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

Doug Cassity: A Master at the Slight of Hand

Posted in NPS/Lincoln, Uncategorized

Our prior blog post discussed the NPS Special Deputy Receiver’s motion for a ruling on two crucial legal issues.  Doug Cassity was appalled that the SDR would attempt such an unbelievable slight of hand on the Federal court, and filed his own response.  According to Mr. Cassity, the SDR has cited the court to the wrong law.  In an effort to set the record straight, Doug provides his explanation of the intent of Chapter 436.   Pure balderdash!

The man has no conscience.

Investment Advisors: How Independent?

Posted in Compliance, Investments, Master Trusts, NPS/Lincoln

In a motion for rulings of law, the NPS Special Deputy Receiver seeks a judicial determination of two legal issues that could impact preneed trustees subject to the jurisdiction of the Eighth Circuit of Federal Court of Appeals: the beneficiary status of preneed purchasers (and funeral homes) and the required independence of investment advisors.  These two issues have direct consequences upon the investment oversight duties of the preneed fiduciary when investment decisions are delegated to a fund manager outside the institution.  Rather than summarize our prior posts on these issues, search our website with the term “hold harmless”.

How could the ruling affect preneed trustees in states other than Missouri?  First, the ruling, whichever way it goes, will likely be appealed.  The issues are central to all parties’ arguments, and the damage claims are too large to not challenge. Second, the court could find the Missouri preneed law to be ambiguous, and then look to the principals of the Uniform Trust Code (as adopted by Missouri).  On page 13 of the Memorandum, SDR quotes from a Federal decision that held the Illinois Trusts and Trustee Act (not the Illinois Funeral or Burial Funds Act) defined the beneficiary of a preneed trust.  (See page 13 of the SDR’s Memorandum.)  While Illinois is not in the Eighth Circuit, the outcome of the NPS case should cause the IFDA Master Trust to pause.  That program’s hold harmless provision contemplates the funeral home sellers as the sole beneficiary.

The NPS Trustees have taken a position similar to that relied upon by master trust programs that utilize outside fund managers.  The seller has assumed investment risk and should have the authority to direct investments.  The Missouri law codified what many state association master trusts attempted to do through their trust instrument.  This law, a product of the lobbying efforts of the Missouri Funeral Directors Association, sought to clarify a grantor’s ability to overcome the rule against the delegation of investment functions, and define a custodial relationship for its program trustee.

The Uniform Trust Code has since been modified to allow such delegation of investment functions.

An immaterial witness: Doug Cassity

Posted in NPS/Lincoln, Uncategorized

Doug doesn’t have much faith in the legion of attorneys retained by the country’s largest banks.  Mr. Cassity has filed a writ of habeas corpus ad testificandum that argues only he can effectively cross examine witnesses to NPS’ compliance with the 1994 consent judgment.   Mr. Cassity argues that NPS could legally withdraw from trust all funds in excess of the market value of the insurance policies purchased by the trust.  This ‘legal argument’ is not actually based on R.S.MO. Section 436.031, but rather on statements attributed to the Missouri Attorney General’s office and its representatives.  Mr. Cassity’s argument also asserts that life insurance, whether it term life or whole life, can be valued at its face.

This is a man who still believes his own hype.

The NPS Civil Trial: our first glimpse of the legal arguments

Posted in Uncategorized

In anticipation of a February trial date, a group from the fiduciary bank defendants has filed a motion for summary judgment in the Federal court that will try the NPS civil lawsuit.  The intent of the summary judgment request is to narrow the scope of claims made by the Special Deputy Receiver.  The pleadings filed with the court are lengthy, and for purposes of this post, we provide a hyperlink to the Table of Contents, Introduction, and Conclusions of the Memorandum in support of the banks’ request.   The SDR’s legal team will next respond with countering arguments and facts.  The moving bank defendants will then have another opportunity to reply.  The banks have requested oral arguments, and the issues could go before the trial court by Thanksgiving.

Consumers Payment Options: Administrative Hurdles and Preneed Trusts

Posted in Administration, Associations, Compliance, Master Trusts, Non-guaranteed, NPS/Lincoln, Recordkeeping, Trust Funded

There are three scenarios for administration of preneed installment payments: the funeral operator collects payments, the trustee collects payments or a third party administrator collects payments.  The entity collecting installment payments must be able to apply each payment to the correct preneed account, and provide the other party (or parties) current payment balances.  If the payment administration is performed by the fiduciary or a TPA, the funeral operator must be informed of any outstanding payment balances.  If a death occurs before the contract is paid in full, the operator must be able to include the amount owed in the final statement of goods and services.   Families also call on the funeral home for payment balances when they desire to pay off a contract.  The trustee must also know how much can be distributed on performance of the contract.

The legal authority for a funeral home to administer consumer payments is based on the preneed contract constituting a sale of goods and services.  The trusting requirement is a safeguard for future performance of the contract.  For decades, it has been appropriate for the funeral home to handle the payments, and to book those payments to its accounting records.  However, smaller operators often lack the accounting resources required to administer significant numbers of consumer payments.  Seeing the need for administration, state associations obtained SEC No Action letters premised on the guaranteed preneed contract.  The SEC No Action letters enabled the master trust programs to limit their liability exposures when providing administrative services to member funeral homes.  While one such SEC No Action letter included a description of non-guaranteed contracts, the submission was made by Fleet Bank, not a state association or funeral operator.

