SECTION 1. TREATMENT OF FUNERAL TRUSTS.

    (a) In General.--Subpart F of part I of subchapter J of chapter 1 
of the Internal Revenue Code of 1986 is amended by adding at the end 
the following new section:

``SEC. 684. TREATMENT OF FUNERAL TRUSTS.

    ``(a) In General.--In the case of a qualified funeral trust--
            ``(1) subparts B, C, D, and E shall not apply, and
            ``(2) no deduction shall be allowed by section 642(b).
    ``(b) Qualified Funeral Trust.--For purposes of this section, the 
term `qualified funeral trust' means any trust (other than a foreign 
trust) if--
            ``(1) the trust arises as a result of a contract with a 
        person engaged in the trade or business of providing funeral or 
        burial services or property necessary to provide such services,
            ``(2) the sole purpose of the trust is to hold, invest, and 
        reinvest funds in the trust and to use such funds solely to 
        make payments for such services or property for the benefit of 
        the beneficiaries of the trust,
            ``(3) the only beneficiaries of such trust are individuals 
        who have entered into contracts described in paragraph (1) to 
        have such services or property provided at their death,
            ``(4) the only contributions to the trust are contributions 
        by or for the benefit of such beneficiaries, and
            ``(5) the trust would (but for this section) be treated as 
        owned by the beneficiaries under subpart E.
    ``(c) Dollar Limitation on Contributions.--
            ``(1) In general.--The term `qualified funeral trust' shall 
        not include any trust which accepts aggregate contributions by 
        or for the benefit of an individual in excess of $7,000.
            ``(2) Related trusts.--For purposes of paragraph (1), all 
        trusts having trustees which are related persons shall be 
        treated as 1 trust. For purposes of the preceding sentence, 
        persons are related if--
                    ``(A) the relationship between such persons would 
                result in the disallowance of losses under section 267 
                or 707(b),
                    ``(B) such persons are treated as a single employer 
                under subsection (a) or (b) of section 52, or
                    ``(C) the Secretary determines that treating such 
                persons as related is necessary to prevent avoidance of 
                the purposes of this section.
            ``(3) Inflation adjustment.--In the case of any contract 
        referred to in subsection (b)(1) which is entered into during 
        any calendar year after 1997, the dollar amount referred to 
paragraph (1) shall be increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year, by 
                substituting `calendar year 1996' for `calendar year 
                1992' in subparagraph (B) thereof.
        If any dollar amount after being increased under the preceding 
        sentence is not a multiple of $100, such dollar amount shall be 
        rounded to the nearest multiple of $100.
    ``(d) Application of Rate Schedule.--Section 1(e) shall be applied 
to each qualified funeral trust by treating each beneficiary's interest 
in each such trust as a separate trust.
    ``(e) Treatment of Amounts Refunded to Beneficiary on 
Cancellation.--No gain or loss shall be recognized to a beneficiary 
described in subsection (b)(3) of any qualified funeral trust by reason 
of any payment from such trust to such beneficiary by reason of 
cancellation of a contract referred to in subsection (b)(1). If any 
payment referred to in the preceding sentence consists of property 
other than money, the basis of such property in the hands of such 
beneficiary shall be the same as the trust's basis in such property 
immediately before the payment.
    ``(f) Exception if Interest Paid To Beneficiaries Pursuant to 
Election.--If, on or before the date on which a qualified funeral trust 
is established, the trustee, pursuant to an agreement with a 
beneficiary of such trust, elects to pay (not less than annually) to 
such beneficiary all income of the trust which is attributable to such 
beneficiary, then for purposes of this title such beneficiary's 
interest in such trust shall be treated as a separate trust to which 
this section does not apply. The election under this subsection, once 
made, shall be irrevocable.
    ``(g) Simplified Reporting.--The Secretary may prescribe rules for 
simplified reporting of all qualified funeral trusts having a single 
trustee.''
    (b) Clerical Amendment.--The table of sections for subpart F of 
part I of subchapter J of chapter 1 is amended by adding at the end the 
following new item:

                              ``Sec. 684. Treatment of funeral 
                                        trusts.''
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to items which, but for such amendment, would be taken 
        into account in taxable years of a grantor or beneficiary which 
        end after the date of the enactment of this Act.
            (2) Trusts established before date of enactment.--In the 
        case of a trust established before the date of the enactment of 
        this Act, section 684(f) of such Code (as added by this 
        section) shall be applied by treating an election which is made 
        before the end of the 1-year period beginning with the date of 
        the enactment of this Act as if such election were made on or 
        before the date on which the trust was established, if such 
        election is made pursuant to an agreement, described in such 
        section 684(f), entered into during such period.
Amends the Internal Revenue Code to provide for the treatment of, as well as define, a qualified funeral trust.
To amend the Internal Revenue Code of 1986 to clarify the treatment of funeral trusts.