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

The Internet has provided consumer advocates a valuable platform for educating the public with ‘how to’ death care information. But, for the most part, that ‘how to’ information has been confined to the funeral half of the equation. A recent Mother Earth News article provided a detailed description of the issues faced by the author when attempting to arrange a private burial. The issue resurfaced for this author twice during the past few weeks. The most recent situation involved a funeral director attempting to accommodate a family that sought to bury a family member on their own land.

While there may be various state laws that impact the private burial, the most restrictive laws tend to be local in nature. The Mother Earth News article suggests that a private burial will be easier to accommodate in a rural area than a town or city. The realities are that private burials within any municipality will be difficult, if not impossible. City ordinances or codes often prohibit the burial of dead without a special use permit. Obtaining one often requires zoning approvals, which can be very expensive. The smallest cemetery for which I obtained such approval was for a prominent community leader and his wife. The fact this client owned the community’s beloved sports franchise no doubt helped in the zoning commission’s decision to grant the requisite permit.

Websites such as eHow provide an overly simplified explanation for starting a family cemetery. As websites from England suggest, a family must consider the impact of a private burial on the future use and transfer of their property. When future family members have more pressing needs for that property, a private burial may not be the final resting ground that was intended. Such was the fate for my smallest cemetery client.
 

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For some Missouri funeral homes, the ‘disagreement’ over the Section 436.405.1.(8) and insurance assignments has been brought to their doorstep.  In January, the State Board and their staff debated the issue of whether insurance assignments and beneficiary designations made in favor of a funeral home should constitute a preneed contract. The State Board rejected the staff’s interpretation of the fore mentioned section, and now the auditors seem to be pressing that disagreement to the Missouri’s funeral homes by way of the Chapter 436 financial examination.

This blog went on record in opposition to the staff’s regulation proposal as too broad, but there is also a need to go on record for the need for better consumer protection in these transactions.

When an assignment of insurance (or the designation of beneficiary) is made, it is done so in anticipation that the funeral home will apply the death benefits to the insured’s funeral arrangement. But have there been any promises about the prices or the right of the insured’s family to use another funeral home?  Such issues should be set out in an agreement between the funeral home and the insured so that the insured’s family is not left to guess. 

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In relation to many of its peers, Springfield’s Oak Ridge Cemetery could be labeled progressive. Oak Ridge maintains both an endowed care trust and a preneed trust. In contrast, a substantial number of the country’s cemeteries have neither. The fact that Oak Ridge Cemetery is owned and operated by the City of Springfield, Illinois, makes the cemetery even more remarkable. Few municipal cemeteries have such funds, and instead, must be subsidized by taxpayers for operating funds. Despite the foresight of Oak Ridge’s board of directors, the cemetery has had to resort to “netting” the past few years to make ends meet. They have done so to the tune of almost a million dollars, and Springfield’s Mayor is being advised that drastic action is necessary.

The Mayor’s attorney blames Oak Ridge’s board of directors for bad investments and netting deposits, and recommends that the control of the cemetery be changed. With the increase in cremations (and the decline in burials), the Oak Ridge board failed to adapt, and instead, spent the funds that should have been contributed to the trusts. To make up for the decline in trust contributions, the board took more risks with trust investments, which exposed the trusts to the market declines of 2008. The combination of netting consumer payments and investment declines put Oak Ridge in a deep hole. And now, the Mayor’s attorney thinks it’s time for a change in management, and for the cemetery to start living within its means. Sounds like sage advice, but it’s not very practical.

Turning Oak Ridge over to the city’s park and recreational department will only ensure a decline in the cemetery’s operations. While the cemetery’s board may be guilty of staying with their old business plan too long, those individuals are more familiar with the operation of a cemetery than those city employees who oversee Springfield’s parks.

Regarding ‘bad’ investments, the Mayor’s attorney suggests the cemetery board should have stayed conservative. The problem with that advice is that the 2008 market crash hit mortgage-backed securities the hardest, which happens to be the ‘bread and butter’ of most cemetery trust funds. The fact is that most cemetery trusts may be too heavily invested in fixed income, and the need is to diversify their investments (as opposed to ‘going conservative’). (In that the Mayor’s attorney is the same individual who defended the IFDA master trust’s investment in key man insurance, this criticism rings a little hollow.)

