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

Rising Interest Rates: A Return to the Good Ole Days?

Posted in Investments, Master Trusts, Trust Funded

For Fed watchers, last week’s announcement signaled a subtle warning that interest rates will likely begin rising by the Summer of 2015.  Since September of 2012, Federal Reserve statements have warned that interest rates would remain unchanged for “a considerable time” after the nation’s economic recovery strengthened.  The reference to “a considerable time” was dropped from this past week’s Fed statement and an LA Times article examines the history of Fed statements when rate hikes were last implemented ten years ago.

The Fed used the phrase “considerable period” in August 2003 to signal its intent to maintain the then current rates into the foreseeable future.  By the time the Fed dropped that phrase from its statements in 2004, four years had passed since the last interest rate hike.  The rate hike came five months after the phrase was dropped from the Fed’s policy statements.

The article suggests that if the Fed follows the course taken ten years ago, the first rate hike may occur next June, and incremental increases of 25 basis points will be implemented until the historic rate of 3.75% is reached at the end of 2017.  While a 3.75% rate would be a welcomed sight for preneed trusts, it may not be enough to offset the rate at which the cost to perform contracts has risen.  And in the meantime, the incremental interest rate hikes will erode the value of long term bonds issued since 2008.  New trusts, or trusts which were forced to ‘start over’ subsequent to 2008, will be the most vulnerable to market value erosion.

When Missouri re-wrote its preneed law in 2009, drastic changes to trusting requirements caused many funeral homes to establish new trusts.  For IFDA members who left their master trust, those trusts were liquidated before transfer.   To the extent these trusts sought investment return without assuming any equity risks, long term bonds were their only course of action.

Funeral homes with preneed funds parked in long term bonds need to pay heed to the subtle warning given by the Fed.  Your preneed portfolio be vulnerable to market value losses as the Fed implements incremental rate hikes.  So long as the rate hikes are incremental, trusts will have time to adjust their investment policies to minimize or avoid market value erosion.

Preneed Trust: Is it the Consumer’s Funds?

Posted in Fiduciary, Missouri - SB1, NPS/Lincoln, Uncategorized

Attorneys are currently arguing this issue before a Federal court in St. Louis.  While the NPS civil trial does not begin for another six weeks, both the SDR and the defendant trustees want to resolve the question of who is a beneficiary of a preneed trust under Missouri law.  The SDR is arguing that all parties to a preneed contract are beneficiaries to a preneed trust.  The defendant trustees are arguing that the preneed seller is the sole beneficiary of the preneed trust.

The SDR’s brief puts forward several arguments that including the position that the preneed seller is a contingent beneficiary of the trust until performance of the contract.  Until performance of the contract, the contract purchaser has a beneficial interest in the trust.  In support of that position, the brief cites tax rulings and other state laws.  This logic will ring true with many Missouri funeral directors who have expressed a similar view: It’s the family’s money until I perform the contract.

But by the time the Missouri Funeral Directors Association sponsored the bill that rewrote Chapter 436 in 1982, the Securities Exchange Commission had issued No Action Letters to several state funeral director associations defining the preneed contract purchaser as a consumer, not an investor.  The 1982 Missouri law was also unique in that it distinguished preneed sellers and preneed providers, and authorized the preneed seller to become the primary obligor of the preneed contract even though it did not own a funeral home.  As primary obligor, the seller could then control the trust relationship.  That legal structure could better isolate the funeral homes from preneed liabilities.   It also isolated the trustee from the demands of the funeral homes.

The arguments being made in opposition of the SDR position are reminiscent of those made by the industry to the IRS in the 1980’s.  The IRS brushed aside state preneed laws in promulgating Revenue Ruling 87-127, and its conclusion that the preneed contract purchaser is a beneficiary of the trust.  If the Federal court accepts the SDR’s argument, preneed trustees face a dilemma similar to that resulting from Rev. Rule 87-127: how to discharge a duty to individuals with whom you have no direct contact.

Testimony Guidelines for the NPS Experts

Posted in NPS/Lincoln

In August, litigants to the NPS civil trial were required to file expert opinion reports with the court.  Initially, there were essentially 8 defendant banks, and most had retained one or more experts to testify at trial.  As a consequence, a plethora of expert reports were filed with the court.  Many of the experts offered opinions on what Missouri’s preneed law did or did not require. Over the past few months, the NPS Special Deputy Receiver has reached settlement agreements with all but two of the Missouri defendant fiduciary banks, and in an order issued two weeks ago, the court identified those experts who will be allowed to testify.  The order also set the areas of testimony that will, and will not, be allowed.  The following are the areas of testimony that will not be allowed:

1. Whether the actions of the Missouri Trustees, or anyone else, complied with Chapter 436;

2. Interpretations of Chapter 436;

3. Interpretations of the governing trust agreements;

4. Requirements of Chapter 436;

5. Duties imposed by Chapter 436;

6. Actions of a Missouri State Court;

7. Trustees’ liability for the actions of the grantor;

8. Whether trustees lack authority and capability to oversee external business activities of trust grantors or beneficiaries;

