Prepaid Funeral Plans in NZ: Residential Care Subsidy and Asset Testing

If you or an older family member is entering residential care — or is likely to within the next few years — the Residential Care Subsidy asset test can feel like it swallows everything. Savings, investments, and property are all counted toward the threshold that determines whether the government will contribute to rest home or hospital-level care costs.

But there is one clearly defined exemption that many families miss entirely: money placed in a recognised prepaid funeral trust is specifically excluded from that asset test, up to a statutory limit.

This post explains how prepaid funeral trusts work in New Zealand, what the Residential Care Subsidy exemption actually covers, and what you need to check before committing to any plan.

What Is a Prepaid Funeral Trust?

A prepaid funeral trust is an arrangement where you pay for your funeral in advance. The funds are deposited with a trust provider and held in trust until they are needed. You specify the type of funeral you want, and the provider is contractually obligated to deliver those services when the time comes.

The idea solves two different problems at once:

1. It protects your family from making financial decisions about your funeral while grieving, under time pressure from funeral directors
2. It can protect your estate from the Residential Care Subsidy asset test — but only if the trust meets specific criteria

In New Zealand, recognised prepaid funeral trust providers include the Public Trust, which is the most commonly referenced option. Private funeral homes and some lawyers also offer prepaid funeral arrangements, but the Residential Care Subsidy exemption only applies to funds held in a formally recognised funeral trust — not to informal deposits or pre-arrangements that sit in a funeral home's general account.

The Residential Care Subsidy and the $10,000 Exemption

The Residential Care Subsidy is the means-tested government contribution to the cost of rest home, hospital, or dementia-level care for older New Zealanders. To qualify, your assets must fall below the applicable threshold. The assessment includes most of your savings, investments, and property.

Funds deposited into a recognised prepaid funeral trust — up to $10,000 — are explicitly exempt from this asset test. This means you can set aside up to $10,000 specifically for your funeral, and that money will not count against you when the government calculates your eligibility for the Residential Care Subsidy.

This exemption exists because the government recognises that people should be able to plan for the cost of their own funeral without being financially penalised for doing so.

What the exemption covers:

• The principal deposited in the trust (up to $10,000)
• Any interest or growth on those funds is typically treated as part of the trust

What the exemption does not cover:

• Amounts above $10,000 — these count as assets in the normal way
• Informal arrangements (e.g., giving money to a family member earmarked for the funeral)
• Pre-arrangements with funeral homes where funds are not held in a formal trust structure

When Does the Asset Test Actually Apply?

The Residential Care Subsidy asset test applies at the point you apply for the subsidy — typically when you are entering or already in a rest home or care facility. Work and Income (Ministry of Social Development) assesses your assets at that time.

If you put $10,000 into a recognised prepaid funeral trust before or after entering care, that amount is excluded from the calculation. However, timing matters: if you transfer funds into a trust shortly before applying for the subsidy as a deliberate deprivation of assets, Work and Income can investigate and may treat those funds as if you still hold them.

The safest approach is to establish the prepaid funeral trust as part of general estate planning — before there is any immediate need for residential care — rather than as an emergency measure once care is already required.

What Should a Prepaid Funeral Plan Contract Include?

Before signing any prepaid funeral arrangement in New Zealand, read the contract carefully. These are the key things to verify:

Is the money held in trust? The funds should be held separately from the provider's operating account in a properly constituted trust. Ask for confirmation of where the money is held and who administers the trust. For the Residential Care Subsidy exemption to apply, the trust must be recognised by Work and Income.

Is the plan portable? If you move to a different city, move into a care facility that uses a different funeral director, or the funeral home closes down, what happens to your money? Some plans are tied to a specific funeral home; others, like those administered by the Public Trust, allow the funds to be used with any funeral director.

What services are locked in? Prepaid funeral plans typically lock in specific services at today's prices. This can be advantageous if prices rise. However, if you want a simpler arrangement than what you originally specified, check whether you can adjust the plan without losing money.

What happens to the interest? The funds typically earn interest or investment returns while held in trust. Understand whether those earnings are used to offset funeral cost inflation, added to the plan's value, or retained by the provider.

What if the provider goes out of business? Public Trust has statutory backing as a Crown entity. Private funeral home prepaid plans carry more risk if the business fails. Check whether there is insurance or a guarantee scheme protecting the funds.

Prepaid Plans and the Funeral Consumer Decision

A prepaid funeral plan is not just a financial instrument — it is a consumer decision that locks your family into specific arrangements. Think through:

• Do you want burial or cremation? Your preference should be legally documented
• Where do you want to be buried or have ashes scattered? Check that the plan accommodates this
• Who has the authority to vary the plan if circumstances change? In New Zealand, an Enduring Power of Attorney ceases at death, so your executor — not your attorney — will be the decision-maker

It is also worth noting that a prepaid plan specifies what you want, but your executor still has the final legal authority over disposal of your remains. Document your wishes formally in your will as well as in the prepaid plan contract, and ensure your executor knows about both.

How Prepaid Trusts Interact With the Broader Estate

The $10,000 in a prepaid funeral trust is earmarked for a specific purpose. It does not form part of your general estate for probate purposes — it is released directly to the funeral director when the time comes. This means it is not subject to creditor claims against the estate in the usual way, and it does not need to pass through probate.

This is genuinely useful if the estate is likely to be complicated, in debt, or if probate is expected to take time. The funeral can proceed without waiting for the estate to be administered.

The Proactive Case for Planning Ahead

Average funeral costs in New Zealand range from $8,000 to $15,000. Families who have not planned ahead often face this bill under extreme time pressure, while grieving, with limited access to the deceased's assets. A prepaid funeral plan eliminates that financial scramble for your family and, if structured correctly through a recognised trust, protects up to $10,000 from the Residential Care Subsidy asset test.

For a complete guide to how prepaid funeral trusts interact with the Residential Care Subsidy, what questions to ask providers before signing, and how to document your wishes in a legally meaningful way, see the New Zealand Funeral Laws & Consumer Rights Guide.

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