Medicaid and Funeral Costs: Spend-Down Rules and Exempt Burial Funds

Medicaid and SSI count your savings against a hard resource limit, but money properly set aside for burial does not count. Federal rules exclude up to $1,500 in designated burial funds per person, plus an unlimited amount in burial spaces — and most states allow far more through an irrevocable prepaid funeral contract. The catch is that "set aside" has a precise legal meaning. A savings account you think of as funeral money is just savings unless it is kept separate and designated for burial, and a funded prepaid plan can eat the $1,500 allowance rather than add to it.

Table of Contents

• The resource limit that forces a spend-down
• What the federal $1,500 burial fund actually covers
• The penalty for spending burial money on something else
• State caps are the number that usually matters
• Questions to settle before signing a prepaid contract
• Frequently Asked Questions

The resource limit that forces a spend-down

Spend-down is what happens when an applicant owns more countable assets than the program allows and must reduce them before qualifying. For 2026, the Social Security Administration sets the countable resource limit at $2,000 for an individual and $3,000 for a couple, unchanged from prior years. Many state Medicaid programs for the aged, blind and disabled use the same SSI methodology, which is why these federal rules matter even when the benefit in question is Medicaid. Countable resources are cash and assets you could convert to cash and spend on support.

Exempt items — a home you live in, one vehicle, household goods, and designated burial funds — sit outside that count. The practical result is that a prepaid funeral is one of the few ways to convert countable cash into something the program ignores without being penalized for giving money away. That distinction drives most funeral-related spend-down planning. Handing $8,000 to an adult child is a transfer that can trigger a penalty period. Paying $8,000 into a properly structured irrevocable funeral contract is not.

What the federal $1,500 burial fund actually covers

Under SSA's burial-funds regulation, up to $1,500 in funds set aside for an individual's burial expenses is excluded, with a separate $1,500 available for a spouse. The exclusion applies only if those funds are kept separate from other resources and clearly designated for burial. Commingling burial money with non-burial money voids the exclusion entirely — not partially. The $1,500 is also not additive to other arrangements.

It is reduced dollar-for-dollar by the face value of any life insurance whose cash value was already excluded, and by amounts held in an irrevocable trust or other irrevocable arrangement available for burial. A fully funded irrevocable plan can therefore consume the entire allowance, leaving nothing extra to shelter in a bank account. Burial *spaces* are treated differently and more generously. The same regulation excludes burial spaces with no dollar cap — plots, crypts, niches, vaults, markers and similar repositories held for the person or an immediate family member — along with the value of an agreement to purchase a burial space and any interest accumulated on it.

The penalty for spending burial money on something else

An excluded burial fund is not emergency savings. SSA's rule requires that excluded funds actually be used for burial, and spending them on anything else triggers a penalty that reduces future SSI benefits. Families sometimes learn this after a medical bill or a car repair empties the account.

This is the limitation most often missed when someone sets up a burial account to qualify quickly. The money is sheltered because it is committed, and the commitment is enforceable. Before touching a designated burial fund, treat it as restricted and ask the agency what the consequence will be. A short checklist for keeping the exclusion intact:.

• Open a separate account holding only burial funds — no deposits of other money, ever
• Designate it for burial in writing at the time it is set aside
• Keep records showing the date of designation and the source of the funds
• Track interest separately; it stays within the exclusion if left in place
• Do not withdraw for non-burial purposes

State caps are the number that usually matters

The federal $1,500 is a floor, not the ceiling. States set their own exemption for irrevocable prepaid burial contracts, and those caps are far larger. Illinois raised its AABD exemption for an irrevocable prepaid burial contract from $8,212 to $8,434 effective January 1, 2026, adjusted annually for CPI-U, with amounts designated for burial space exempt regardless of value. Illinois also restricts *what* the contract may cover. Its policy limits the exemption to goods and services the contract itemizes with a complete description and price; money in the contract that is not tied to specified goods can be treated as a transfer for less than fair market value — the same category as a gift.

A vague "funeral package" line item is a planning risk, not a detail. New York takes a different structural approach. It requires pre-need funeral agreements funded with an applicant's assets on or after January 1, 1997 to be irrevocable, and treats the irrevocable agreement's value as not an available resource; since January 1, 2011 agreements for certain family members must also be irrevocable. New York then permits a supplemental $1,500 burial fund — $3,000 per couple — only when less than that amount has been paid into the irrevocable agreement for non-burial-space items, so an SSI-related applicant whose agreement already holds $1,500 or more for such items gets no separate fund. Texas layers the same offset onto prepaid contracts. Its MEPD rules treat a prepaid burial contract as a non-countable resource but reduce the $1,500 burial-fund exclusion by the contract's value, and exclude burial-space items only if the contract is paid in full or specifies those items are paid first with refund value at least equal to them.

Questions to settle before signing a prepaid contract

The structure of the contract determines whether it works, and the funeral home's standard form may not match what your state requires. Ask these before any money moves: Then recalculate the $1,500.

If the irrevocable contract already holds $1,500 or more for non-burial-space items, a separate burial savings account adds no shelter in states that follow New York's offset rule, and the money is better placed inside the contract or in another exempt category. Finally, confirm the figure with your own state's current manual rather than a national summary. Illinois adjusts its cap every January for inflation, which means a number published last year is already wrong.

• Is the contract irrevocable? A revocable contract is usually still a countable resource
• Does it itemize every good and service with a description and a price, as Illinois requires?
• Does it separate burial-space items from other goods and services, and state the payment order?
• Is it paid in full, or does unpaid balance affect the burial-space exclusion, as in Texas?
• What happens to any refund or excess at death — does it go to the estate, and will the state claim it?

Frequently Asked Questions

Does buying a cemetery plot count against the $1,500?

No. SSA excludes burial spaces — plots, crypts, niches, vaults and markers — with no dollar cap, separately from the $1,500 burial-fund exclusion.

Can I use a life insurance policy as my burial fund instead?

You can, but it interacts. SSA reduces the $1,500 burial-fund exclusion by the face value of any life insurance whose cash value was already excluded.

Why would my state allow more than $1,500?

Because prepaid burial contract caps are state-set. Illinois exempts an irrevocable prepaid contract up to $8,434 as of January 1, 2026, indexed annually.

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