Prepaid Funeral Trusts in New Zealand: How They Work and Why They Matter

When someone enters residential care in New Zealand, the government conducts a rigorous asset assessment before granting a Residential Care Subsidy. Almost everything you own counts — savings, investments, property. But there is one exception most people don't know about: money held in a recognised prepaid funeral trust, up to $10,000, is explicitly exempt from this asset testing.

That single feature makes a prepaid funeral trust one of the most financially sensible planning tools available to aging New Zealanders — provided you understand exactly how these trusts work, what they cover, and where the risks lie.

What Is a Prepaid Funeral Trust?

A prepaid funeral trust is a formal legal structure in which funds are set aside specifically for funeral expenses and held by a trustee — typically the Public Trust or a private provider — until the person dies. At that point, the funds are released directly to the funeral director or family to cover the agreed costs.

This is different from a prepaid funeral plan sold directly by a funeral home, where you pay a funeral director in advance and they hold the money. The distinction matters. In a trust structure, the money is held independently of the funeral director — it sits in a separate trust account, not the business's general operating funds. If the funeral home closes or changes ownership, your money is protected.

Under New Zealand law, a recognised prepaid funeral trust must comply with specific statutory requirements to qualify for the asset test exemption. Not every prepaid arrangement qualifies. A simple deposit or advance payment to a funeral home does not.

The Residential Care Subsidy Exemption

The Residential Care Subsidy (RCS) helps people in rest homes or hospital-level care with the cost of their care. Eligibility is means-tested — the Ministry of Social Development assesses both income and assets. In 2026, the asset threshold for a single person without a partner is low enough that most people with a home, savings, or KiwiSaver will initially fail the test and need to spend down their assets before qualifying.

Here is where the funeral trust exemption is significant: under the Social Security (Long-term Residential Care) Regulations 2005, funds of up to $10,000 held in an approved prepaid funeral trust are excluded from the asset assessment. This means a person can legally ring-fence $10,000 for their funeral without it being counted as a spendable asset for RCS purposes.

For someone entering residential care, spending $10,000 on a prepaid funeral trust achieves two things simultaneously: it reduces their assessable assets, potentially accelerating RCS eligibility, and it provides certainty that funeral costs will be covered — relieving the family of a financial burden at the worst possible time.

The $10,000 limit is per person. Couples can each hold $10,000 in separate trusts, potentially sheltering $20,000 in total from asset testing.

Who Provides Prepaid Funeral Trusts in New Zealand?

The most widely used provider is the Public Trust, a New Zealand Crown entity. The Public Trust's prepaid funeral trust service operates as a formal legal trust structure meeting statutory requirements, which means it qualifies for the RCS exemption. Funds earn interest while held in trust and are transferred to the nominated funeral provider or family at the time of death.

Private providers — including some law firms and specialist financial advisers — also offer trust structures that may qualify, but you should verify explicitly that the trust meets the Residential Care Subsidy exemption criteria before committing funds. Ask for written confirmation that the trust qualifies under the Social Security (Long-term Residential Care) Regulations 2005.

Some funeral homes offer their own "funeral plans" that include a trust component. These vary. Some use the Public Trust as the trust vehicle, which provides the statutory protections. Others hold funds in less formal structures. Always establish where exactly the money is held and whether it qualifies for the RCS exemption.

What Does the Trust Cover?

Prepaid funeral trusts typically allow you to specify:

• Whether you want burial or cremation
• The funeral home you want to handle the arrangements
• General preferences for the service (scale, formality, any religious or cultural requirements)
• How the funds should be distributed if your preferences cannot be met

The trust holds the money but does not lock you into a rigid contract with a specific funeral provider. If circumstances change — you move cities, the nominated funeral home closes — the funds remain available for the purpose of your funeral through whichever provider is ultimately engaged.

It is important to note that a prepaid funeral trust covering $10,000 does not guarantee this will be sufficient. Average funeral costs in New Zealand range between $8,000 and $15,000 as of 2026. A $10,000 trust may cover most of a modest funeral but is unlikely to cover a full-service traditional funeral including catering, floral tributes, and a burial plot in an expensive urban cemetery. This is worth discussing with the trust provider when structuring the arrangement.

What a Prepaid Trust Does Not Do

A prepaid funeral trust is not a substitute for a will. The trust specifies funding for the funeral, not who inherits your estate, who serves as executor, or how your property is distributed. These remain entirely separate matters.

It also does not eliminate the need for the executor to manage the estate. The funds in the trust are earmarked for funeral expenses only. The executor still needs to handle estate administration — bank accounts, property transfers, KiwiSaver withdrawal, and tax obligations — through separate processes.

A trust also does not override your executor's legal authority. The executor ultimately has the right to arrange the funeral, subject to any instructions in your will. If you want to bind your executor to specific funeral arrangements, those instructions should appear in the will itself (though note that will instructions about funerals are legally persuasive rather than strictly binding on an executor).

The Alternative: A Funeral Directive in Your Will

If you do not want to tie up $10,000 in a trust but want to make your funeral preferences clear, include a funeral directive in your will. This sets out your preferences — burial or cremation, religious requirements, cultural customs, service size — without pre-funding them.

The limitation of a will directive is that it only comes into effect once the will is located and read, which may be after the funeral has already been arranged. A prepaid trust, by contrast, is active information that the nominated funeral home can access immediately.

Questions to Ask Before Setting Up a Trust

Before committing funds to any prepaid funeral trust, get written answers to:

1. Is this trust structure formally recognised under the Social Security (Long-term Residential Care) Regulations 2005 for the purposes of the asset test exemption?
2. Who is the trustee, and are the funds held in a separate trust account — not the general operating funds of the funeral provider?
3. What fees does the trustee charge, and how do they affect the funds available for funeral expenses?
4. What happens if the nominated funeral home is no longer operating when I die?
5. Can I change the nominated funeral provider or cancel the trust if my circumstances change?
6. How is interest on the funds treated — does it accrue to the trust or to the provider?

Prepaid funeral trusts are one of the more underused planning tools available in New Zealand, particularly for people approaching residential care. The asset test exemption alone is worth significant financial planning attention. The New Zealand Funeral Laws & Consumer Rights Guide covers the full picture of pre-death planning, estate administration thresholds, and how to structure your affairs to protect your family from unnecessary financial stress.

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