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

Conventions and seminars provide trade associations and trade journals important sources of revenue. Accordingly, the death care industry has plenty of ‘retreat opportunities’ to choose from. However, there will be a death care convention held in Montgomery Alabama this weekend that will be off limits to funeral directors, cemeterians and their legions of industry vendors.

Death care regulators have their own association, and its convention agenda includes several roundtable discussions. These roundtables provide a forum for administrators, agency directors, investigators, examiners, auditors, attorneys, compliance officers, and staff personnel. Regulators won’t freely admit it, but many do not understand the business practices of this industry and the convention may be one of the few opportunities they have to share information and ideas. But, ID will be required for admission because industry representatives are not allowed. (A sad reflection on the fact that regulators don’t feel they can quite trust some industry operators.) 

The exclusion of the industry from regulatory meetings should be a cause for anxiety to operators. With the preneed scandals that have occurred during the past few years, these same regulators are being forced to assume a greater role in preneed oversight.  In the next year or so, our Midwestern regulators will actually be reviewing those annual reports and then visiting to ask questions. If the regulator has some misconceptions about business practices, that tends to influence their interpretation of applicable law, which affects the direction of their inquiries. If misconceptions must be addressed operator by operator, the correction process will be slow and painful.  

Keeping the regulator ‘in the dark’ has been the historic strategy. Preneed oversight is on the rise, and it’s time to begin engaging your regulators and earning their trust.

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Missouri’s preneed seller renewal forms include reports regarding each contract that is funded either by a trust, a joint bank account or an insurance contract. What may not be apparent to both funeral homes and funding agents is the requirement under SB1 that the funding agent attest to the accuracy of the information set out in the seller’s report.

 While the report forms accurately track the provisions of SB1, some banks officers may balk when asked to provide their signature to the form.

Banks, whether they issue joint accounts or serve as a preneed trustee, are dependent upon the funeral home for accurate information regarding the preneed contracts reported to them. While the intent of the report is to obtain financial information regarding each contract, there will be a few bankers hesitant to sign for fear they are being asked to certify the completeness of the contracts reported, or the accuracy of data reported about the purchasers and beneficiaries.

 If a Missouri funeral home finds itself caught between a hesitant banker and the October 31st reporting deadline, it should make an inquiry to the State Board to determine if the certification can be revised to the following:

The undersigned, after being duly sworn, on his/her oath states: (1) I am over 21 years of age and am authorized on behalf of the financial institution set out above to attest to the information set out in this report; (2) the preneed contract information set out in columns 1 through 6 of this report has been provided by the seller identified above; and (3) the joint account information set out in columns 7 through 13 is complete and correct to the best of my knowledge.
 

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In August 2009, the members and staff of the Missouri State Board of Embalmers and Funeral Directors put in a lot of overtime to keep the preneed industry operating. Senate Bill 1 established brand new licensing requirements for preneed sellers. Without a license, a seller’s preneed contracts could be voided. However, the State Board lacked authority to issue a seller license until SB1 went into effect. With regard to August 28, 2009, the State Board faced the task of licensing hundreds of funeral homes, and responded by providing the industry an abbreviated process for obtaining the initial preneed seller’s license.

With the renewal of a seller’s license, the Missouri funeral home faces a much longer and detailed form (and process). The seller renewal form advises that the applicant may file their annual report upon receipt of the form. Realistically, the seller is precluded from filing the renewal and report until after September 1st. The annual report must include all contracts sold through August 31, 2010 (and beginning with August 28, 2009).

Depending upon how quickly its contracts are processed, the seller will have less than 60 days to work with trustees, banks and insurers to pull together the data and documents required by the renewal form. The failure to timely file the renewal form and report will cost the seller $200 and the authority to sell preneed until the license is renewed. Consequently, Missouri sellers would be best advised to begin working with their funding entities as soon as possible.
 

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License renewal packets mailed to Missouri funeral homes in August are a little thicker than what has been sent out in prior years. The new renewal forms include five new preneed reporting forms: a Preneed Seller Annual Report, a Preneed Provider Renewal Form, a Report form for Trust Funded Pre-Need Contracts, a Report form for Joint Account Funded Pre-Need Contracts, and a Report form for Insurance Funded Pre-Need Contracts.

The latter three reports are voluntary, self-reporting forms that the State Board ‘requests’ be filed by January 31, 2010. In future posts, this blog will address those forms and the motivation for complying with the State Board’s request.

As between the two renewal report forms, the shorter provider license renewal form may be the source of anxiety to some Missouri funeral directors. The instructions for Section E state:

List all preneed contracts that were in existence with a preneed provider as of August 27, 2009 pursuant to 436.053 RSMo, if any.

Missouri has a long history of third party preneed sales organizations, and Chapter 436 has always made a legal distinction between the seller and the provider. Over the course of the last twenty-eight years, the synonyms APS, NPS, FSP and MFT can be found on the majority of preneed contracts sold in the state of Missouri. Missouri funeral homes opted for third party sales organizations for various reasons, including the avoidance of accounting and recordkeeping issues. Accordingly, funeral directors who interpret the Section E instructions to require the reporting of their third party contracts have reason to be alarmed.

