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

Missouri Preneed Tax Cut: The Contract Fee

Posted in Missouri - SB1, Uncategorized

Saving Money Credit 2

Using its emergency rulemaking authority, the Missouri State Board of Embalmers and Funeral Directors reduced the state preneed contract fee from $36 to $25.  The change is to go in effect on September 1, 2015, the first day of the next reporting period.

The High Cost of Litigation: Copy Charges

Posted in NPS/Lincoln

The Special Deputy Receiver for National Prearranged Services recently filed a Bill of Costs with the Federal trial court.  The Bill of Costs seeks to recover copy charges of more than $500,000 from a former NPS trustee.  Those costs do not include attorneys’ fees.  Litigation can be very costly.

Missouri’s preneed regulators are keenly aware of the costs of the NPS lawsuit, and accordingly, have been challenging the Missouri Funeral Trust regarding how it is financing its lawsuit against the Missouri State Board of Embalmers and Funeral Directors.  In pleadings filed with the Circuit Court, the State has sought confirmation that the MFT is not using consumers’ trust funds.  The program’s executive director stoked that issue at a recent State Board meeting when he advised that the program trustee should not be required to disclose whether attorneys’ fees are being paid from the trust.  As a defense to that statement, the executive director advised that preneed purchasers do not have a right to trust income on the cancellation of a contract.  That statement ignores the Chapter 436 provisions that allow a purchaser to name an alternative provider and transfer their trust.  The statement also ignores whether the funeral home providers have a right to a disclosure by the trustee of the payment of attorneys’ fees, and how those fees are being allocated.   More appropriately, the MFT trustee would owe provider funeral homes an explanation of why litigation expenditures are necessary and in beneficiaries’ best interests.

Trustee Investment Liability: The Preneed Purchaser Wild Card

Posted in Associations, Fiduciary, Investments

Back in March, the NPS Special Deputy Receiver won a judgement of $355 million against PNC Bank (as successor to Allegiant Bank).   In defense of Allegiant Bank, PNC argued that Missouri’s Chapter 436 defined the trustee’s duties as owed solely to the preneed seller.  That was the intent of the Missouri Funeral Directors Association when it sponsored the 1982 legislation that was to become Chapter 436.  The MFDA wanted to establish a master trust program that could control investment functions and limit the trustee’s duties.  Watching what other state associations were doing, the MFDA went a step further by having the law define a new legal entity: the third party seller.  In contrast to the agency relationship followed by other states’ preneed programs, Missouri wanted a program where an entity other than the funeral provider could be the principal, and in control of the preneed trust.

But, the Federal court disagreed with PNC and instead interpreted Chapter 436 to find that funeral home providers and contract purchasers were also beneficiaries to the preneed trust, and thus owed fiduciary duties.  That ruling cut the legs out from under PNC Bank, and the jury quickly awarded a judgment in favor of the SDR.  In a recent pleading filed with the Federal trial court, the SDR is now requesting $179 million of prejudgment interest from PNC Bank.  The total tab sought by the SDR against the former NPS trustee is now in the neighborhood of $570 million.  So, it is perplexing to witness Missouri’s last active third party seller continue to deny the impact of the NPS decision and a new preneed statute on the duties owed by its program trustee to funeral homes and contract purchasers.

At this past week’s State Board meeting, the executive director of the Missouri Funeral Directors and Embalmers Association and the Missouri Funeral Trust spoke in opposition to Chapter 436 legislation that refers to provider funeral homes and preneed contract purchasers as beneficiaries to the preneed trust.  The executive director offered isolated provisions from the new Missouri preneed law in argument that purchasers have no rights to trust income, and therefore, no rights to trustee disclosures.   It was not clear from the executive director’s comments whether either the Association or the Missouri Funeral Trust have a position on the provider funeral homes as trust beneficiaries, and thus entitled to trustee disclosures.

Clearly, one issue that troubles the MFT is the extent that Eagle Bank (the program trustee) and its fund managers owe a duty to preneed contract purchasers for investments.  Sponsors of master preneed trust programs often limit their trustee’s investment exposure by offering investment options to the funeral home.  If the preneed purchaser is excluded from that process, can they then sue the trustee, investment advisor and funeral home provider if the account loses value?  That is what happened in Illinois.  If the program includes the preneed purchaser in the process (by contract provision consenting to the funeral home’s decision), will a court find that binding on the purchaser when the program limits the funeral home’s investment options?

By challenging legislation because it acknowledges the purchaser as a trust beneficiary, the Missouri association has become that proverbial ostrich with its head into the sand.  The NPS trial ruling has thrust Missouri preneed trustees into a dilemma whether the association will admit it or not.

