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

Association Master Trusts: De Facto Trustees

Posted in Compliance, Exams/audits, Fiduciary, Investments, Master Trusts

According to court filings, the reorganization plans for the Wisconsin Master Trust and California Master Trust each seek to eliminate ‘de facto trustee’ relationships that allowed the respective associations’ executives to ‘misuse, misspend, and mismanage millions of dollars’ of trust funds, and to direct funds towards inappropriate and unsuitable investments that served the association’s, rather than the beneficiaries’, goals.   The receiver for the Wisconsin Master Trust laid responsibility for abuses of that trust at the feet of the association, and reported to the court that:

The Trust was hemorrhaging from the costs it was incurring. We promptly eliminated between $50,000 and $100,000 per year in administrative costs, $125,000 per year in investment advisor fees and $240,000 per year in payments to the WFDA and its affiliate. We also eliminated a large amount of other fees that did not appear on the Trust’s records but that were built into securities transactions.*

The trust agreements proposed to courts in California and Wisconsin would reinstate the trustee’s duties with regard to investment compliance, controlling trust expenses, and to severe the association’s use of master trust funds.  Consequently, it seems odd that executives for the Missouri Funeral Trust would use the circumstances of the Wisconsin and California master trusts to distinguish their own program, and to then file a lawsuit declaring confidential and proprietary all trust documents, client lists and investment contracts.  Sources report that while attending the Missouri Funeral Directors and Embalmers Association convention a few weeks ago, master trust representatives declared the program had “deep pockets” and could afford to sue to protect its interests and client relationships.  If trust assets are being used to finance the lawsuit, the State of Missouri may legitimately inquire whether the Missouri program also has a de facto trustee.  Since Missouri’s preneed financial examinations are not structured to drill for hidden investment costs and inappropriate trust expenditures, the MFT lawsuit seems to be inviting further scrutiny of the trustee by the Division of Finance and the Federal Deposit Insurance Corporation.

*The hidden fees the receiver refers to are 12b-1 fees that the association allowed fund managers to collect off various mutual funds.  Those types of fees are often in addition to basis points fees charged by the fund managers.

Transparency:The Curious Case of the Missouri Funeral Trust

Posted in Master Trusts

In his final report to the court, the Wisconsin Master Trust receiver proposed a new trust agreement that is intended to provide “transparency, accountability, oversight and prudence”.   Similarly, the California Attorney General seeks to provide transparency through express reporting requirements included in the trust agreement proposed to the court presiding over the California Master Trust.  The proposed California Master Trust agreement would provide more program information to the state regulator, funeral homes and trustors/contract purchasers.  Funeral homes were included in the beneficiaries for transparency because the master trust programs often operated in secrecy to participating funeral homes.  Funeral homes participating in the Illinois master trust were not informed of how the trust invested, or that key man insurance was frequently purchased on owners’ lives without their knowledge.  With three large state master trust programs having been forced to provide greater transparency, it is curious to see a state master trust bringing litigation claiming that information concerning its members, investments and agreements are proprietary and confidential.

On May 22nd, the Missouri Funeral Trust filed a lawsuit against the State Board of Embalmers and Funeral Directors and Catholic Holy Family Society seeking an injunction to protect various program documents and information as confidential.  Catholic Holy Family Society is an insurance company that writes preneed insurance policies, and it hired away from the State Board, an auditor that had handled the examination of the Missouri Funeral Trust program.  For 4 years, the Missouri Funeral Trust has been the subject of a preneed financial examination, and the complaint alleges this gave the auditor unfettered access to program information, including strengths and weaknesses, and which funeral homes might be prime targets for a competitor company to ‘steal away’.  The lawsuit was disclosed to Association members and industry attendees to the Association convention, with an explanation that the Missouri Funeral Trust has very deep pockets and can pursue litigation against any competitor that solicits MFT board members.

Curiously, what is not alleged in the complaint is that the defendants misrepresented any information communicated to program members.  The main message communicated by the lawsuit, and by program representatives, is that the program’s executives should be the sole source of information to the member funeral homes.  This rings a little too familiar with what happened in Wisconsin and Illinois.

State Master Trusts: Plans of Reorganization

Posted in Master Trusts, Preneed, Trust Funded

Two of the country’s largest association ran master trusts now have pending plans of reorganization.  On May 14th, the receiver appointed for the Wisconsin Master Trust filed a Final Report that outlined to a court his proposal for the reorganization of that program.  On May 22nd, a hearing was held in a California on the Attorney General’s proposal to reorganize the master trust established by that state’s funeral directors association.  Both proposals substantially alter the relationships among the funeral directors association, member funeral homes and the master trusts.  Over the next few weeks we will examine the changes made to these master trusts.

