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Kokua Line

By June Watanabe

Friday, March 24, 2000

Prepaid funeral plans
subject to tax

Question: We purchased two funeral plans, including casket and personal services, fully paid for and thought that was the end of it. Recently, we received a "Grantor Advice Letter" from the seller informing us that the monies have been placed in trust and subject to taxation every year. As I see it, this is an investment plan and legally must have an application signed and approved by us, which we did not do. If it is an investment, shouldn't we receive all monetary gains? Instead, the grantor keeps all the gains and requires the buyer to pay the taxes on it, receiving nothing.

Q: My neighbor purchased a pre-arranged funeral plan in October 1998 and paid in full. The $11,000 was placed in an interest-bearing account. In January 1999, Ordenstein's sent a letter saying the interest ($280) earned with his money must be claimed as income on his tax form for 1999. He had to pay taxes on that interest, but they got to keep the interest. When he contacted the IRS and Ordenstein's, he was advised it was legal. How can that be?

Answer: The IRS says the information provided by Ordenstein's in both cases is correct.

A recent issue of Modern Maturity magazine reported, "An AARP survey released last year regarding older Americans and pre-need funeral and burial arrangements found that one third of Americans 50 and older have prepaid some of their funeral or burial costs. Yet many of them did not know whether the money was invested, or where."

The state Office of Consumer Protection would be concerned if there were no disclosure of the fact that payments would be placed in trust and the buyer is responsible for taxes, said acting director Stephen Levins. Call 587-3222 if that is your case.

However, Ken Ordenstein, vice president of Ordenstein's Center for Pre-arranged Funeral Planning, Inc., said that all customers must sign a contract, in which the pertinent investment/taxation information is given. (A copy of a signed contract was to be sent to the first complainant.)

He acknowledged, "Having to pay taxes on income you don't put in your pocket even though you receive the benefit of this income is difficult to understand."

Complicating matters this year, he said, was that customers were told they had to file tax returns using the long, rather than short, form.

To clear up confusion based on the company's funeral trusts having a "Grantor Tax" status, Ordenstein's decided, on March 7, to move to Qualified Funeral Trusts.

While customers still must pay taxes on the gains of their funeral trusts, the taxes, starting this calendar year, will be paid from the earnings of their trusts -- not out of pocket, Ordenstein said.

As background, he provided copies of IRS rulings, which, for nearly 10 years, he said, defined funeral trusts as Grantor Trusts. The Qualified Funeral Trust option was not initially available, he said.

Because a customer (grantor) can cancel a Grantor Trust, "and the trust income is for the customer's use, benefit and protection," he/she is responsible for paying taxes on trust earnings, he said.

As sellers of "pre-need funeral plans," a required percentage (70 percent) of the money received from customers is placed in trust, he said. While the customer doesn't receive income from any trust growth, he "gets the benefit of this growth in the form of a price guarantee," Ordenstein said. "As sellers, we're able to provide this guarantee because we keep the income the trust earns."

Need help with problems? Call Kokua Line at 525-8686,
fax 525-6711, or write to P.O. Box 3080, Honolulu 96802.
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