Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

Preneed Shortfalls: Extended Installment Options

Posted in Preneed Shortfalls, Price Protection

For consumers who need installments to pay for their preneed arrangement, funeral directors report that the $100 monthly payment is the comfort threshold for most individuals.   For a widow planning her own funeral, the $100 monthly payment will require an installment term of six years or longer.  If the widow needs to also cover an interment space, vault, marker and services, the installment term will be pushed out to ten or more years.

In a prior post we explained how a deficiency between preneed investment returns and performance cost increases will exacerbate preneed shortfalls when the consumer pays with installments.  But, funeral homes suffer preneed shortfalls even when the investment performance keeps track with performance cost increases.   If a 70 year old widow purchases a $7,500 funeral arrangement with a monthly payment of $100, six years is required to pay the preneed contract.  Until the contract is fully funded at the end of the sixth year, the trust must earn more than the funeral home’s performance costs to keep pace.   The Social Security’s life tables indicate that the 70 year old widow will live another 16 years.  As the attached spreadsheet shows, that same funeral will cost $12,154 in 16 years.  But the funeral home’s preneed trust will have only grown to $11,184.  So when the funeral home’s performance costs and preneed trust both maintain the same 3% rate, the funeral home will have a shortfall of $970 when the contract is performed.  If instead, the funeral director’s performance costs rise at a higher rate than his preneed funding, the 72 month installment contract will result in a shortfall of thousands of dollars.

For funeral homes using insurance funding, the shortfall will often be worse.  Funeral homes have been trained to believe insurance is the best funding option for consumers who need the installment option.  We will look at the insurance option from the consumer’s perspective in a future post to explain why insurance contracts have a higher rate of lapses.

The MFT Complaint: Records and the Administration of Consumer Funds

Posted in Exams/audits, Recordkeeping

The next issue in our review of the MFT Complaint concerns the State Board allegation that the MFT fails to maintain adequate records to document how much consumers have paid and that the proper amounts were deposited to trust.   In subsequent sections of the Complaint, the State Board asserts that the MFT in some instances collected and deposited consumer funds in excess of the purchase price of the consumer preneed contract.  In other instances, MFT records reflect consumers have far less in trust than what Chapter 436 requires.   So, the State Board seems to be asserting that the MFT lacks sufficient records and reports for establishing an audit trail that would confirm proper administration of consumer funds.

We do not see how a single record could be create that covers all aspects of the administration of consumer funds.  Many funeral homes issue a receipt to consumers when cash or a check are received.  But a receipt cannot reflect whether the consumer funds were deposited to trust.   Sellers can create a report that documents both the receipt of funds and the transfer of those funds to the trustee.   But, the trustee would then have to create a corresponding record or report of the receipt of such funds, and whether any amount of such funds were then reimbursed back to the seller for sales expense or origination fees.   A series of records and reports are needed to create an audit trail.

Health Care Proxy: Someone with a Backbone

Posted in Power of Attorney, Transition Documents

The Conversation Project recently posted a blog entry titled “Somebody with a Backbone”: Tips for Choosing a Health Care Proxy.   We could not agree more with the post’s recommendations about how to go about selecting a power of attorney for health care decisions.   The post includes a hyperlink to “How to” brochure that is an excellent resource for those thinking about whether a parent needs a health care powers of attorney, or even a financial power of attorney, and who might best fill those roles.   As an example of a ‘how not to’, my mother put off her health care proxy decision until forced by a hospital where she was to be admitted for a procedure.   My sister was our mother’s transportation to the hospital, and Becky was ‘drafted’  to be our mother’s health care proxy.   In a subsequent hospitalization, my mother also made me her health care proxy.  That too, was made out of necessity rather than a discussion.   Years later, when our mother’s health eventually deteriorated to the point when hospice was suggested, we made a joint decision to proceed with the doctor’s recommendation.    Over the course of a few weeks,  Mom slipped into a vegetative state that lasted several days.  My sister had second thoughts about our decision and became extremely distressed.   Self-doubt persisted long after our mother’s death.