Preneed Downgrades: Refunds

Posted in Compliance, Guaranteed, Preneed, Trust Funded

With increasing regularity, preneed consumers are downgrading from traditional funerals to cremation services.  To accommodate the consumer, funeral homes often amend the original contract with a downgrade addendum.   An addendum is used to avoid a contract cancellation and a new contract where additional state fees might be required.    However, downgrade addendum can pose certain problems.

For contracts that are paid in full or have trust balances in excess of the adjusted sales price, a trust funded contract will have excess funding.  Most state preneed laws do not contemplate distributions except for performance or cancellation.

State preneed laws that allow a seller to retain sales expense often do so from the initial payments.  Consequently, when a downgrade addendum is offered after the full sales expense has been collected, the trust balance will have a deficit for the ‘excess’ sales expense collected.

Trust Funded Preneed and Insurance Assignments

Posted in Compliance, Exams/audits, Guaranteed, Insurance Funded, Non-guaranteed, Preneed, Recordkeeping, Trust Funded

Funeral homes frequently allow the assignment of insurance as partial payment towards a trust funded preneed contract, but the manner in which the assignment is made can cause problems for them.  Preneed trustees will not accept an insurance policy for a host of reasons.  Insurance proceeds paid to a trust are not tax free and require individual administration for tax reporting.  Most preneed trusts are also subject to the prudent investor rule, which requires diversification.  Insurance policies do not pay income for the payment of expenses.  Upon the cancellation or lapse of a trust funded contract, applicable law typically contemplates the return of funds (not an insurance policy).  Consequently, most trustees will not accept the insurance policy.

If applicable state law allows the funeral home to be named the policy beneficiary, then there are ways for the funeral home to use a contract addendum where both trust funding and insurance funding are considered.  The goods and services to be purchased with each source of funding should be described separately.   If a trust funded contract is prepared describing all goods and services with the insurance policy as partial payment, the contract will appear to an auditor as underfunded.  The funding reported by the trustee will never reflect the insurance proceeds.   In Missouri, auditors rely upon the trustee report to identify consumers to send inquiry letters.  (Letters are sent to trust accounts that reflect amounts are still due on the preneed contract.)  One funeral director complained to us about this procedure, suggesting that auditors should be able to figure this out.  In response, we suggested that funeral homes can expedite the audit procedure by avoiding that situation.

We advise funeral homes to apply insurance proceeds with a non-guaranteed insurance addendum.  We recommend the insurance addendum be non-guaranteed because there is too high an incidence of the insurance proceeds failing to cover the planned costs of the funeral.  This can be due to policy lapses, family members borrowing against the policy or the policy not keeping track with funeral costs.

The trust funded portion of the contract should only describe those services and merchandise to be paid by the trust.  But, the funeral director has a decision to make about whether the trust funded portion of the contract should be guaranteed.  If the sales price of the trust funded portion is less than the non-declinable services and the casket price, then we would recommend a non-guaranteed contract.

Preneed Contracts: Where to Apply a Discount

Posted in Administration, Exams/audits, Guaranteed, Non-guaranteed, Preneed, Trust Funded

It is common for a funeral home to offer a discount to a preneed contract purchaser when the sales price is to be paid in full at the time of purchase.  However, funeral homes are often inconsistent in how the discount is applied to the preneed contract.  We have seen the discount recorded as a payment credit, a reduction to the aggregate purchase price, as a reduction to the cash advance funds, or as a reduction to the purchase price of the guaranteed goods and services.  Of these approaches, we would recommend the latter.

We recommend against the payment credit approach because it can cause an auditor to mistake the account as being underfunded.   With the payment credit approach, the funeral director will complete the contract using the General Price List to prepare the final contract purchase price and then reduce the outstanding balance owed.   Auditors will typically compare the trust balance to the contract sales price to determine if the contract’s funding is adequate.   In Missouri, the auditors send a letter to each consumer when the trust does not appear to be ‘fully funded’.

When the discount is applied to the aggregate purchase price without reference to either the guaranteed goods and services purchase price or the cash advance items, there can be confusion regarding the proper sales expense charge.  In Missouri, the 10% sales expense can only be charged to the purchase price of the guaranteed items.

Applying the discount to cash advances will reduce the funds meant to cover expenses that the consumer must bear at a future date.   The consumer hasn’t truly saved anything through the discount.

If a discount is to be given, it should be applied solely to the purchase price of guaranteed goods and services.  But, funeral homes must also consider the FTC opinion that non-declinable services cannot be discounted.  (Click here for Opinion 09-1)  Consequently, other itemized goods and services essentially bear the entire discount.