Trust Shortages: Sponsorship Fees

Posted in Associations, Master Trusts, Missouri - SB1

It was been almost 7 years since we posted the piece titled “Trade Association Membership: weighing the costs vs. the benefits”.   Towards the end of that article, we discuss how the master trust sponsor fee provides a crucial source of revenue to state associations.  That post was written subsequent to the dissolution of the Minnesota master trust but prior to the lawsuits filed against the Illinois, California and Wisconsin master trusts.  Through those subsequent lawsuits, we learned that each association assessed sponsorship fees against their respective master trust that was labeled abusive.  Settlements of the lawsuits divested trust control away from each association.  We continue to assert that the state association should be allowed to charge a reasonable sponsorship fee, but would repeat the suggestion made in our original post:

Association leadership must also be careful that the master trust does not become a source of dissatisfaction when earnings and/or expense expectations are not met. Disclosures, accountability, frequent communications, innovation and leadership will be crucial to retaining membership satisfaction.

Missouri Audits: What’s in store for round 2?

Posted in Compliance, Exams/audits, Missouri - SB1

The Missouri State Board of Embalmers and Funeral Directors will meet August 4th and 5th to discuss legislation, regulation drafts and changes to the examination process.  The State Board examiners are completing the first audit of each preneed seller, and the scope and procedures for the next round of preneed audits will be discussed.   Use the following hyperlink to down load the State Board Open Agenda Material.

Preneed Trust Shortages: Investment Management Fees

Posted in Associations, Compliance, Investments, Master Trusts, Missouri - SB1

One strength of the state association master trust is that it can provide the ‘critical mass’ required for economies of scale to reduce trust management costs.  As the state master trust grows in size, the association can better negotiate asset management arrangements.  However, the reality has been very different for these programs.  The reorganization of the each of the Wisconsin Master Trust and the California Master Trust cited the need to reign in high investment management costs.

Investment management fees can include mutual fund expense ratios, ETF expense ratios, advisor fees, brokerage fees, transaction fees, load fees and 12b-1 fees.  (To learn more about investment expenses follow this hyperlink to a Bloomberg Business article: An Investor’s Guide to Fees and Expenses)  When management fees are not controlled, expenses can take a heavy toll on the fund return.  (Follow this hyperlink to a Forbes magazine article: The Heavy Toll Of Investment Fees).

In a prior post (Accountability and the Master Trust  ), we explained how the state master can provide the smaller funeral home the economies of scale necessary to reducing costs that would otherwise be prohibitive.  But as we noted in that post, transparency and accountability to funeral home members and consumers is lacking on the part of some state association programs.

Master trust programs should provide the following information:

  • The name and address of the trustee.
  • The master trust’s written investment policy.
  • The fees paid to the trustee, fund managers and account administrators.
  • The taxes paid by the trust.
  • A summary report of the trust’s performance and asset description.
  • A disclosure of related party transactions (loans, discounts, service agreements, etc.)
  • Any sponsorship fee paid the association.

In another prior post (Un-parking those death care trusts: diversification) we discussed how poor investment performance by preneed trusts can be blamed in part on the lack of active fund management.   When the program’s investment policy consists of offering a few mutual fund options to the funeral director to choose from, one has to question whether the program is meeting its fiduciary duties to funeral directors and consumers.

Missouri Funeral Trust: Seeking a Gag Order

Posted in Associations, Master Trusts, Missouri - SB1

On July 27th, a Missouri court will consider a motion filed by the Missouri State Board of Embalmers and Funeral Directors to be dismissed from the lawsuit filed by the Missouri Funeral Trust.  One of the allegations made by the Missouri Funeral Trust was that confidential information obtained by a state auditor regarding the program’s weaknesses have been communicated to participating funeral homes by a competitor.  The Missouri Funeral Trust has requested the court to order the State Board to cease auditing the program until all sensitive information and documents can be properly protected.  But what is rather odd about the lawsuit is that the Missouri Funeral Trust has not alleged that the information or documents purportedly being leaked to MFT members is either inaccurate or fraudulent.  So, the MFT is suing to be the sole source of information to its program members.

The Missouri lawsuit should seem a bit of déjà vu when one considers that it was 9 years ago when Minnesota regulators forced that state’s master trust to be disbanded.  The Minnesota Funeral Trust could not earn enough to pay its expenses, which resulted in the Minnesota Department of Health and the association battling over the information that was to be provided to the program’s funeral home members. In the end, the association was forced to enter a Stipulation and Consent Order, and to provide certain information to its members.  Individual funeral homes also signed consent orders that allowed them to assume control of the trust funds sold in their name.