While Springfield needs to make the Oak Ridge board more accountable, those members should be given the opportunity to develop a new business plan for the cemetery. The decline in traditional burials is inevitable, and cemeteries must plan accordingly. While the costs of the traditional funeral and burial are a leading factor to the rise in cremations, cemeteries need to evaluate the prices charged for their interment rights and services. They also need to evaluate the need for marketing. One such opportunity is to market to the consumer who has already chosen cremation. Another opportunity is to form marketing alliances with funeral homes.

Or, the Mayor could pull in the reigns and allow the taxpayer to foot the bill.
 

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Mortuary Management recently ran a short editorial criticizing cemeteries, stating “we can only conclude that cemeteries will, in the long run, be the losers”, and “it may be time for a reevaluation of standards and staunch principles of the past”. The editorial is nothing more than a handful of comments from anonymous funeral directors about interment charges, and a vague criticism of cemeteries. However, the quotes are representative of the friction that frequently exists between the funeral home and the cemetery that maintain an adversarial relationship while seeking to serve the same families. All too often, families get caught in the middle of that competition, and in the long run, everyone loses.

The funeral home often has the initial contact with the family, and it is natural that the funeral director will attempt to provide as much of the final arrangement as possible. The family often leaves the funeral home believing that everything has been taken care of. But as the quotes from the editorial indicate, the cemetery will charge the family for opening and closing the burial space. There may also be cemetery charges for weekend interments, the rental of a tent, vault installation charges, second interment rights and memorial installation charges.

The editorial seems to suggest that cemeteries are solely to blame when families are surprised by such charges. In that cemeteries are not subject to the General Price List disclosure requirements of the FTC’s Funeral Rule, funeral directors may not have access to information about what the cemetery charges. The same may be true for monument dealers who need to know about marker restrictions, setting fees and care charges. Unfortunately, some cemeteries view lot owners as their customers, and do attempt to keep the funeral director and monument dealer “in the dark”. If the intent of the editorial was to call out this practice, then the criticism is appropriate.

However, many cemeteries do publish their services, restrictions and fee requirements. The funeral director has no duty to ensure that the family understands all of the cemetery’s services and charges, but he/she does a disservice to the family when omitting that information from the arrangement meeting, and then subsequently assigning blame to the cemetery.

As the editorial suggests, the funeral home and the cemetery are going to experience a decline in their traditional services. It is time for both to reevaluate the “standards and staunch principles” established by their competition. The funeral home and cemetery under common ownership has an economic advantage over its independent competitors. The ‘combo’ operator can package funeral and burial selections to provide the consumer a more competitive price, and better ensure the consumer understands the cemetery requirements.
 

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In a recent article, Bruce Ruston provides a detailed account of the drama behind the IFDA master trust and its divesture of the key man insurance policies. It is a long, costly story about an organization that pushed the legal envelop in several directions with disastrous results: a master trust without a corporate trustee, insurance investments to avoid Rev. Rul. 87-127, fixed returns, high administration fees, and the stubborn defense of a twenty year mistake. The Rushton article is appropriately critical of the IFDA’s legal counsel. But, to better evaluate that criticism, consideration should be given to those facts reported in the various lawsuits and the Secretary of State’s Consent Order that reflect an organization ran by an iron-fisted executive.

That evaluation should start with Robert Ninker’s 1985 decision to reach out to a young, newly licensed insurance salesman. By 1985, there were ample signs that the IRS was building its case for the taxation of preneed trusts. Mr. Ninker cannot be faulted for making life insurance the preferred alternative because it eliminated income reporting to consumers. Many trusts did not have the consumers’ social security numbers and couldn’t report income if they wanted to. So, insurance was proved a means to avoid the reporting problem. But, Mr. Ninker’s decision to turn to Ed Schainker, an insurance salesman with two year’s experience should have caused the association’s attorneys to raise questions.