From the perspective of a consumer or a regulator, the safest method would be to require all payments be deposited directly to the trust.  However, few trustees have procedures or accounting platforms designed for frequent deposit and distribution activity.   Allegations made against the National Prearranged Services trustees include improper custodial arrangements intended to simplify the banks’ role in administrative functions.   The pending Federal civil trial will explore whether administrative procedures outlined by some of the banks amounted to an aiding and abetting of fraud by NPS.

The NPS civil trial may also implicate the administration of consumer payments by the independent TPA.   Doug Cassity asserts that no fiduciary duties were owed with regard to consumer payments until the contract’s purchase price was paid in full.   In one court pleading, Mr. Cassity argued Chapter 436 was silent on the issue and that Chapter 214, Missouri’s cemetery law, authorized NPS’ administration of consumer payments.  While it may be an absurd argument, the assertion will bring into question whether the TPA owes fiduciary duties to the consumer, funeral home and trustee.   For rollover preneed trusts, NPS was not the preneed seller, but rather served as an administrative agent appointed by the funeral home.  Few TPAs may perceive their role as one owing duties to either the consumer or the trustee.

The industry will need to move cautiously in offering the consumer options regarding installment payments and non-guaranteed contracts.

Consumer Options and Administrative Hurdles: Market Value Allocations

Posted in Administration, Associations, Compliance, Master Trusts

The conventional guaranteed preneed transaction is premised upon investment returns offsetting performance cost increases to the funeral home.  Many funeral homes restrict consumers to single payment preneed contracts to limit their exposure to funding short falls.  If the funeral home allows the consumer to pay the preneed purchase price over 60 months, the preneed trust is put at an investment disadvantage until the contract is paid in full at the end of the five year payment period.   The lure of non-guaranteed preneed is that consumers can pay on the arrangement at their own convenience until the trust is large enough to have investment returns that offset cost increases.  But while the arrangement is in the non-guaranteed phase, the consumer bears the investment risk and the trustee must therefore make reasonable market value allocations to the consumer’s account.  As we alluded to in prior posts, the master trust programs in Illinois and Wisconsin skirted this issue with fixed rate returns.   It was not that long ago when some industry experts recommended that preneed trusts use ‘book value’ or tax cost basis as the basis for allocations to individual accounts.  The simplicity of this approach would be that the trust could use its tax accounting platform for ‘market value’ allocations.   That approach was defendable with preneed trusts invested exclusively in fixed income securities held to maturity.  The last decade has been particularly brutal to preneed trusts that stayed their course with an investment policy that relied exclusively on interest income.   As trusts have revised their investment policies to incorporate diversification into equity holdings, the trustee must have administration that makes periodic allocations of actual market value.

Trust Administrative Hurdles: Tax Allocations

Posted in Administration, Compliance, Taxes, Uncategorized

A few weeks ago, we discussed the need to offer to consumers new preneed funding options, and outlined the various administrative hurdles faced by funeral homes that rely upon trust funding. (Preneed Trust Options: Administrative Limitations) With this post, we will examine how the non-guaranteed option impacts tax allocations and makes spreadsheet administration impractical.

In response to the need for funding options, an increasing number of funeral homes are exploring a combination of non-guaranteed contracts and guaranteed contracts that include a surcharge for price protections.  The non-guaranteed contract is necessary for the consumer that could not afford a preneed contract even before the surcharge was added.  The non-guaranteed option gives the consumer with limited finances the ability to establish a fund that may someday be converted to a guaranteed arrangement.  However, until that day, the fund will more closely resemble a savings plan (search this blog for “MyPA”).  Once the MyPA is included in the preneed program, both the funeral home and the trustee must give consideration to how income and expenses are allocated to individual trust accounts.

In our post, Qualified Funeral Trusts – once a simple concept, we discuss how investment diversifications have made tax allocations and the preparation of the Form 1041QFT more difficult.  To simplify the allocations of income and expenses, tax administrators often base allocations on the year end balances of individual accounts.   That allocation approach does not comply with Notice 98-66, where the IRS provided the industry a quarterly allocation method that avoided the burdens of monthly allocations.  While the IRS has had little reason to challenge the trust’s tax return when it was invested in fixed income securities, that approach becomes suspect when non-guaranteed contracts are added to the preneed trust.   With the non-guaranteed contract, the consumer bears both investment risk and the trust’s tax consequences.

When yearend account balances are used for tax allocations, a consumer purchasing a non-guaranteed contract on December 30th would be allocated income and expense as though he/she had been in the trust since January 1st, the same as the consumer that actually purchased a non-guaranteed contract on January 1st.   State regulators will ask how two contracts purchased almost a year apart have the same income.  Most trusts will be dominated by guaranteed contracts, which mean that the majority of serviced accounts will also be guaranteed.  If those contracts are omitted by the tax administrator, the active non-guaranteed accounts will bear a portion of the tax liability of the serviced accounts.