The request for a gag order has some asking whether the Missouri Funeral Trust also has secrets it wants to hide from its members.

Preneed Trust Shortages: Deposit Plus Accounting

Posted in Administration, Compliance, Legislation, Missouri - SB1

During its state convention, the executive director for the Missouri Funeral Director and Embalmers Association stated that their master trust program would have a $3 million dollar surplus if all preneed contract beneficiaries were to die that day.  If the Missouri program were being administered pursuant to common trust fund rules, there should not be any surplus under the facts stated by the program’s executive director.  All assets would have been distributed by the trust to the servicing funeral homes.  One can only conclude from the statement that the Missouri program relies on tax cost accounting for the individual ‘value’ of each preneed contract.

In two prior posts (Consumer Options and Administrative Hurdles: Market Value Allocations and Nebraska’s Push to Market), we discussed tax cost accounting and master trust programs.   Tax cost accounting can be described as tracking deposits plus realized income.  This type of accounting does not reflect unrealized gains and losses.  So when a trust has significant unrealized losses, tax cost accounting results in performance distributions that exceed a contract’s share of the assets’ fair market value.  Each performance distribution digs the program’s hole a little deeper.

Since the Missouri Funeral Trust’s claim of a 5% surplus, the investment markets have been rocked by the insolvency of Greece and the volatility of the Chinese stock market.   These events only add to the general uncertainty caused by the Federal Reserve’s plan to begin raising interest rates.   The Missouri program could still have a ‘surplus’, but it may now be razor thin.  And, that ‘surplus’ will not be uniform to all preneed contracts.   When the Fed begins raising rates, any portfolio holding long term bonds will experience market value declines.

When a master trust program uses tax cost accounting for contract values, or any basis other than fair market value, who has the liability for trust ‘shortages’ caused by performance distributions that exceed a contract’s fair market value?  In Illinois, the trustee was forced to assume a portion of the liability, but funeral homes will bear the remainder with each contract they service.

The Missouri Agenda: a few clean up provisions

Posted in Missouri - SB1

The Missouri State Board of Embalmers and Funeral Directors will meet to July 21st to discuss “a short slate” of legislation and regulation proposals.   While many of the proposals have been previously discussed, some, such as the preneed shortage funding requirement, are new.  We also note regulation proposals regarding when forms and reports are deemed filed, requirements for external/independent investment advisors and the formation of an insurance funded contract.

Tuesday’s meeting may last longer than an hour.

Preneed Trust Shortages: Missouri’s Income Withdrawals

Posted in Exams/audits, Investments, Legislation, Master Trusts, Missouri - SB1, Recordkeeping, Reporting, Trust Funded

Prior to Missouri re-writing its preneed law in 2009, preneed sellers could draw off realized income so long as the withdrawal did not reduce the trust’s fair market value below trust deposits.   Seeking income, many Missouri sellers directed their trustees to invest in bonds.  As interest rates declined during the early part of the prior decade, bonds with higher yields climbed in value.  However, replacing those yields with new bonds became difficult, and then impossible (with the subprime mortgage collapse in 2008).  A trustee would have to pay a premium for a bond with the rate that sellers sought.  Today, many of Missouri’s older preneed trusts are left with a cupboard of long duration, lower yield bonds that are very susceptible to market volatility.  When the Federal Reserve does eventually begin to raise interest rates later this year, bonds with longer durations will experience a fair market value erosion.  If an older Missouri preneed trust has a resulting ‘shortage’, that exposure will likely be due to a trustee having sit on a bond portfolio while the seller continued to pull out interest income.  This is primarily an old trust problem because the new law now requires income to be accrued until the cancellation or performance of the contract.  (Sellers that combined their pre and post SB1 contracts in the same trust may have another set of problems.)

It has not been our experience that the financial examiners seek information to determine if a seller’s trust has been making income distributions, and how the trustee documents compliance with the prior law’s “mark to market” requirement.  Such distributions could be documented with the trust’s current fair market value, gross income year to date, gross trust expenses year to date, any reserve for income taxes, income distributed year to date, and the income to be distributed.

So long as the seller and trustee appropriately apply the brakes to income distributions before the fair market value hits the deposit balance, a subsequent shortage resulting from a market decline should not trigger the seller’s liability to contribute funds.  Failure to anticipate the market’s decline, could leave the trust in a prolonged shortage that could require future distributions to be based on fair market value (ie, on the performance of a contract, sellers would receive less than the contract’s deposit balance).