9. Trustees’ responsibilities or liability for investment decisions;

10. Duties and Responsibilities of the Independent Investment Advisor;

11. Interpretation of the meaning of “independent” in Chapter 436;

12. Whether applicable statutes require independence from seller or trustee, or both;

13. Prevailing trust customs and practices supersede Missouri law;

14. The appointment of Wulf Bates relieved the trustees completely of all liability for investment decisions;

15. The trustees could not monitor investment decisions of the investment advisor.

Testimony regarding the following will be allowed:

1. Purpose of Chapter 436;

2. Reference the trust agreements and applicable statutes;

3. Purpose of a standard of care;

4. What trustees generally understand their responsibilities to be and their fiduciary duties but not what a specific trustee understood as their duties and responsibilities;

5. What the expert believes the purpose of the trust agreement and the statute were designed to achieve;

6. What the expert currently advises clients to do or not to do;

7. The responsibilities of trustees, in the practice of the expert;

8. Opinions as to independence of David Wulf;

9. Observations of what trustees did or did not do;

10. Whether trustees complied or did not comply with the standard of care;

11. Reference sections in the law and state if evidence was or was not presented to show the acts were done but cannot say the law requires certain actions;

12. How trustees did or did not control trust assets, keep records, or monitor trust distributions but not what the statute requires.

Francis Hanna, a name familiar to Missouri attorneys that practice in trust law, will be one of the experts to testify at the NPS civil trial.  Mr. Hanna’s expert report assumed an approach that seems consistent with the court’s testimony guidelines, and in future posts we will examine the trustee duties as outlined by the report.

A Legacy of Disgrace: the NPS Management Team

Posted in NPS/Lincoln, Uncategorized

Randall K. Sutton, former President and CEO of National Prearranged Services, died in prison on December 8th.    Accordingly to pleadings filed in the NPS criminal and civil lawsuits, Mr. Sutton played a central role in the company’s operations.  Another pivotal player in the Cassity schemes, Howard Wittner, was recently released from Federal prison so that he may live his remaining days at home.  According to the order for early release, the NPS/Cassity attorney, Mr. Wittner only has months to live.

Preneed Shortfalls: Installment Payments

Posted in Funeral Home Business Practices, Preneed Shortfalls

In prior posts, we discussed the impact that investment return and performance cost increases have on preneed shortfalls.  In this post we will look at how installment payment options impact the funeral and cemetery operator.

Many funeral homes do not offer installment payment options because those monthly payments cut directly into the trust earnings that must offset performance cost increases.  Using the average funeral cost ($6,623) determined by the Funeral Consumer Alliance of Kansas City, that same funeral will cost $9,803 in 2024 if the same rate of increase (4%) continues for ten years.  Depending upon how long a funeral home allows for installment payments, a trust earning a net return of 2% will cause the funeral home to experience a shortfall of between $1,900 and $2,250.  Click this hyperlink to see how a spreadsheet analysis of the impact of installment payments.

Right of Sepulcher: An Attorney’s Error

Posted in Power of Attorney, Right of Sepulcher, Transition Documents

Betty Jean Collins had her own preferences for the disposition of her body, but her children had other plans.  As counsel to many funeral homes, I have seen this situation too many times.  The time that should be used for remembrance and healing, is instead marked by conflict and expense.  A right of sepulcher designation provides a way to avoid such conflicts, but Betty’s attorney made a mistake with the procedures allowed by Missouri law.  In an appeals court opinion issued last year, the Missouri court discusses Betty’s attempt to designate her right of sepulcher through a ‘springing’ durable power of attorney for health care.  The ‘springing’ durable power of attorney would go into effect when one physician determined that Betty was incapacitated.  Betty executed the durable power of attorney on June 12, 2012.  Four days later, Betty died instantly in an automobile accident.  A dispute subsequently arose between Betty’s children and the friend designated with the right of sepulcher.  A year later, the court determined Betty’s durable power of attorney never ‘sprung’ into life because there had never been a determination of incapacity.  As a consequence, Betty’s preferences were not followed, the emotional healing process was delayed a year, and all involved incurred significant expense.

Exploiting the Gaps In Chapter 436: NPS’ take on a preneed law

Posted in NPS/Lincoln, Uncategorized

Over a three day span beginning December 17th, a Federal court in St. Louis will hear legal arguments from the NPS special deputy receiver and from banks that served as NPS trustees at some point during the past 30 some years.  Initial legal briefs have been filed, and response briefs will be filed.  The arguments concern the interpretation of Missouri’s preneed law, Chapter 436, and the duties that the banks owed to NPS, consumers, funeral homes that were providers of NPS contracts, and funeral homes that were sellers of contracts rolled over to NPS.  Doug Cassity, once an attorney, has offered his own interpretations of Chapter 436 and the duties owed by trustees.

In a habeas corpus motion filed October 21st, Mr. Cassity argued that NPS could withdraw from trust all funds in excess of the face value of life insurance held by the trustee.  Three days later, Mr. Cassity filed a response pleading that argued Chapter 436 did not require the trusting of 80% of the consumer’s payments.  Mr. Cassity’s arguments demonstrate how NPS exploited ambiguities and gaps in three key provisions of Chapter 436.