While I would not characterize my sister as someone without a backbone, a frank family discussion could have eased her conflicted feelings.   But we gave into our mother’s reticence to have an end of life conversation.

The MFT Complaint: No Seller Records

Posted in Compliance, Exams/audits, Recordkeeping

This post will look at the first allegation made by the Missouri State Board of Embalmers and Funeral Directors against the Missouri Funeral Trust: MFT does not create or maintain any records of its activities as a preneed seller.   In subsequent paragraphs of the Complaint, the State Board will also challenge the adequacy of those records produced for the financial examination.  But, the “no records” allegation has been made to bolster a subsequent claim that MFT is failing to perform the duties required of a preneed seller by Chapter 436.

MFT  obviously has preneed records, but the Complaint asserts that those records are created and maintained by Eagle Bank as MFT’s trustee.  The Complaint suggests that there is no agreement between MFT and its trustee addressing whether the trustee has assumed the preneed seller’s recordkeeping obligations under Chapter 436.  In the absence of an administration agreement or an agency agreement, the Board seems to be suggesting that the MFT cannot offer the trustee’s records for seller’s compliance with Chapter 436.

We do not interpret Chapter 436 to prohibit a seller from delegating preneed recordkeeping functions to a trustee, or to an administrative firm.  It may also be fairly common for state association preneed programs to define funeral homes as agents for specific seller record keeping functions.  Accordingly, this allegation could probably be resolved with one or more agreements that specifically set out each party’s recordkeeping functions.

We have encountered funeral homes taking a similar record keeping approach towards insurance funded contracts.  Some funeral homes erroneously view the insurance company as the preneed seller, and as having the duty to provide all necessary reports.  The insurance carriers appreciate the need to assist funeral homes in creating records and preparing annual reports, but the funeral home, not the insurance company, is the seller of the preneed contract.  If the insurance reports are not adequate, it will be the funeral home, not the insurance company that will be disciplined.

We would not be surprised to see the State Board staff propose a record keeping provision that mandates the seller maintain all preneed records at its offices.   While such a requirement could prove burdensome to MFT, it may have minimal impact funeral homes that are licensed as both seller and provider.

The Proceeding against The Missouri Funeral Trust: The Long Build Up

Posted in Exams/audits, Missouri - SB1, Recordkeeping, Uncategorized

We start our review of the case against the Missouri Funeral Trust with the procedural issues raised in the State Board’s Complaint and MFT’s Answer.   From the Answer, we learn that the preneed financial examination was initiated on January 20, 2011.  But, it was almost three years before an examination report was sent by the State Board to MFT.  The early financial examinations often involved an on-site visit that lasted several weeks.  For a seller the size of MFT, the on-site visit could have lasted a few months.  But, on several occasions, the MFT openly challenged the Board’s authority to request records and documents, and instructed funeral home providers that they were not required to respond to State Board inquiries.  So, the three year delay in the MFT examination report was probably due to MFT’s resistance to records and document requests.

For most preneed sellers, an examination report comes within a few weeks after the on-site review is completed.   The exception report identifies issues which the State Board seeks clarification or changes from the preneed seller.  According to the State Board complaint, the MFT examination report listed 17 exceptions.  Based on our experience, 17 exceptions is not that high of a number.  However, these may be categories of exceptions that involve multiple issues per exception.

According to the pleadings, the State Board and MFT met on May 29, 2014, to discuss the examination report, and thereafter traded a handful of correspondences until November 2014.  Then, two years passed before the State Board filed its Complaint with the Missouri Administrative Hearing Commission.   The delay in filing the Complaint is due in part to the MFT’s May 2015 lawsuit against the State Board for alleged breaches of confidentiality.  If the lawsuit was meant to head off a State Board disciplinary action, it worked.  And, the lawsuit also had a chilling effect on State Board efforts to establish audit procedures and preneed record keeping standards for future financial examinations.  Unaware of the MFT exception report, industry members wrangled with the State Board for more than a year over record keeping proposals and the scope of future audits.  When a consensus could not be reached at the State Board’s September 2016 meeting, the MFT Complaint was filed a few weeks later.

