Death is a somber matter, and so too funerals – at least most of the time.
Take the case this past October of Gilberto Araújo, a car washer in Alagoinhas, Brazil. After hearing of the murder of a local car washer, José Marcos Araújo attended at the mortuary and identified the victim as his brother. Imagine the shock of the mourners then, when Gilberto later walked into his own funeral alive and well. Though he had tried to call, no-one would believe it was him on the line – apparently the man in the casket was a dead ringer.
Bad puns aside, funeral planning is a very important process for many people. On top of the emotional and religious elements, there are logistical and cost issues to address, which in turn may have legal and tax implications.
Funeral instructions in a Will
Everyone has heard about the Hollywood-style ‘reading of the Will’. In my experience, it doesn’t generally happen that way. Still, it is not uncommon that the funeral has been held before the Will is located and/or reviewed. If funeral instructions come to light at that point, that could certainly create some unwanted drama.
This is a key reason why lawyers seldom include more than a general funeral reference when drafting a Will. In fact, despite instructions in the Will or elsewhere, the deceased’s personal representative retains the right and responsibility to arrange the funeral.
In practice though, wishes that have come to the attention of the personal representative will normally be observed. Subject to individual comfort level, it may therefore make sense to express these wishes during one’s lifetime. Alternatively, a sealed envelope could be left prominently with one’s personal papers, with a clear note that it be opened promptly at death.
The growing trend toward prearranged funerals might contribute to better awareness of these issues and improved communications. As well, a special tax sheltering vehicle is available to assist where prepayment is attached to such prearrangements.
Funerals and taxes
If death and taxes really are life’s only certainties, fortunately the Income Tax Act has some tax relief for funeral pre-planners in the form of the eligible funeral arrangement (EFA) rules. The benefit here is that accruing interest earned on qualified contributions is not taxed to the plan contributor or to the person for whom the services are delivered, nor even later to the estate of the deceased.
In terms of form and process, an EFA can be established by either a licensed funeral director or cemetery operator to assist with qualifying funeral or cemetery services, including supplies and products such as flowers, an urn or an interment vault. Where the finance terms of the contracted services include money placed on deposit with the supplier, the EFA rules may then apply to income earned on those deposits.
While the contract terms and ultimate price may be higher, the contribution limits for EFA treatment are $15,000 for funeral services, $20,000 for cemetery services, or $35,000 for combined funeral/cemetery services. These thresholds are critically important, as EFA treatment ceases to apply to the entire arrangement from the date these thresholds are breached, not just to the portion that exceeds the limit. Not surprisingly, if there is a return of funds or if the contract is altogether cancelled, the portion of returned funds that had benefited from the EFA sheltering will be treated as income to the recipient.
In the normal course, the accumulating funds will eventually be used toward the contracted services, and no tax will ever have to be paid on the EFA qualified income. If the cost of the services is less than the available funds, a refund to the estate will be taxable to the extent of the accrued interest, with any excess being non-taxable return of contributions. Even in this last case, at a minimum there will have been the benefit of tax deferral on the accruing interest.
Life insurance & EFAs
The Canada Revenue Agency (CRA) issued an interesting ruling (2011-0428171R3) early in 2012 with respect to the use of an insurance policy in conjunction with an EFA.
There was in existence an EFA-qualified service contract between the taxpayer/client and a funeral home. The taxpayer proposed to transfer the existing contract to a new one with the same funeral home, which is generally possible as long as the new contract also satisfies the EFA requirements. The taxpayer/client would obtain a life insurance policy and pay an initial premium. The policy would then be assigned absolutely to the funeral home, and the transferred funds from the original EFA would then be paid to the Insurer in satisfaction of the remaining Policy premiums.
In the end, the funeral home agreed to accept the insurance proceeds as compensation, regardless of the retail price of the agreed services in future. As a corollary, even if the retail price was less than the death benefit, the funeral home would keep all the insurance proceeds. On that basis, the CRA representative ruled that this would be a valid EFA, with no income inclusion to the client/taxpayer at any point in the series of transactions.