However, the instructions refer to Section 436.053 (of the ‘old Chapter 436’), which authorized funeral homes to use joint accounts to fund preneed contracts. This old provision allowed funeral homes to sell the joint account contract as a provider without registering as preneed seller. The intent of the report seems to be the reporting of joint account contracts written prior to the effective date of Senate Bill No. 1, and not the reporting of all contracts sold on behalf of the funeral home by a third party seller. This is bound to be one of the issues raised with the State Board of Embalmers and Funeral Directors when it meets during the second week of September.
 

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Families and funeral homes harmed by NPS will hope that company’s owners and officers have to face a judge like the Honorable Richard Rome.

The Hutchinson News reported that District Judge Richard Rome rejected a plea bargain for probation, and sentenced Fairlawn Burial Park’s owner to almost 5 years in prison. A Kansas Secretary of State audit of Fairlawn’s permanent maintenance trust and preneed merchandise trust found several hundreds of thousands of dollars missing. The owner’s attorney suggested the funds were used to keep the cemetery operating.

While prosecutors negotiated a deal to replenish the trusts, the judge disregarded the plea bargain and sentenced Ms. McDonough to prison. The message to operators is that if the cemetery needs funds for operations, don’t borrow them from the trusts.
 

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Almost a year to the date after SB1 was signed into law, one of the NPS sister companies was forced to close its doors. The recent Kansas City Star article about Mt. Washington Forever Funeral Home and Cemetery describes a situation that confused and disheartened the families who purchased Mt. Washington preneed contracts. The Missouri Attorney General’s subsequent press release offers little hope to the purchasers of preneed funeral contracts. While the press release offers some encouragement to preneed cemetery purchasers, those families also face the prospect of losing the funds paid to the cemetery.

Many consumers will lose some, or all, of the funds they paid Mt. Washington towards preneed contracts, and question why Missouri regulators did not act sooner. While operators and consumers both tend to view death care regulators as the ‘cops’, these state agencies lack both the authority or budget to summarily close businesses that break the law.

Within the next few weeks, both the Office of Endowed Care Cemeteries and the State Board of Embalmers and Funeral Directors will release to their respective industries new reporting requirements. Similar to reporting requirements imposed in Nebraska and Iowa, the Missouri regulators will begin seeking individual contract data from operators, and confirming data from preneed fiduciaries. These new reporting requirements will allow the regulators to begin identifying other potential Mt. Washingtons. But, regulators alone cannot protect every consumer. In the case of Mt. Washington, consumers have complained they were caught completely off guard by the closure.

If operator compliance reports were made available to the public, consumers could also assume a role in policing the preneed industry. In this vein, the OECC has expressed an interest in using the reporting requirements to form a grading system for operators’ compliance with state law requirements.

Such systems already exist in other states, Texas for one. Using a system that ranges from 1 (the highest level of compliance) to 5 (the lowest level of compliance), the operator is graded routinely on a number of issues. Such a system must be fair and equitable, and provide operators the opportunity to address issues. But once the process has been completed, the grades are then made public. Consumers are then able to access an operator’s audit report and grade to assess how safe the operator’s preneed funds are.

Rather than rely wholly upon the regulator, consumers must make inquiries before signing the contract and writing the check. If regulators do not make information available to the public, then consumers should begin asking their funeral home or cemetery whether certain types of information is available, and if so, can copies be provided:

• A copy of the death care operator’s current audit/examination report
• A summary of the annual report filed with the state regulator
• A summary of the current trustee report or insurance statement
• A contact name and email address with whom inquiries can be made of the preneed fiduciary or insurance carrier.

The Missouri Attorney General has advised Mt. Washington consumers to contact the AG’s office to file a complaint. Mt. Washington consumers also need to make inquiries to the Missouri funeral home regulator and/or the Missouri cemetery regulator.
 

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While the reasons are open to debate, it is common knowledge within the funeral industry that a small percentage of consumers cancel their preneed contracts. Consequently, some funeral directors tend to view their preneed block of business with a degree of certainty. Performance of the contracts, and recognition of the revenues, seems to be just a matter of timing. A few state laws reflect the perception that performance of the preneed contract is a ‘lock’. For 37 years, Missouri law allowed preneed sellers to withdraw trust income. Nevada’s law has similar provisions. Preneed trust income became a source of funds that could subsidize funeral home operations.

While the preneed subsidy had long been a source of frustration for certain Missouri officials, they were powerless to stop the practice until the failure of National Prearranged Services. With the 2009 passage of Senate Bill No.1, Missouri officials feel they have a law that they can use to force a new business model upon the funeral industry.

In the case of the California Master Trust, the Department of Consumer Affairs has taken a similar position with regard to an administrative fee that has been paid to participating funeral homes for decades. Consistent with the historic industry view, the CFDA response relies in part upon the preneed guarantee and the risk assumed by the funeral home.