While the MFT had expressed a willingness to participate in discussions to re-work the record keeping proposal, it proved to be too little, too late.

Missouri’s Funeral Consumer Board: Another Step Closer

Posted in Exams/audits, Missouri - SB1, Uncategorized

With the support of the Missouri Funeral Directors and Embalmers Association, The Funeral Consumer Board Bill (HB 596) was voted out of committee last week with a crucial amendment.  As reported in our January 19th post, Rep. McGaugh wants a preneed regulator that is more responsive to the consumer.  The Representative’s constituents lost hundreds of thousands of dollars when the Polley Funeral Home operated years in violation of Chapter 436.  (Coincidently, Mr. Polley was sentenced to 9 years in prison last week.)

The amendment sought by the MFDEA was the transfer of the preneed audit function from the State Board of Embalmers and Funeral Directors to the Division of Finance.  The MFDEA used this issue sheet as an explanation of its “support” of the Funeral Consumer Board.   The common ground that the MFDEA and Rep. McGaugh have found is that Missouri’s preneed audit program is broken.

Granted, the discipline sought by the State Board against The Missouri Funeral Trust has provided the Association its motivation for taking the unusual step of supporting a piece of legislation that would fill half of the State Board chairs with consumers.  But after five years, the State Board still lacks an audit manual that would help guide the industry towards compliance with Chapter 436.

No one expects the passage of HB 596.  Rather, the bill should be taken as a wakeup call to the industry to take charge of the preneed audit process.

Missouri’s Longest Preneed Audit: Continued until October

Posted in Exams/audits, Master Trusts, Missouri - SB1, Recordkeeping, Uncategorized

After five months of trading Complaints and Answers, the Missouri State Board of Embalmers and Funeral Directors and the Missouri Funeral Trust have been assigned an October hearing date before the Administrative Hearing Commission.   The dispute between the State Board and the MFDEA’s master trust program has been waging for years over issues such as the Board jurisdiction, and whether the Board possesses the requisite authorities to inspect records and require the creation of new types of preneed records.   This saga had prompted the Board staff to make several recordkeeping rule proposals, each of which stalled before the State Board.   Even though the Board could not agree on recordkeeping proposal made in September 2016, the staff was authorized to proceed with a disciplinary complaint against the MFT in November.

In the weeks to come, we will discuss how the claims made against the MFT could impact funeral homes that act as their own preneed seller.   Click the following hyperlinks to down load the State Board’s First Amended Complaint or the MFT’s Answer and Affirmative Defenses.

Missouri Financial Exam Documents: Insurance Policies

Posted in Uncategorized

The financial examination records sought by the Missouri State Board of Embalmers and Funeral Directors two bullet points directed at insurance funded arrangements:

  • A current statement from any/all applicable insurance companies with which you have insurance-funded preneed contracts for each active preneed contract
  • A current listing of any other insurance assignments which require insurance funded preneed contracts that are not included in the above bullet

The first bullet point seeks the statements provided by such companies as Homesteaders, Forethought and National Guardian Life, where the preneed seller has a contractual relationship with the insurance company.

The second bullet point seeks a listing of the insurance policies where the consumer has made the funeral home the beneficiary of a pre-existing policy, often is a spend-down situation.  To comply with this request, the seller could update and provide the Excel worksheet used for the annual report.  (Contact us for an Excel template for this purpose.)

