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 Trusts and Value Allocations: Total Return vs Income Return

Posted in Administration, Compliance, Investments

As discussed in our prior post, funeral homes are becoming increasingly dependent upon their preneed trustee for individual account administration.  Many trustees that provide account administration rely upon programs that use tax cost basis accounting.  (For a prior discussion of tax cost basis see “Consumer Options and Administrative Hurdles: Market Value Allocations”.)    Tax cost accounting programs require the trust to realize income and capital gains before preneed contracts can reap any investment return.  Prior to the 2008 mortgage crisis, most preneed trusts were invested primarily in long term bonds, and thus, were income return trusts.

Ten years’ of declining bond yields have forced many preneed trustees to diversify investment portfolios into equity holdings.  However, tax cost accounting has had a countering force on the fund manager.  The fund manager must sell assets in order for the trust to reap an investment return.  As a consequence, this year’s investment market surge has not necessarily translated into higher contract distributions for those preneed trusts with a tax cost accounting system.

When a fund manager seeks to harvest growth on a regular basis, he must then find new growth opportunities to provide a consistent return.  The fund manager will be forced to ‘ride the crest’, increasing the trust exposure to market volatility.

Preneed Trust Income: What Accounting Rules?

Posted in Administration, Compliance, Missouri - SB1

A Missouri funeral home client recently had a consumer with a trust funded contract cancel their prearranged funeral and request a refund. The contract was sold subsequent to the 2009 law change, which provides the consumer a refund equal to all payments in excess of a 5% origination fee. Missouri law allows sellers to withdraw a sales expense of 10% of the sales price, but that amount must be refunded if the consumer cancels the contract. Trust income can be used to fund the 10% sales expense owed by the seller. However, this particular contract had not been in trust long enough to earn the sales expense amount. When advised of the amount that the funeral home would owe the consumer, the funeral home questioned why the trust could not refund the entire amount. In the absence of a Missouri law provision that entitles the funeral home to the trust income, a nationally chartered fiduciary is bound by the Office of the Comptroller of the Currency rules governing common trust funds. In prior posts we have discussed Regulation Part 9, and how funeral preneed trusts are a form of common trust fund. (Strength in Numbers) Each consumer account is a separate trust, and should be administered accordingly. The OCC would frown upon a trustee withdrawing funds from one consumer trust to fund a distribution owed to the beneficiary of another trust.

Prior to the 2009 law change, Missouri preneed sellers were entitled to trust income, and trustees were exempted out of the OCC rules regarding income administration. It was fairly common for state preneed laws to vest trust income in the seller (as a way to ensure taxation of trust income to the seller instead of the consumer). Missouri’s prior law was an example. Accordingly, trustees could appropriately transfer or distribute income from consumer accounts. The concept that each consumer account is its own separate trust is not only foreign to Missouri funeral homes, but also to Missouri’s State Board of Embalmers and Funeral Directors.

A preneed trustee must look to trust income to fund trust administrative expenses. Similar to the client with the contract cancellation, preneed contracts that are serviced within a few months of sale do not earn sufficient income to offset the cost of creating the consumer account. One Board member’s comment was that the seller should bear that cost. However, the reality is that more and more sellers are dependent upon the trustee for individual consumer contract accounting.

Cemetery Rules and Regulations: the right to control cremation benches

Posted in Cemeteries

Earlier this year, the dispute between a Missouri cemetery and an independent monument dealer made local news. The cemetery had given notice to several lot owners that memorial benches they had placed on graves were going to be removed.  While the cemetery was permitting certain types of benches to remain, other benches proved difficult for maintenance workers to mow around.  An independent monument dealer suggested to the news reporters that the cemetery did not have a right to go on to someone else’s piece of property and remove something that belongs to that person.  Based on his comments, the monument dealer may not understand the property rights of grave space owners.

