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.
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 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.
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.
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
- a) Investment Return
- b) Operator’s Performance Cost Increases
- c) Duration of the Preneed Contract
- d) Duration of Installment Payments
- 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.
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.
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.
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.
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.
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.
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.