Missouri Exam Documents: Trustee Records

Posted in Compliance, Exams/audits, Recordkeeping

In a prior post, we listed the records sought by the Missouri State Board of Embalmers and Funeral Directors when an examination is scheduled against a preneed seller.  In this post we will look at the five bullet points that involve the preneed trustee:

  • A current statement from your state or federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have identifying the payments, earnings, and distributions for each active preneed contract
  • A copy of a ledger or computerized report showing all outstanding preneed contracts, including consumer addresses, if available
  • Total payments and applicable payment dates on preneed contracts, if available (not necessary for payments on insurance funded preneed contracts)
  • A copy of the trust agreement with the financial institution for any preneed trusts
  • A blank preneed contract currently used by you as a seller

To an extent, these record requests are overlapping, and some of the wording is pulled directly from the statute.  Therefore, the request may be confusing to some funeral homes.

The first bullet point is almost a trick question.  The State Board is not only requesting a trustee statement that reflects trust payments, earnings and distributions, but also some form of documentation of the trustee’s authority to provide fiduciary services in Missouri.  Sellers can comply with the main part of this bullet point by providing a purchaser report produced by the trustee that lists the individual purchasers, their address, contract sales price, total payments, deposit balance, ‘account value’ and distributions for sales expense and origination fees.  If the purchaser report summarizes the trust information, it will also help cover the second and third bullet points.   We italicize account value because trust “earnings” is ambiguous term.   What the Board has sought in the past is the trust’s market value.  The main purpose of Senate Bill No.1 is to ensure a trust if properly funded, and an audit cannot assess a trust without knowing its value.

The first bullet point is also tricky in that it seeks the distributions made from an active contract.  The only distributions that a trustee would make with regard to an active contract are any 10% sales expense or 5% origination fees reimbursed back to the seller.  Consequently, the purchaser report should reflect any sales expense or origination fees paid the seller.

The State Board also requests payment dates on the individual accounts, if available.  This can be difficult information to provide for preneed contracts that are paid for installments.  Our office generally offers to provide payment reports on a sampling of contracts if such a request is made by the Board.

The State Board is also seeking the trustee’s legal documents: trust agreement, preneed contract form and a document reflecting the trustee’s authority to serve in Missouri.  With regard to the latter item, banks and trust companies must obtain authority to provide fiduciary services.  For state chartered trustees that are not based in Missouri, that may mean two sets of documents.  For preneed trusts that have independent fund managers or third party administrators, the trustee may also be required to provide related agreements.

Round 2 of Missouri’s Preneed Exams: The Document Request

Posted in Exams/audits, Missouri - SB1

It has been more than a year since the Missouri State Board of Embalmers and Funeral Directors approved the expansion of the scope of financial examinations.  Consequently, preneed sellers up for their second preneed audit are receiving notices that request the following reports and documents:

  • A current statement from your state or federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have identifying the payments, earnings, and distributions for each active preneed contract
  • A current statement from any/all applicable insurance companies with which you have insurance-funded preneed contracts for each active preneed contract
  • A current listing of any other insurance assignments which require insurance funded preneed contracts that are not included in the above bullet
  • A current statement from your financial institution/s of preneed joint account/s for each active preneed contract
  • A current statement from any other sellers reflecting contracts listing you as provider
  • For any joint accounts, an attestation from each bank that the accounts are under joint control of the seller and consumer
  • A copy of a ledger or computerized report showing all outstanding preneed contracts, including consumer addresses, if available
  • Total payments and applicable payment dates on preneed contracts, if available (not necessary for payments on insurance funded preneed contracts)
  • Copies of agreement(s) with providers, if any
  • A copy of the trust agreement with the financial institution for any preneed trusts
  • A blank preneed contract currently used by you as a seller
  • Written policy regarding retention of records, if available
  • Written policy regarding cancelled and transferred contracts, if available
  • Explanation of sequential numbering system for preneed contracts
  • A report showing all contracts that have been canceled transferred or fulfilled since your previous exam.

We will address some of the requests in greater detail in future posts.