If a funeral home is considering whether to offer both term guaranteed contracts and non-guaranteed contracts, periodic allocations of income and expenses could eventually become a requirement.   Tax preparers and funeral homes will have to go beyond the current practice of making allocations based on year end account balances.

Father Knows Best: the Cassity Clan

Posted in Uncategorized

The remaining members of the Cassity clan have filed motions in opposition to the dismissal of Doug Cassity from the NPS civil lawsuit.  Rhonda Cassity and Tyler Cassity argue that they too are the victims of Doug’s scheming and fraudulent conduct, and that good ole’ Dad should be compelled to testify, and held accountable.

The plan to shelter assets under other family members has shown its ugly side.

Establishing a Red Flag System: Massachusetts Preneed Oversight

Posted in Uncategorized

The Massachusetts Division of Professional Licensure and the state Board of Registration of Funeral Directors and Embalmers are taking flak over the one and half million dollars of preneed funds that may been diverted by the owner of the defunct Ryder Funeral Home in South Hadley.  The Daily Hampshire Gazette reported that 200 Massachusetts funeral homes are late in filing their annual preneed reports and the newspaper is pressuring state regulators to explain how some funeral homes, such as the Ryder Funeral Home, were allowed to go years without filing a report.

Massachusetts death care regulators are not alone in the quest to obtain prompt preneed reports from funeral homes and cemeteries.  This issue was highlighted by Nebraska’s Department of Insurance when preneed legislation was discussed with the industry last year.  The Illinois Comptroller implemented a new fine system with the annual report form released last month.  A few years ago, Missouri’s State Board of Funeral Directors and Embalmers began suspending sellers’ licenses when their paperwork was not timely submitted.  But with limited staff and resources, how is a regulator to distinguish the tardy licensee from the funeral home or cemetery that is diverting preneed funds to their operating account?  As a representative of the Massachusetts State Board points out, there is no way to distinguish tardy guys from bad guys if so many operators are late to file.  So, the first course of action for that State Board was to request administrative complaints filed against all tardy filers.   But, will this provide regulators the information they need to red flag operators that may be diverting preneed funds?

Another member of the Massachusetts State Board described the preneed reports as useless, and recommended that preneed funds be kept out of the funeral director’s hands by requiring preneed payments be made with checks made payable to insurance companies or guaranteed trusts.

Missouri sought to implement a similar approach with regard to trust funded contracts, but the requirement met strong opposition from operators that provide primary accounting of contract payments.  Most corporate trustees do not have the administration required for installment payments or consumer payments that must be split among contracts and charges.  Nor did funeral operators want to bear the cost for banks to develop such administration.  Use of a clearing account dedicated to the operator’s preneed sales could remedy this problem.  Dictating the format of deposit transmittals to the clearing account, reports of the division of the payments, and resulting transmittal of trust deposits would provide inspectors an audit trail from the consumer’s hand to the preneed trust.  But, such reports may be difficult to understand if they are not produced monthly or quarterly.  While the Board’s staff may not have the time to review each quarterly clearing account report, the timely production of the reports would signal the operator is at least making timely deposits to the trust.

But, only the consumer may know whether all deposits have been made to his or her trust.  Consequently, the Massachusetts State Board may want to expand its preneed requirements to include an annual consumer statement similar to that required by Illinois. Each year, Illinois preneed trustees must produce a consumer statement that advises the contract purchaser the deposits and withdrawals that have been made to their preneed account.  The statement must also disclose the fees and taxes paid from the account, and its market value.  In theory, the consumer statement will trigger inquiries if the trustee fails to report a contract sold, or reports lower trust deposits than what the purchaser could expect.   The concept has merit for state death care regulators that lack the resources to turn every page of a funeral home’s preneed records.    Until a contract goes paid in full or lapses for failure of payments, the trustee could produce an annual consumer statement that would be mailed to the consumer, and made available at the funeral home where the contract was purchased.  The regulator’s website could advise consumers to expect a statement from the trustee, and to visit their funeral homes if the statement causes any questions.  If funeral director’s explanation does not add up, then an inquiry should be made to the state board.  That inquiry would create the red flag that would prompt the examiner to review the periodic reports filed on behalf of the funeral home.

Taking Liberties with the Law: Where is my due process?

Posted in NPS/Lincoln, Uncategorized

Better to remain silent and be thought a fool than to speak out and remove all doubt.
Abraham Lincoln

Pleading by pleading, the Cassitys are speaking out against injustice.  Brent Cassity followed his father’s lead, and filed a motion to dismiss from the civil lawsuit against NPS’ former management and trustees.  The younger Cassity made a hodge podge of legal arguments better suited to a death row inmate. As if the Cassitys’ actions haven’t already cost the public enough, Brent has requested the court appoint a qualified attorney to represent his interests.  Otherwise, “basic fairness and due process” should dictate that Brent be dismissed from the SDR’s lawsuit.

The lawyers at Reilly Ponzer have to be chuckling.