Preneed Funeral Contracts in South Dakota: The 85% Rule, Trusts, and Cancellation Rights

Prepaying for a funeral is an act of care — one that removes financial and logistical burden from family members at the worst possible time. But a preneed funeral contract is not a simple prepayment. It is a legal agreement between you and a funeral home, governed by South Dakota statutes, with specific rules about how your money must be held, what happens if you change your mind, and how the contract interacts with Medicaid planning if that becomes relevant. Understanding what you're signing before you sign it protects both your money and your wishes.

What a Preneed Contract Is

A preneed funeral contract allows you to select specific funeral goods and services in advance — casket, urn, burial plot arrangements, ceremony options — and pay for them at today's prices, with the service delivered when needed in the future. The primary appeal is price locking: funeral costs rise steadily, and pre-purchasing at current prices can provide meaningful savings.

The secondary appeal is peace of mind. When you've made these decisions yourself and documented them in a legally binding contract, your family doesn't have to make high-cost decisions while grieving, and they can't accidentally contradict your wishes.

The risk inherent in any preneed contract is the time gap between payment and service. The funeral home receives your money today and must remain in business and financially solvent for years or decades before delivering on its obligations.

The 85% Trust Requirement

South Dakota protects preneed consumers through SDCL 55-11, which mandates that funeral establishments deposit at least 85% of every preneed payment directly into a regulated trust account or an insurance policy. The remaining 15% may be retained by the funeral home to cover immediate administrative costs and commissions.

The trust must be held by a qualified financial institution and is not accessible to the funeral home for general operating expenses. The funds are earmarked for future delivery of the contracted services — they should not be at risk if the funeral home encounters financial difficulties.

When you sign a preneed contract, ask the funeral home which institution holds the trust and confirm in writing that 85% will be deposited. If a funeral home cannot produce documentation of where preneed funds are held, that is a warning sign worth reporting to the South Dakota Board of Funeral Service.

Upon the death and delivery of services, the trust funds are released to the funeral home, and any accrued interest or growth in the trust typically offsets cost increases between the time of purchase and the time of delivery.

The South Dakota Funeral Laws & Consumer Rights Guide includes a checklist for reviewing preneed contracts, including the specific questions to ask before signing and the documents you should receive.

Revocable vs. Irrevocable — The Key Difference

South Dakota preneed contracts come in two forms: revocable and irrevocable. The distinction matters enormously, particularly for families dealing with Medicaid planning.

Revocable preneed contracts function like a standard prepayment with the ability to cancel. If you relocate, change your mind about the funeral home, or simply want to cancel the contract, you can do so. The funeral home must return the trust balance — typically including accrued interest, minus certain administrative fees permitted under state law. Revocable contracts provide flexibility but offer no Medicaid planning benefit.

Irrevocable preneed contracts cannot be canceled or refunded once signed. The funds are locked in, and you cannot access them for any other purpose. This sounds like a disadvantage — and in terms of flexibility, it is. But irrevocability is a critical Medicaid planning tool.

When you apply for Medicaid to cover long-term care costs, the state assesses your countable assets. Assets above the exemption limit must be spent down before Medicaid eligibility kicks in. An irrevocable funeral trust is generally exempt from Medicaid asset limit calculations because you cannot access those funds — they are legally committed to funeral expenses.

South Dakota allows up to $15,000 in an irrevocable preneed funeral trust to be exempt from countable Medicaid assets, provided the trust includes a valid Goods and Services Statement specifying exactly what will be provided. This makes the irrevocable preneed contract one of the few legitimate "spend-down" tools available to families facing nursing home costs.

Cancellation Rights for Revocable Contracts

If you hold a revocable preneed contract and decide to cancel, South Dakota law entitles you to a refund of the trust balance. The funeral home may retain certain administrative fees, but it cannot impose arbitrary cancellation penalties.

Specific situations where you might want to cancel:

• You've moved to a different state and want to transfer the contract to a funeral home closer to your new location
• The funeral home was sold or closed and you're not comfortable with the new operators
• Your wishes have changed regarding the type of funeral you want
• You've entered into a different financial arrangement

If a funeral home refuses to honor a revocation request or makes the cancellation process unreasonably difficult, this is a reportable violation. Contact the South Dakota Board of Funeral Service with documentation of the contract, your cancellation request, and the funeral home's response.

What Happens If the Funeral Home Closes

The 85% trust requirement exists specifically to protect consumers if a funeral home goes out of business. Because the funds are held by a third-party financial institution, not by the funeral home directly, they should be preserved even if the funeral home ceases operations.

In practice, the outcome depends on whether the trust was properly maintained and how the receivership or closure is handled. If you have reason to believe a funeral home that holds your preneed funds is in financial distress, contact the South Dakota Board of Funeral Service promptly and request documentation of your trust status.

The Funeral Arrangement Directions Are Legally Binding

Under SDCL 34-26-74, the specific funeral arrangements documented in a preneed contract are legally binding on the family after death. Family members cannot simply override what was specified in the contract.

There is one important exception: if the decedent explicitly named an agent within the preneed contract with authority to alter the plans, that agent can make modifications. Similarly, if the trust funds are insufficient to cover the full cost of the contracted services at the time of death — due to cost increases exceeding interest earnings — the family may need to supplement or modify the arrangements accordingly.

For families using a preneed contract as part of Medicaid planning, understanding the full interaction between the trust structure, the 85% requirement, and the Medicaid exemption limits is important. The South Dakota Funeral Laws & Consumer Rights Guide covers the complete preneed framework alongside the Medicaid estate recovery rules that make this planning so consequential for South Dakota families.

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