Mr. Schainker did what salesmen do, he looked through available products, picked one with a high commission and put together the proposal. The proposal not only skirted the Illinois preneed law requiring preneed purchaser approval, it failed to satisfy the requirements of an insurance policy (ie that the master trust have an insurable interest in the ‘insured’ funeral directors). With such obvious problems, why didn’t the IFDA attorneys apply the brakes to the proposal?

Fast forward ten years, and the IFDA lawyers had cause to remind the client in writing of the firm’s concerns about the authority to act as trustee, and to suggest that the association resign. At that point in time, Mr. Ninker was still the boss. Okay, clients do, from time to time, reject their attorney’s advice.

Fast forward another twelve years, and, Mr. Ninker has retired and the Comptroller has finally forced the association’s hand on the trustee issue. With the IFDA attorney in Mr. Ninker’s chair, the association went to Regions Bank, a leading name among death care fiduciaries, for a proposal. That proposal put the key man insurance issue squarely in the attorney’s lap, and rather than acknowledge a twenty-year mistake, the attorney challenged Regions. In the end, there was no client to hide behind.

The decision to defend the investment “to the end” suggests the law firm may have been ‘in over its head’ from the start.
 

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Every funeral home and cemetery feels the pain of this economy, but that pain runs deeper for Missouri and Illinois funeral directors. Per capita, Missouri funeral homes bore the greater brunt of the NPS collapse. In the same year NPS collapsed, the IFDA master trust was forced to divest its key man insurance policies and force substantial losses on preneed accounts. While both states’ funeral directors were angered by the losses, Illinois funeral directors have been faster to accept some of the responsibility for their preneed failure, and to work towards change. Recent comments of MFDEA representatives reflect an association in denial, and on the path of further alienation.

In February, the Missouri funeral association held a legislative day that called for members to blitz state legislators on three bills: SB767, HB1769 and HB1770. When the Missouri cemetery association voiced opposition to SB767, that bill’s sponsor sought input from the State Board of Embalmers and Funeral Directors. The State Board called a meeting to discuss the three bills.

 With regard to each Bill, the funeral association was afforded the opportunity to explain the bill and their intent for the legislation. With regard to the two House bills, the association stated its intent was to elevate the professionalism of the industry. Really?

One of the bills, HB1770, proposes to prohibit preneed sales by any person other than a licensed funeral director. One association representative offered to the State Board that if preneed sales had been restricted in such a nature years ago, the industry would not have suffered through the National Prearranged Services collapse. Such reasoning requires everyone to turn a blind eye to the fact that NPS’ demise was accelerated by a program that was sold by licensed funeral directors. NPS maintained two separate sales programs, and the one sold by funeral directors made promises that were too good to be true.

The association’s twisted logic is further magnified by HB1769. Through this bill, the association supports a new two-year degree/certificate requirement for funeral directors that would eliminate the current apprenticeship program. To make the education requirement more palatable, current licensees will be exempted. Absent from the bill (and any other association proposal) is a requirement for continuing education. So, the association sees a need to educate the state’s future funeral directors, but no need to educate those funeral directors who sold NPS preneed contracts.

When the three bills were met with criticism and opposition at the State Board meeting, association representatives (and supporting Board members) became defensive and accusatory by admonishing the opposition for blocking education needed so badly by the industry. In reality, the bills were opposed because they are protectionist in nature, and poorly written. When the association had ‘floated’ these issues at prior Board meetings, they were met with many of the same criticisms. Such actions only serve to erode the association’s credibility and effectiveness.

In contrast, the recent successes of the IFDA can be attributed to industry representatives who became involved in the association, put aside their differences, and searched for common ground. Through that approach and hard work, the IFDA is earning back credibility with the industry, regulators and legislators.
 

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For the past three and half years, many Illinois funeral homes teetered on the brink of financial crisis when the IFDA master trust was forced to write down the value of preneed accounts invested in a special tax exempt fund. As reported last week by the NFDA’s Memorial Business Journal*, the “new” IFDA has negotiated settlements that could restore a significant portion of the write down of the tax-exempt fund. Credit is due to those funeral directors who made a commitment to change the leadership at the association.

The settlement of a class action suit must be approved before funds can be distributed. A hearing on the settlement has been scheduled for June 12th.