American property rights are based on an assumption that when you purchase a piece of real estate, you acquire all rights regarding the use of that land.  This is inherent to the deeds we use to convey real estate.  Originally, cemeteries also used deeds to convey fee simple rights in the grave spaces sold to individuals.  However, that began to change several decades ago when cemeteries began to convey limited rights in a grave space.  Those rights were defined as a limited interest of burying the single remains of a human body.  Some cemeteries even changed the name of the instrument from a deed to an assignment.  While some cemeteries retained the title “deed”, they altered the operative language to limit what rights the grave space owner acquired.

Cemeteries also condition the grave space owner’s rights to rules and regulations, that can be similar to what are imposed by homeowners’ association.  The cemetery would permit monuments and decorations subject to rules that could be amended from time to time.

The Blue Springs cemetery dispute may be one that more cemeteries, lot owners and monument dealers encounter.  As lot owners become more accepting of cremation, they will look at using their grave space for purposes of a cremation bench or niche monument.  The cemetery’s rules and regulations contemplate a traditional burial garden that has easier maintenance requirements.  The monument dealer and cemetery may have to work out accommodations to retain their clientele.

Right of Sepulcher: Last Rites Denied

Posted in Right of Sepulcher, Transition Documents

We recently came across a Missouri Law Review article that examined a Missouri Court of Appeals case that ruled a durable power of attorney for health care decisions was ineffective for the granting a right of sepulcher.  The form included a “springing” clause which was never triggered by two physicians’ determination of incompetency.  The article provides detailed explanation of the facts, but erroneously concludes that Missouri law has a flaw regarding the granting of the right of sepulcher.  With R.S.Mo. Section 404.710.6(8), the Missouri Legislature authorized the use of a financial durable power of attorney for the granting of the right of sepulcher.  Springing clauses are not commonly used in financial powers of attorney.

We have seen where specially drafted financial powers of attorney can also ‘backfire’ on the individual attempting to grant the right of sepulcher.  In a ‘special power of attorney for the right of sepulcher’ form found on the internet, a Missouri funeral home offered a form that included the following provisions:

To arrange and purchase funeral goods and services and to enter into contracts with funeral homes and/or funeral home operators on my behalf and for the benefit of myself, and in regard thereto, to execute funeral home contracts upon such terms and conditions as my said Agent shall think fit.

……….and to make prepayments and/or payments for such goods and services utilizing my funds.

This Power of Attorney shall become effective immediately, and shall not be affected by my disability or lack of mental competence, except as may be provided otherwise by an applicable state statute. This is a Durable Power of Attorney. This Power of Attorney shall continue effective until the final disposition of my body is carried out as directed in this instrument.

We have highlighted language from the form that is vulnerable to challenge.  Borrowing the general powers of the Missouri statute, the form purports to give the designated agent the authority to pay for a funeral and burial after the principal’s death.  It is probably the assumption of the principal, agent and the funeral home that the principal’s resources can be used for payment of the funeral and burial.  However, while the statute grants authority to carry out the right of sepulcher, the authority to use the principal’s resources will terminate with the principal’s death.  If the funeral and burial arrangements are not prefunded through preneed contracts or a final expense trust, the right of sepulcher agent will be deprived the funding needed to carry out the principal’s wishes.

Avoid the Long Spring Lines: File your Missouri Preneed Renewals Early

Posted in Compliance, Missouri - SB1, Recordkeeping

Missouri’s preneed seller and provider license renewals expire October 31st of each year, and many funeral directors approach this deadline like they would their tax return: if it is in the mail by Halloween I’m good.  But, dozens of Missouri funeral directors found otherwise this past year when they were summoned to appear before the Board for selling or servicing contracts while the license(s) had lapsed.  The Division staff has taken the position that seller and provider licenses must be renewed prior to October 31st.   The staff contends that the renewals have to be received with sufficient time to permit their review and approval prior to the deadline.

The State Board updated their website this past week to include an automated request for replacement renewal forms and the PDF schedules that may be prepared by the seller’s funding agents.

