Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

The ICCFA’s November Magazine included an article by Craig Martin that provides good advice for all death care trusts. Death care trusts are notoriously bad performers, and if operators are to improve investment performance they need to work more closely with their fiduciaries and portfolio managers. Mr. Martin offers 5 tips that are equally applicable to preneed trusts and endowment care trusts:

1. Know your investment guidelines (and statutory limitations)
2. Communicate with the investment manager on a regular basis
3. Use a professional fund manager
4. Include growth in the asset allocation
5. Explore the availability of a master trust

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With some industry members having already declared the preneed transaction dead, a recent AARP bulletin reports that the patient is not only alive, but it is regaining its strength. But, the reason for increasing preneed sales will only bedevil many death care operators: the rising costs of funerals.

Operators who face preneed competition will have difficulty swearing off the guaranteed contract if consumer advocates such as the AARP begin to recommend the transaction as a way for seniors to control future costs.

While the AARP’s stance on preneed may be moderating, the bulletin offers advice that consumers should heed:

• Visit at least three funeral homes and ask lots of questions.
• Ask for a detailed price list of products and services.
• Examine the insurance policy or trust documents that fund the preneed contract (even have a lawyer review them).
• Make family members aware of the funeral plans, and keep all documents and receipts in an accessible place.

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A “Spend Down” is the transaction where a person seeking public assistance transfers money or insurance to a funeral home to avoid having the “asset” count as a resource. It is a commonly held perception that the Spend Down accounts for many preneed contract purchases. But should all Spend Downs trigger the state preneed law intended to protect the consumer? That question has been the source of disagreement and confusion for Missouri funeral directors since last July when the State Board first began to implement SB1.

The Missouri controversy swirls around the Spend Down that involves an existing insurance policy. It is a fairly common occurrence for a family to approach the funeral director with a small life policy ($10,000 or less) with a request that the policy be held until welfare applicant’s death (when it is to be applied to funeral expenses). Missouri’s public assistance policies are interpreted at the county level, and the result has been widely diverging requirements. Some Missouri counties require the funeral director to provide a contract to the family to evidence the assignment was not made as a gift. The contract requirement also serves to protect the funeral director by setting out the terms and conditions underlying the assignment. For example, the funeral director may not necessarily promise the insurance policy is being accepted as the sole consideration for the future costs. If the policy proves worthless, the family will still be obligated to pay for the funeral.

The Missouri State Board of Embalmers and Funeral Directors has grappled with whether this transaction should be subject to the requirements of SB1. During it’s initial SB1 meetings, the State Board leaned towards excluding the Spend Down from SB1, but in subsequent meetings expressed an intent to include the transaction if a contract were involved.

When the family approaches the funeral director with an existing insurance policy or certificate deposit, and the funeral director receives no compensation in the form of a commission, the Spend Down represents an accommodation to the consumer. Under such circumstances, a regulator should consider whether the licensing requirements are sufficient to protect the consumer. Imposing the requirements of SB1, or any preneed statute with additional fees or costs, on an accommodation transaction burdens both the consumer and the funeral home.
 

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1. Losing 20 pounds
2. Quit smoking
3. Spend more time with the family
4. Find an independent trustee

And so goes the list of New Year resolutions for the Illinois funeral director, with the last being forced on the industry by SB 1682.

Funeral directors and consumers can learn more about the new independent trustee requirements by visiting the Comptroller's website for SB 1682 information and  SB1682 FAQ issues .

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It is an all but too familiar news report about 60 Michigan preneed contract purchasers having lost all their money, the industry response described the protections afforded by state law.

The MFDA statement drew some rebuke on an industry chat page, including one post recommending that state FD associations take a greater role in educating the public. However, consumer advocate groups will readily acknowledge that “educating the public’ on the risks of the preneed transaction is a difficult task that often occurs after the fact.

The MFDA offers good advice regarding the protections provided by Michigan law, but consumer advocates would be more impressed if the association offered that same advice on their website, and through printed disclosures at member funeral homes.

Once the preneed contract is sold, the industry has long felt it was best to limit communications with the consumer. This ‘perception’ was reflected in the following assertion made in one of the lawsuits filed against the Illinois Funeral Directors Association:

One of the benefits of the Preneed Trust Tax-Exempt Fund was to avoid reminding the preneed customers of their own mortality with an annual mailing of an interest reporting form (Form 1099). The mortality concept has always been critical to the satisfaction of preneed customers insofar as it allowed choices to be made by the customers while sparing their survivors the emotional and financial obligations associated with a funeral. The tax-exempt option was and remains the preferred choice for approximately 75% of preneed customers.

But as the MFDA statement suggests, consumers are better protected when annual statements are provided. In contrast to the old perception, regular contact between the funeral home and the consumer could be used to strengthen the consumer’s loyalty with the funeral home. Such contact could also help reduce another age-old preneed problem: but Mom said her preneed contract took care of everything.
 

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The Missouri Funeral Director and Embalmer Association provided crucial support to the passage of Senate Bill No. 1, but the heart of the association’s membership, the mom and pop operators, may now be second-guessing that decision.

SB1 provides regulators the authority to audit or examine preneed trusts and joint accounts, including those established prior to August 28, 2009. Missouri funeral directors are now hearing that the State Board will enforce provisions of the law against their old preneed business in such a way so to put their funeral establishment licenses at risk.