The larger of the two settlement funds will be distributed pursuant to Paragraph 4 of the Consent Order (page 13) approved by Illinois Secretary of State. The Consent Order defines “Eligible Pre-Need Contracts” as a contract that was not only subject to the value write-down, but also outstanding as of July 31, 2010. This definition will exclude preneed contracts that were written down in value, but serviced prior to July 31, 2010. In contrast to the settlement administered last year by the Illinois Secretary of State, these settlements will be paid to the trustee instead of the funeral homes.

The terms of the class action lawsuit settlement agreement will govern how that fund is to be distributed.

*"Reprinted with permission from the February 23, 2012 issue of the Memorial Business Journal. To subscribe please call 609-815-8145."
 

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The Kansas Secretary of State’s office bore the brunt of the criticism for a Hutchinson cemetery that siphoned off hundreds of thousands of dollars from its trust funds. That office has the responsibility of auditing cemetery trust funds (preneed merchandise and care funds). But, poor record keeping on the part of the cemetery industry has made the auditor’s work difficult, if not impossible. Accordingly, the KSOS office implemented a new reporting system last year that requires cemetery corporations to file quarterly reports regarding their sales of preneed and interment rights. These new reports are intended to enable the office to more closely monitor the cemetery’s trusting requirements. This reporting mechanism has another requirement that went into effect on January 1st: corresponding reporting by the banks and trust companies that administer the cemetery’s trust funds.

House Bill No. 2240 amends the cemetery merchandise law and the permanent maintenance fund law to impose several reporting duties on the trustee. For each type of fund, the trustee must prepare quarterly reports on formats approved by the Secretary of State’s office. With regard to merchandise funds, the trustee must also report its allocation of income to the merchandise and services sold by the cemetery.

For many of those banks and trust companies serving as cemetery fiduciaries, these reporting requirements will come as a rude awakening. Few cemetery fiduciaries are aware that these accounts are subject to a separate set of Kansas laws. Consequently, these banks often price their services as a custodial relationship. Many will not want the fiduciary relationship and its new reporting requirements. With the first fiduciary reports due May 1st, the upcoming Memorial Day will be hectic for Kansas cemeteries for more than the usual reasons.

Click the following hyperlinks to view the HB 2240 sections on reporting: merchandise or permanent maintenance.
 

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The U.S. Government Accountability Office (GAO) released its latest report on the state of state regulation of the death care industry.  As it did in 2003, the GAO selected a handful of states to review in depth, and Illinois was one of those states for 2011 report.  The Illinois review is set out as Appendix IV of the GAO report, and paints a bleak picture of preneed oversight in the Land of Lincoln. 

The Illinois review advises that the Office of the Comptroller has 10 staff positions and 10 field audit positions to provide supervision of preneed and crematories.  While it is the Comptroller’s intent to audit each preneed seller at least once every five years, budget constraints have limited audits to those businesses with the most preneed.  Otherwise, the Comptroller will target sellers based on annual reports that either reflects ‘abnormal fluctuations’ or the lack of a corporate trustee. 

And when the Comptroller does find problems, her staff complains that the law provides them little power to address the situation.  The GAO was advised that the disciplinary process is extremely slow and costly.  That latter comment should raise some eyebrows in Illinois.  It was the Comptroller’s office (albeit a prior officeholder) that pushed through amendments to the Funeral or Burial Funds Act just a short two years ago, and now the staff claims the law has no teeth.

The Illinois review ends with the Comptroller’s office on the defense.  Industry representatives challenged whether the Comptroller’s 2010 legislation provided any additional protections.  The Comptroller responds that “there is no way to be sure if the changes to the laws would have prevented these kinds of incidents, but that there may have been the ability them earlier”.  (Obviously someone left out a few words, but they also failed to confer across the hall with that other someone who was more honest about the law’s lack of teeth.)

The review concludes with the statement “[F]urther, state regulators in Illinois stress the importance of consumer education and whistleblower protections to help prevent and detect future problems.”  If the Comptroller lacks funding and enforcement powers under the current law, who is fooling who?  Can additional legislation be too far away?

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