Besides the timeliness of the renewal filing, funeral homes were also summoned to appear before the State Board for incomplete filings.  More than one funeral home contended that it had included all of its renewals in a filing, only to have the Division misplace one of the renewals.  To avoid this situation, and to document the timeliness of the renewal filing, we would recommend that sellers and providers mail their renewals by October 1st, and include a cover letter that sets out: the applicable seller/provider names and license numbers; each renewal form included; each check that is included; and the date deposited to mail.  The renewal document packet should be sent certified mail to the State Board’s physical address (not the PO Box address):

Missouri State Board of Embalmers and Funeral Directors

3605 Missouri Boulevard

Jefferson City, MO 65102-0423

Facing 14 Years’ of Hard Time: One Missouri Funeral Director’s Failure to Deposit Preneed Funds

Posted in Compliance, Exams/audits, Recordkeeping

The Missouri Iron County Mountain Echo ran the following story on August 15th:

A former Ironton Funeral Home Director has pleaded guilty to two counts of stealing in Iron County Circuit Court.  The charges stem from the sale of pre-need funeral plans.  George Treaster of Ironton entered a plea of guilty to two counts of theft/stealing where the value of the property or services is $500 or more but less than $25,000.  Treaster is the former owner of White Funeral Home in Ironton.  The funeral business is no longer in operation and the building and lot were sold to the county.  Treaster received a sentence of seven years incarceration with the Missouri Department of Corrections on each count, with the execution of the sentence suspended.  He was placed on supervised probation for five years.  The court further ordered restitution to the victims of approximately $30,000 and ordered Treaster to spend 120 days in the Iron County Jail.  According to Iron County Prosecuting Attorney Brian Parker, the suspended execution of sentence means that if Treaster violates his probation, he will be required to spend 14 years in the penitentiary.  “Under a suspended execution of sentence, a person is a felon for the rest of their lives,” Parker said. “As part of the terms of his probation he must serve 120 days in the Iron County Jail.”

To avoid 14 years in prison, the Missouri funeral director has agreed to repay $30,000 of consumer funds that he applied to his business rather than deposit to a trust pursuant to Missouri’s preneed law.   The funeral director had initially sought to sell his preneed contracts to other funeral homes, but those efforts failed with the funeral director could not produce preneed examination reports.  A source advises that 120 days in the Iron County ‘dungeon’ will be no picnic.

Missouri Preneed Records: Disbursements

Posted in Compliance, Exams/audits, Missouri - SB1, Recordkeeping, Reporting

When the State Board first discussed the seller records proposal in December 2015, the disbursements records drew complaints from industry members that the examination process was delving too deeply into how funeral homes were conducting their business.   Some comments were directed at whether examiners would review statements of goods and services to determine if consumers received what had been promised by the preneed contract.  We’ve also heard concerns over whether the examination would look at the funeral home’s profit margin in areas such as casket and vault sales.

In response, the Board’s staff revised the seller records proposal regarding disbursement records to the following:

Records showing payment for fulfilled preneed contracts including, but not limited to, written certificate of performance for each preneed contract fulfilled, requests to the financial institution and/or insurance company for payment, evidence of the date the seller received the funds from the financial institution or insurance company, the account from which the funds were paid to the seller, and documentation of the payment by the seller to the provider including, but not limited to,  the name to whom payments were made, the date and amount of each payment, and a description of payment to the provider.

At the most recent State Board meeting, objections were raised against the staff’s revision because it leaves open the door to require new, unspecified records.  The language includes not once, but twice the phrase “but not limited to”.   That prompted us to compare the staff’s two proposals, and focus on the following language from their first proposal:

(4) accountings showing the disbursement of funds;

(5) records showing disbursements;

(6) the physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;

(7) records of all electronic transfers from preneed trust or preneed joint accounts, including the name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;

(8) reconciliations of the preneed accounts;

While industry members may fear the exam looking into each performed contract, we suspect the staff’s main objective is to seek records that would allow a reconciliation of trust disbursements.  While the NPS collapse was the impetus for getting preneed reform passed in Missouri, the staff probably remains mindful of the events that transpired subsequently in Illinois, Wisconsin and California.  Master trusts in those states were making performance distributions on individual account allocations that did not use market value.  All had serious funding deficiencies that resulted from years of ignoring the trust’s market value.

