In our last blog post, we detailed pre-paid funerals and the topic of whether you should pre-pay funeral expenses. This time around we consider funeral bonds, which are a specific form of pre-payment that has become increasingly utilised.
The rise of funeral bonds has offered prospective purchasers a form of managed investment that provides interest on the original pre-payment. When payment is made, the funeral director will invest your money into an independently managed fund.
Accumulated funds are restricted from release until one’s passing, at which time the sum is released to the funeral director or estate of the deceased to cover funeral expenses. As an alternative, you may invest directly with a relevant investment company.
When it comes to the tax treatment of funeral bonds, there are numerous intricacies to be aware of. For starters, bonds that have been consigned to a funeral director to act as pre-payment for funeral costs are treated as pre-paid funeral expenses. As we detailed last time, these expenses are not subject to Centrelink’s assets test.
In the case of other funeral bonds, holders may be exempt from asset testing on a maximum of 2 bonds. However, this is conditional upon the holder also not pre-paying their funeral expenses, and up to a maximum amount as defined by the Funeral Bond Allowable Limit. This limit is subject to review and adjusted July 1 each year.
Meanwhile, non-exempt funeral bonds are deemed assessable assets deriving income. Under these circumstances you would need to declare the degree of ownership in the bond’s current value and accumulated interest. The Australian Department of Human Services outlines other considerations including joint interest in a funeral bond, interest in multiple funeral bonds, and disclosure requirements.
In the same manner as pre-payments, funeral bonds are beneficial for those who prefer to pay up front and avoid thinking about the details of their funeral. The added benefits however, are that your funds will be earning money over time, you can pay your funeral bonds in instalments, and you have flexibility in choosing the funeral director of your choice.
As for the downsides, the biggest risk associated with funeral bonds is that they do not lock in the price of the funeral. As such, funeral costs will continue to rise with inflation and other associated price increases. This means that you are relying upon your funeral bonds to accumulate interest that outpaces cost increases – something that can’t necessarily be guaranteed.
Furthermore, if one pays in instalments it’s worth considering that an untimely death would mean that the director or beneficiaries would only be entitled to the amount paid and interest accumulated until that point. Like all investment products, ensure you understand and research the specific terms of your funeral bonds. One of the big watchpoints concerns terminations and refunds.
Despite their overarching common purpose, it’s easy to see that funeral bonds and pre-paid funeral expenses offer material differences. Conduct your due diligence and if in doubt, speak to a financial advisor.