The position becomes tenuous when the administrative fee is judged on terms of whether a necessary service has been rendered to the trust, and whether the amount paid is reasonable for the services received. It is apparent from the documents that the DCA will also apply that analysis to what the CFDA has charged the trust. Depending upon how this controversy is resolved, other states’ regulators may ask whether the administrative fees charged to the master trust are appropriate.

As a recent Funeral Service Insider comment suggests, some industry associations have also become dependent upon the preneed subsidy. The classic guaranteed argument loses traction when facts such as those in Illinois emerge. By one account, non-guaranteed preneed contracts accounted for one third of the contracts administered by the IFDA.

But, in defense of the CMT, preneed trusts are labor-intensive enterprises where the funeral home, administrator and fiduciary have shared responsibilities. In its challenge of a different CMT issue (the maintenance of preneed records within California), the DCA acknowledges this reality while discussing the funeral home’s recordkeeping duties. Effective field examinations will require that certain preneed records be maintained at the funeral home. But, is it reasonable to impose greater administrative requirements on the funeral home without allowing any compensation to be paid to them?

The emerging regulatory challenge to the preneed subsidy is premised on the position that the funeral home’s right to preneed funds does not vest until the contract is performed. That position is consistent with Missouri’s efforts to improve portability. But, regulators must also find a consistent and reasonable position with regard to the services that they mandate from the funeral home. 

(The Funeral Service Insider excerpt was included by special permission from Kates-Boylston Publications and Funeral Service Insider.)

 

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In contrast to how the IFDA situation was handled, the California Department of Consumer Affairs has taken a public approach to disclosing its issues with the CFDA’s master trust by posting its website an audit report and the Association’s reply.

The DCA is unhappy with the Association, and the master trust fiduciary, with regard to (among other things) the fees that have been charged to the trust, the authorities that have been delegated by the fiduciary, and their refusals to respond to certain audit inquiries and document requests.

The audit report reflects a very literal interpretation of the applicable California laws. A close reading of the report should leave one scratching his/her head on a few of the issues (hint: corpus issues). But, auditors have no choice but to apply the laws that are applicable to the entity under examination, and unfortunately, the California preneed law and rules are dated and disjunctive.

For those who summarily advise that the audit report and the DCA actions reflect yet another example of a preneed program gone bad, that is not the case.

The DCA website includes the April 29th response from the law firm representing the Association. I doubt the attorneys knew that the letter would end up on the DCA website, but the reply is very illustrative of the issues that exist with a dated, and ambiguous, law. While the Association has made some serious missteps with regard to some of the law’s ambiguities, the auditor’s interpretations of the law and its requirements are inconsistent or unreasonable in some respects. Accordingly, the DCA would be well advised to accept the offer extended in reply’s “Conclusions” on page 46 of the reply.

The crucial issues raised by this dispute are relevant to all master trusts, and will be addressed in future posts. Hopefully, the DCA will continue to make the discussions and eventual resolutions public so that death care regulators and preneed program administrators can take note.
 

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The Missouri State Board of Embalmers and Funeral Directors met June 15th and 16th to consider legislative proposals offered for technical corrections to SB1. In a prior post, this author took exception to one of the proposals made by a Board member to raise Missouri’s trusting requirement from 85% to 100%. However, a majority of the State Board did not, and voted to include 100% trusting among its proposals to the Missouri Legislature later this year.

While the submitted proposal stated this was ‘a consumer protection matter’, the Board discussion was addressed to the fact insurance funded preneed provides the funeral home a better return. Trust funded preneed was criticized for lacking the investment vehicle to recover the 15% of consumer payments retained by the funeral home when the contract is sold. So, how does the 100% enhance consumer protection?

Historically, trust funded preneed in Missouri has been a liability to industry. When allowed to keep 20% and withdraw all income, funeral homes have been left to service a contract on an amount that may not even cover the costs of merchandise after 15 years.

SB1 takes three key steps towards rectifying that situation. First, the ‘retainage’ the seller may keep has been reduced from 20% to 15%. Second, the trust is now required to accrue all income. Third, and most elusive, SB1 now allows sellers to pool their trusts for investment purposes.

Prior to SB1, sellers were prohibited from commingling their trusts. The accounting systems available in the 1980s were not sophisticated enough to track both consumer and seller funds when multiple sellers were involved.

In the defense of the Board’s position, a trust that averages a gross return of 4% will be hard pressed to pay the funeral home enough to cover its at need prices in 10 years. As more funeral homes are pressed to provide preneed, the growth in ‘guaranteed preneed’ eats into the long-term profitability of the business. An indirect answer to the justification to the 100% trusting requirement.

The weakness in this position lies in the alternative that funeral homes are forced to take: insurance funding and the costs to the consumer.

If the funeral home has to offer preneed, and it has costs associated with providing preneed, then insurance funded preneed becomes the vehicle of choice. One of the knocks on insurance is its costs to the consumer when coverage is purchased with installments.

For the older consumer who cannot afford a single premium policy, the financing of the policy over five or ten years will cause the cost of the funeral to increase substantially.

All forms of preneed are beginning to include separate charges or fees to the consumer. It becomes incumbent upon the consumer to approach the preneed transaction with more questions, including: How much is this going to cost me?
 

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