A Treasury Market Out of Whack: Insurers and Preneed Consumers

Posted in Consumer Advocates, Insurance Funded, Preneed, Preneed Development, Preneed Shortfalls, Price Protection

In a prior post, we used Allan Sloan’s article on the Treasury bond market to discuss the impact on preneed insurers and their funeral home clients.  The Treasury market has forced preneed insurers to lower their policy returns, which has a direct impact on the profitability of funeral homes.  To make insurance funding more profitable to the funeral home, insurers have recommended that the funeral home include a surcharge based on the sales price of the prearranged funeral.  Depending upon the insurer, consumers have been required to pay a surcharge as high as 19%.  But, the Treasury market has also forced preneed insurers to raise their premium rates, and the most dramatic rate increases involve installment terms of three years and longer.

A 70 year old preneed consumer looking to pay for a $7,500 prearranged funeral with a monthly installment of $150 or less, might anticipate an installment term of about 50 months.  But with insurance funding, the consumer will typically have to make installment payments for about 84 months.   While installment premiums have always added additional cost to the insurance funded preneed arrangement, the Treasury bond market has forced insurers to push more costs upon the consumer.

A Treasury Market Out of Whack: Preneed Insurers and Preneed Sellers

Posted in Insurance Funded, Investments, Preneed, Preneed Development, Preneed Development, Preneed Shortfalls, Price Protection, Price Protection, Uncategorized

In our last post, we used Allan Sloan’s article on the Treasury bond market to highlight the investment exposures to death care trusts.  Today we will look at how the Treasury market is also impacting funeral homes that rely upon insurance for preneed funding.  Mr. Sloan’s article alluded to insurance companies being required by statute to invest reserves in fixed income securities that include Treasuries.   Inflated Treasury prices and extremely low yields have forced preneed insurers to drop their policy death benefit increases to below 2%.  Some policy increases are now below 1.5%.

While some funeral homes will embrace any funding vehicle that avoids the potential for investment loss, most of those same funeral homes are facing internal cost increases in excess of 3%.  Consequently, insurance products are not keeping pace with funeral homes’ costs to perform a preneed contract.  To minimize a funeral home’s exposure to preneed shortfalls, insurers are recommending that the funeral home include a surcharge based on the sales price of the prearranged funeral.  The percentage differs by program, but some have been as high as 19%.  Despite what may seem to be an exorbitant charge to impose upon the consumer for a guaranteed price contract, many funeral homes may still suffer an investment loss on that contract.

A Treasury Market Out of Whack: Putting a hurt on death care funds

Posted in Care Funds, Cemeteries, Compliance, Investments

The July 25th Marketplace Morning Report on National Public Radio included a segment called Allan Sloan’s lessons on bond investments. Mr. Sloan is a business columnist for the Washington Post who recently wrote that the current Treasury bond market is “out of whack”, and poses a risker investment than the stock markets. Mr. Sloan wrote:

If you’re a retiree of modest means who saved all her life to accumulate a nest egg to buy Treasury securities to supplement Social Security, you’re up a creek. Not only have these low yields hurt savers of modest means, they’ve caused problems for insurance companies, annuity issuers and pension funds, all of which set aside money today to meet needs that will arise in the future.

Add to Mr. Sloan’s list death care trusts, and especially, cemetery care funds and preneed trusts that have historically made current distributions of income. Cemeteries face rising maintenance costs and cremation rates, and have become increasingly dependent upon perpetual care trust income. In states such as Missouri, funeral homes can withdraw income from some of their preneed trusts, and they too face rising cremation rates.

Mr. Sloan suggests that demand, rather than yield, has been driving up the bond market. While the yield on Treasuries has dropped, our bonds are more attractive to investors than those being offered by European counterparts that have a negative yield. Neil Irwin, a columnist for the New York Times, offered a similar analysis in a piece he wrote earlier this month (Can We Ignore the Alarm Bells the Bond Market is Ringing?)

The risk that the columnists refer to is the eventual move the Federal Reserve will make to raise interest rates. While that may not begin to happen until 2017, the slightest of increases will cause ripples for the value of long term Treasuries. Investors (such as perpetual care trusts and preneed trusts) that have opted for those types of Treasuries will be hit the hardest.