The Right of Sepulcher: One Hurdle to the Final Resting Place

Posted in Cremation, Preplanning, Right of Sepulcher, Supulcher/Preference Laws, Transition Documents

A Kansas City Star article reported on the role of the Missing in Action Project in getting Major Rombauer to his final resting place.  Much of the work of the MIA Project goes unreported, but this story was found noteworthy because Major Rombauer’s cremains had been sitting on a shelf at the crematory for 102 years.   All too often our country’s veterans are denied the final act of respect, and instead of a burial or interment, their cremated remains are never claimed from the funeral home or crematory.   “Abandoned cremains” can pose various legal problems for the funeral home or crematory when their authorization forms do not address the right of sepulcher and when ‘abandonment’ occurs.

The right of sepulcher is a quasi property right that each person has with regard to how his or her remains are to be handled.  We each can make a written designation of the right of sepulcher, or in the absence of such a designation, the right of sepulcher passes to family members.   When cremation is chosen, the right of sepulcher is not competed until the cremains are delivered back to the individual who originally authorized the disposition.   But cremation authorization forms frequently do not address when cremains are abandoned, and how the cremains are to be handled when abandonment occurs.  It is unfortunate, but family disputes often occur over the final disposition of a loved one’s cremains.   Litigation exposures do cause some cremains to sit on the shelf for years, and after a period of time, to go forgotten.

Criminal Intent: Use of the Wrong Deposit Book

Posted in Exams/audits, Preneed, Trust Funded

An Oklahoma funeral director faces serious prison time over the deposit of preneed funds to his business operating account.  The Oklahoma Department of Insurance decided to go to a local prosecutor when a Department audit found the funeral director had routinely failed to deposit consumer funds to the preneed trust required by state law.  The funeral director’s attorney has suggested to news sources that although the funeral director admitted the funds were deposited to the operating account, no funds were missing.  Consumers were getting their funerals, and his client was only guilty of being ‘sloppy’.  But, the Department would have no part of the ‘no harm, no foul’ defense.   The Oklahoma authorities have taken the position that criminal intent is determined by the decision on whether to comply with the deposit requirement, not whether the funeral director has intent to honor the contract.

Missouri and Illinois funeral directors have similar deposit requirements with regard to consumer preneed funds.  So do Missouri cemeteries that sell merchandise and services on a preneed basis.  Prior to the overhaul of Chapter 436 in 2009, the Missouri preneed law was ambiguous regarding the deposit requirements for consumer funds.  Today, Section 436.440 requires consumer funds to be deposited directly to trust within 60 days of receipt by the seller.  The ‘deposit directly to trust’ brought objections from large operators that include finance charges and other fees in the preneed sale, and an accommodation was made by the State Board to allow deposits to a clearing account.  However, Missouri funeral homes that use a clearing account bear the burden of proof that the account is merely an extension of the trust.

Until December 2016, the Missouri funeral director who fails to deposit consumer funds to trust within 60 days of receipt has exposure to class c felony charges.  Subsequent to January 2017, these violations of Chapter 436 will carry a class d felony penalty.  With the 2009 law change, the preneed auditors of the Missouri State Board of Embalmers and Funeral Directors are now on the front line for determining compliance with the trust deposit requirement. While Chapter 436 provides concurrent jurisdiction to the Missouri Attorney General and local prosecutors, the law contemplates the State Board first referring possible prosecution matters to the AG.  As an industry board, the State Board will lean towards giving funeral directors every opportunity to ‘get right with the Lord’, but we are five years into the ‘new’ law and that should be enough time to figure out which deposit book to use.  Restoring consumer confidence requires proactive use of the authorities granted by the Legislature in 2009, including the Oklahoma option.

NPS’ Legacy of Damages: No One Knows How Deep the Waters Were

Posted in Associations, Exams/audits, Master Trusts, Missouri - SB1, NPS/Lincoln, Recordkeeping

When NPS first collapsed, the estimate of the company’s liabilities to funeral homes was reported to have been as much as a billion dollars.  When the SDR finally brought the case to trial, the damages awarded by the jury were less than half of the original estimate.   While this author believes the actual damages are closer to the original estimate, the truth may be that no one, including those who ran NPS, knew all what had been promised funeral homes.    Chapter 436’s lax standards for regulatory oversight and fiduciary duties meant that no one was asking NPS for records that would have shown whether the trusts were appropriately funded.   Consequently, it is ironic that members of the Missouri funeral industry are now suggesting that the State Board of Embalmers and Funeral Directors has exceeded its audit authorities, and that the Board’s members could have personal exposure for doing so.

