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She had what she was allowed in her savings after spend-down and a very small insurance policy. Combined, it is not enough for a full burial, headstone, etc. We cannot afford to cover her burial. Will the state require us to give them the money needed for burial?

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Cremation is about $1,000. The cremation center sells urns from modest to ornate. You can have her cremated then have a little reception in a restaurant for close family and friends. The whole thing will cost less than $2,000.
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The zero cost option is to donate the body to a nearby medical school and have a simple memorial service at her church. If she is the widow of a veteran, VA will provide a headstone, but you pay the cemetery to have it placed. The medical school will return her ashes in about two years and you can have them interred at the cemetery for minimal cost. The state does not handle any arrangements, if no one claims the body, they do a cremation and put the ashes in a pauper's grave.
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