The State Board’s authority to audit preneed sellers under the old law was vague. During the 1980s and early 1990s, the State Board conducted ‘random’ audits. In reality, the audits were not random, but weighted by the number of contracts sold. Using independent CPA firms, audits were made of the same small group of sellers. The practice was challenged in the mid-1990s, and audits were discontinued.

While the vast majority of Missouri sellers have never been audited, their preneed contracts have been reviewed periodically by State Board inspectors. Funeral directors are now troubled by the prospect of those contracts failing to pass muster when reviewed by an independent CPA firm.

The licensees’ worries are well founded. Few funeral homes engaged legal counsel for the purpose of preparing preneed contracts or trust agreements. Instead, funeral homes shared or borrowed documents, often without regard to such specifics as how the contract was to be funded. Consequently, funeral homes have used trust-funded contracts for joint accounts.

Some funeral directors are bound to take a defiant position with the State Board’s enforcement of SB1 against their preneed paperwork. While it is predictable that the State Board may assert the licensee’s failure to engage legal counsel is no defense, licensees represented by counsel also have reason to be indignant with the Board.
 

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Over the next year, Missouri will examine the various flaws of SB1. One of those flaws concerns the independent investment advisor and the ‘fix’ meant to preclude conflicts of interest.

Preneed trusts have a poor track record in terms of investment performance. Trustees often fail to appreciate the key factors that impact investment strategies for preneed. Those factors can vary substantially from trust to trust, making the fund manager’s job more difficult.

Consequently, it is not uncommon to see large trusts delegate investment authority to an independent fund manager. Missouri’s old preneed law took the practice an ill-advised step too far by relieving the trustee of liability for the advisor’s decisions. NPS exploited that provision by appointing investment advisors who handed the keys to the vault to Lincoln Memorial. Believing themselves to be exculpated from investment liabilities, the NPS fiduciaries became bystanders to the largest preneed fraud in history.

Section 436.445 of SB1 appropriately requires the fiduciary to remain responsible for the investment advisor’s actions. However, the statute goes too far in attempting to preclude any relationship between the advisor and the seller. The provision was lifted from Missouri’s Uniform Trust Code without adequate consideration of the relationships of the seller, fiduciary and fund manager.

In contrast to SB1, the Uniform Trust Code does not prohibit relations between the trustor/seller and the investment advisor (or any service provider to the trust). Missouri’s preneed industry would be better served if such relations were allowed if fully disclosed and subjected to a higher level of scrutiny.
 

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Veterans Day invariably results in a few newspaper articles similar to the one written about the Pittston City Cemetery. Out of respect for veterans’ graves, this small Pennsylvania town is seeking volunteers to provide care to its cemetery. Budget cuts and personnel cuts have left Pittston without the resources to provide maintenance to the cemetery.

The Pittston cemetery plight provides a context to one funeral director’s assertion that municipal cemeteries represent a ‘true value’ to consumers. The funeral director fails to grasp that the grave at a municipal cemetery is priced artificially low. Most municipal cemeteries are exempt from contributing to endowed care funds intended to provide care to the graves. Instead, taxpayers must subsidize the cemetery’s care. In lean times, the cemetery must go without care.

But for the veterans, would Pittston be seeking volunteers to cut the weeds and clean up the cemetery? Even in death, these veterans continue to serve their community.

Before purchasing a grave space, consumers should ask the cemetery how its maintenance will be funded in future years. If the cemetery maintains a care fund, determine whether it complies with state laws, and request information about the fund’s trustee.
 

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In May 2009, the American Funeral Director editorial advised that fixing preneed has to be a cooperative effort, and that the industry needs to agree upon a plan before attempting to legislate a fix. In that same month, the Missouri legislature passed a ‘fix’ to the NPS abuses that incorporated provisions from a mixed bag of industry recommendations. The Missouri funeral industry is now learning that their recommendations don’t amount to much of a plan.

With rumblings that Chapter 436 would have to be reopened this year to fix SB1’s flaws, the State Board took two important steps towards a plan: suspending any legislative efforts by state regulators for at least a year, and establishing a forum for industry attorneys to provide input regarding SB1. So now, in who’s court is the ball?

Mr. Defort suggests that state associations must take the lead in developing the “plan”. Perhaps, but that would depend upon the strength of the particular association’s membership. The Missouri Funeral Director and Embalmer Association played a crucial role in passing SB1, but the Missouri preneed industry is large and diverse. Consequently, the MFDEA cannot be expected to shoulder the plan-building task alone.

Some might suggest the ‘big’ sellers should step up, but the national companies have preneed programs that already comply with more stringent requirements than those imposed by SB1. The big sellers are waiting for the regulators to clarify SB1’s ambiguities and conflicts.

Rather, the ball would seem to be in the regulator’s court, and more specifically, the court of the Division of Professional Registration.

If the Division needs some starting points for a plan, here are four:

• Develop an annual reporting system that operators can use to demonstrate compliance with the 80% funding requirements of existing trusts (so as to minimize audit expenses and lower the $36 contract fee)
• Develop an alternative to the broken joint account contract
• Establish a voluntary compliance program to fix the technical violations that have accumulated over the past 27 years (when there were no guidelines or oversight)
• Establish a “no action letter” procedure that will allow more sophisticated sellers to determine the boundaries of compliance.

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