Section 436.027 authorized a preneed seller to retain the consumer’s payments until 20% of the sales price had been received.  The NPS argument is that this section did not go on to state that the consumer’s next payments had to be deposited to trust.  If the drafters wanted consumer payments to be deposited to trust within a certain number of days, they would have said so.

Section 436.031.3 authorized the seller to withdraw income from the trust so long as the trust’s market value was not reduced below the trust’s aggregate deposits.   The law doesn’t provide a definition of market value, and NPS claimed that the policy’s death benefit was the account’s market value, and all funds received from the consumer were income.

Section 436.045 authorized the trustee to distribute an account’s deposits to the seller when the funeral provider provided notice of receipt of payment from the seller.  According to Mr. Cassity, when an insurance policy was purchased for a preneed account, NPS had satisfied its liability requirements and could withdraw the account’s funds from trust.   Chapter 436 did not contemplate insurance, and consequently did not distinguish paid in full policies from installment policies, or whole life insurance from term life.

Rules of statutory construction dictate that individual sections of a law be interpreted to give a consistent meaning to the law as a whole.  The intent of Senate Bill No. 644 was to allow the seller to retain up to 20% of the consumer payments, and then trust all subsequent payments until the contract was either performed or canceled.  In the case of a third party seller, the trust distribution was to be made in the form of a reimbursement.  Overall, it was an awkward mechanism that required the seller to ‘go out of pocket’ to pay a funeral home provider, and then seek payment from the trust.

Depending on the rulings that come out of the December hearings, banks will be asked at trial how they administered their NPS trusts in compliance with these three Missouri statutes.   Bremen Bank, the small bank serving as trustee when NPS converted the whole life policies to term insurance, has settled with the SDR rather than defend its conduct.

Preneed Shortfalls: Performance Cost Increases

Posted in Power of Attorney

In our prior post we discussed two factors to preneed shortfalls: investment returns and the operator’s performance cost increases.  The Funeral Consumer Alliance of Greater Kansas City conducts an annual survey of the region’s funeral homes to track the price increases on their General Price Lists.  A couple days after our post, the Kansas City Star published a story on the FCA’s survey.  According to the survey, funeral prices rose at 4%, while cremation service prices rose about 3.6%.  The survey found the average cost of a funeral in the Kansas City region is $6,623.  If funeral costs were to continue to rise at that same 4% rate, the average funeral cost in 2024 will be about $9,800 (which does not include the costs of a grave space, marker and interment service).

One insurance company marketing against preneed shortfalls offers two bump options of 9% and 16%.   These ‘bumps’ are a percentage of the current General Price List costs.  So for an average funeral in Kansas City, the bump options would be $596 or $1,060.  This particular insurance company advertises a policy annual increase of 1.8%.  Using the higher bump, the life insurance death benefit in 2024 would be $9,184.  Under these assumptions, the Kansas City funeral home would still have a shortfall of  about $600.  The funeral home would have to charge a bump of 24% (or $1,590) in order to avoid a shortfall on an insurance policy paying 1.8%.  The consumer would be required to pay $8,213 for that average funeral of $6,623.

The Factors Contributing to Preneed Shortfalls: Investment Return and Operator’s Performance Costs

Posted in Guaranteed, Insurance Funded, Non-guaranteed, Preneed, Preplanning, Trust Funded, Uncategorized

When the Federal Reserve recently announced the end of the quantitative easing program, it did so with a hint that any increase in interest rates could be a considerable time off.  Several global factors may now cause interest rates to remain at unprecedented lows for longer than what the Fed had suggested last December.  As we’ve discussed in a previous post, interest rates have now been below preneed performance cost increases for more than 10 years.  The continuation of that circumstance will fuel industry discussion of preneed shortfalls, non-guaranteed contracts and/or guaranteed contracts that include a price protection “bump”.   In examining whether to sell (or purchase) a preneed contract with a price protection bump, operators and consumers need an understanding of the factors that contribute to preneed shortfalls:

Five Factors That Lead to Preneed Shortfalls

  1. a)      Investment Return
  2. b)      Operator’s Performance Cost Increases
  3. c)      Duration of the Preneed Contract
  4. d)     Duration of Installment Payments
  5. e)      Sales Expense/Commission Retained

In the most basic of terms, the investment return must exceed future costs to perform if the preneed transaction to be profitable for the funeral home.  While performance cost increases will vary from funeral home to funeral home (except for consolidator owned establishments), it is safe to assume most operators are experiencing cost increases in excess of 2%, a rate which trusts and insurance are struggling to provide.  For purposes of demonstrating the preneed shortfall, assume a preneed contract is paid with a single premium, the investment funding provides a steady net 2%, and the contract beneficiary lives ten years.  Depending upon the funeral home’s individual performance cost increase, the preneed shortfall could be between $460 and $1960, or more.

We will look at the other factors in more detail in future posts, but the funeral home’s preneed shortfall will be greater if the purchase price is paid in installments, or the contract beneficiary lives longer than 10 years, or a portion of the sales price was retained as sales expense in a trust funded arrangement.

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.