the account and then earns interest on your money. While the interest rate varies monthly, last year the California Master Trust averaged 13 percent interest. During the first five months of this year, it averaged about 6 percent, according to spokeswoman Debbe Dreher.

The consumer is responsible for federal and state income taxes on any earnings.

If you invested $3,500 in the California Master Trust in 1992 plus paid taxes on earnings, you would have $7,390 available in 2002. Funeral price increases are estimated at 5 percent a year.

Many funeral homes offer two plans - guaranteed and unguaranteed. In a guaranteed plan, the funeral director risks that the fund will earn enough to offset inflation. If there is excess money, the funeral director keeps it; if there is not enough, the funeral director takes the loss.

With an unguaranteed fund, the family takes the risk and agrees to pay the difference if there's not enough money in the fund. If there's excess money, it's returned to the family.

Also, there is a penalty for early cancellation. It's an administrative fee equal to 10 percent of the original deposit deducted from the interest.

The American Association of Retired Persons recommends preplanning, but not necessarily prepaying.