At a recent State Board meeting, it was suggested that a Supreme Court decision now puts Board members at risk for personal liability.  In North Carolina State Board of Dental Examiners vs Federal Trade Commission, the Supreme Court held that the members of an industry board could not claim state action immunity because the state had not provided adequate supervision of an entity that was acting more for the benefit of the industry than for the good of the public.   The North Carolina dental board passed regulations controlling who could provide teeth whitening services, and the FTC found the regulations to be in violation of antitrust laws.

The Missouri State Board has a history with the FTC and the antitrust laws.   About eight years ago, the Board passed a regulation controlling who could sell caskets.   As a part of the settlement with the FTC, the Board had to include disclosures on its website.   The North Carolina case also reminds us of the time when California regulated the funeral industry with an industry board.  That state board retained its own legal counsel and pursued issues which seemed closely aligned with the state association.  Eventually, the California Funeral Board was eliminated by a sunset law, and regulation of the industry was transferred to the Cemetery and Funeral Bureau.

We have heard the industry’s frustrations with the Missouri audit process.  Auditors have written up issues that could have been explained through an exit interview.   Audit exceptions based on insurance policy assignments made decades ago for an accommodation to families.  The auditor’s failure to incorporate explanations into reports forwarded to the State Board.   Exceptions left open without a formal response by the State Board.  But, it is disingenuous to raise the North Carolina decision in context with the preneed audit process.    However flawed the process may be, audits are not intended to further industry interests over those of the public.  That may be best typified by the obvious friction between the State Board and the state association over the audit of their master trust.  Second, the State of Missouri provides oversight of the State Board through a staff and attorney who are Division of Professional Registration employees.

NPS Trustees: Standard of Care for Investments

Posted in Compliance, Investments, Missouri - SB1, NPS/Lincoln

Now that a judgment has been rendered against Allegiant Bank, the NPS litigation will move on to the appeal stage where the focus will be on R.S.Mo. Section 436.031.  The NPS trustees universally argued that this provision of the Missouri preneed statute relieved them of all responsibility and liability for investment supervision.  As set out in expert report of Professor Hanna, the trustees argued that the law prohibited them from participating in the investment advisor’s strategy and management of trust assets, and required them to follow investment instructions even though preneed funds were being sent to insurance companies with ties to NPS.  In support, the expert report references the 1994 Consent Judgment between NPS and the State of Missouri, and suggests that a reasonably prudent trustee would have determined that the court had approved the purchase of insurance policies from a related company.   While paragraph 6 of the Consent Judgment did obligate NPS to continue premium payments to Lincoln Memorial Life Insurance Company, Statesman National Life Insurance Company, and Memorial Service Life Insurance Company, other comments included in the Hanna expert report suggest that one or more of the NPS trustees were not even aware of the Consent Judgment.

There can be no argument that the trusts’ purchase of insurance from a commonly controlled company enabled the Cassitys to shift funds, first among policies, and then out of the insurance companies.   The SDR argued that the trustees opened the door to this fraud by allowing the trusts to purchase insurance from a related company, and then failing to monitor the cash surrender values of the policies.  The latter part of the SDR argument begs the question of who was in a better position to challenge the irregularities of Lincoln Memorial Life.   If intercompany fraud was a possibility that trustees should have foreseen, why did the Missouri Attorney General allow the continued purchase of Lincoln policies?

In resolving a long running dispute with NPS, the Missouri Attorney General’s office focused on getting NPS to timely fund the trusts.   Exploiting one of Chapter 436’s many ambiguities, NPS claimed it was not required to deposit consumer funds to trust until the contract was paid in full (a theory borrowed from Missouri’s endowed care law).    There is little discussion of Statesman National Life Insurance Company other than there was a reinsurance arrangement between it and Lincoln Memorial Life.   We are left to speculate whether Statesman’s role as original issuer of the policies issued to the NPS trusts was viewed as an element of independence that broke the line between NPS and Lincoln.  But, the Texas Department of Insurance’s records indicate that Statesman was put into liquidation in 1999, which was at a time when the Missouri Attorney General still had oversight of the NPS operations.  Was Lincoln then allowed to assume the Statesman policies issued to the NPS trusts?  It would seem to us that the State of Missouri put too much reliance on the Texas Department of Insurance to keep NPS and Lincoln on the straight and narrow.

For purposes of the civil trial, the Court cutoff any arguments that regulators should share in the fault for the NPS collapse.  So consequently, the defendants will ask the Federal Court of Appeals whether the trial court erred in its interpretation of R.S.Mo. Section 436.031.  Can the preneed trustee be relieved of all investment supervision?  If so, who then assumes the fiduciary duties for investment oversight?  Does the independent investment advisor become a fiduciary to preneed consumers?  Does the preneed seller also assume a fiduciary duty for the fund manager appointment?