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

Death Care trade publications such as the Funeral Service Insider and the FuneralWire advocate that funeral homes revisit the non-guaranteed preneed contract.  I agree that funeral homes should reconsider the non-guaranteed preneed contract, but for reasons different from those expressed by other authors.

The non-guaranteed preneed contract affords flexibility and portability to the individual who wants to do more than preplan, but is not prepared to make all of the decisions that go into planning the final disposition.  The guaranteed preneed contract often ties the hands of the consumer's survivors and the funeral home.   While many families take satisfaction knowing the prearranged funeral, some survivors feel they have been deprived the final opportunity of taking care of a loved one.    

Rather than espouse one form of preneed over another, funeral homes need to provide a viable non-guaranteed arrangement that can be selected in lieu of a guaranteed contract. There is a place for both types of contracts.  However, there are a number of hurdles to the non-guaranteed preneed transaction.  In this post, I will identify those issues briefly, and provide expanded discussions in subsequent posts.

• Most state preneed laws have been written with the guaranteed contract in mind.
• Marketing - proactive vs passive
• Efficient trust management
• Finding a sponsor

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Whether it is because of state law restrictions or preneed purchaser demographics, death care trusts have unique requirements when it comes to investments.  Consequently, it is fairly common for a death care trust to utilize an investment advisor who has experienced with the industry.  However, the deductibility of the fees paid to outside advisors by death care trustees will now be more closely scrutinized in light of a January 16th decision handed down by the US Supreme Court in the case titled Knight vs. Commissioner.   

The conflict over the deductibility of investment advisor fees developed within the context of estate planning trusts, and has been brewing since 1993 when the Sixth Circuit rejected the IRS' position in O’Neill vs. Commissioner of Internal Revenue, 994 F.2d 302.  In subsequent cases in other circuits, the IRS prevailed in its application of IRC Section 67(a) and the 2% floor.    Like side catch in a commercial fishery net, death care trusts are being pulled into a controversy based on estate planning facts. 

The impact of this issue on some death care trusts is felt not so much by the 2% floor, but by a collateral issue: the alternative minimum tax.  For maintenance trust returns, the characterization sought by the IRS renders the advisory fees fully taxable. And, the arguments forwarded by the IRS in its briefs to the Supreme Court and the lower courts suggest that the Service may look at other types of services outsourced by the fiduciary.   

The Supreme Court left the door cracked for the full deductiblity of fees paid to trust service providers, but the death care companies will have to work with their fiduciaries to justify the deduction of such fees.  To defend the deduction, the parties have to start with their trust instrument and administration documents to define the services and justify their need.   

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The Clayton Smart debacle has been, and will continue to be, the subject of articles calling for preneed reform. A recent AARP article titled R.I.P. Off  will be one of the more controversial (leading to frequent citations by consumer advocates).   While the article is biased and should be rebuked by the death care industry for its various flaws, the industry should examine the Smart affair and the public's reaction to Mr. Yeoman's issues (including the comments posted to the AARP website). 

Mr. Smart exploited the Tennessee laws to divert millions of dollars of trust assets.  While Forest Hill's new owners should be applauded for taking steps to minimize the loss to consumers, the industry should not ignore the magnitude of the fraud committed.  Over the next few months, I plan to revisit the Smart affair and the issues it spawns.  But for this post, consider the missing fiduciary.

In its April 2007 edition, the American Funeral Director reported in detail about Mr. Smart, including his appointment of a small Indiana institution as Forest Hill’s preneed trustee and the revision of the governing trust instrument.   While another of Forest Hill’s trustees discharged its duties to consumers by refusing Mr. Smart’s distribution instructions, the Indiana institution followed Smart's instructions to terminate life insurance policies that would result in millions of dollars of loss to the trust.  Too frequently, funeral directors exhibit the similar business ethics by shopping for a trustee that will do what it is told.   

Many of our country’s larger banks now refuse to accept death care trusts either because the laws are ambiguous or because of the industry’s reputation.   Death care companies need to develop procedures and controls to ensure compliance, accountability and transparency.  Restoring the confidence of  financial institutions and consumers will take time.   

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A Wisconsin bill that would establish a right of sepulcher looks bound for passage (AB 305).   There are several things to like about this bill.  It would establish an individual's right to control the disposition of his or her body, and to designate an agent authorized to carry out that directive.  The bill also provides the hierarchy of kin who may control the disposition in the absence of a directive from the deceased.  In the event of a dispute between kin, the bill requires all concerned to be prepared to assume the financial responsibility for the disposition (avoiding the potential for a disgruntled family member from acting as a 'spoiler'). 

The bill also defines those individuals who may not serve as an designated agent for disposition.  Funeral directors and cemeterians are precluded, as are hospice workers and clergy.   I am puzzled by the exclusion of clergy and hospice workers from those who may be designated (unless related by blood.  I have prepared estate planning documents that included a minister as the individual's fall back choice for implementing his disposition directives.  I could also see where individuals have established relationships with hospice workers and would trust them to carry out plans for disposition.  

Perhaps the Wisconsin legislature was concerned about individuals who might have an undue influence on the terminally ill, but I do not understand the need to restrict an individual's rights with regard to either clergy or hospice workers.  I would welcome comments regarding these limitations. 

But in any event, the bill will benefit Wisconsin citizens by providing the right to control one's own disposition.    If the bill is signed into law, funeral homes and crematories should evaluate their forms with regard to this bill and the Crematory Authority Act passed in 2005.  Preneed contracts that contemplate cremation may want to include an authorization form that addresses both laws.   

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The National Funeral Directors Association has taken the lead in getting legislation introduced to eliminate the dollar cap imposed on qualified funeral trusts.  While I hope the NFDA succeeds, it won't be without a fight from the IRS. 

As the death care industry inches towards the non-guaranteed preneed transaction, the IRS will express its concerns over abusive trusts.  While funeral directors ponder whether consumers will embrace a preneed transaction that does not provide price guarantees, the IRS will question whether the transaction will be abused as a tax shelter. 

The Section 685 needs to be increased substantially, but I anticipate the Service will pull no punches while fighting the NFDA's efforts.   

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For the second time in 7 years, the Delaware legislature is taking up the issue of cemetery oversight. As with most death care legislation, Delaware’s Cemetery Study Committee faces two hurdles: finding answers for aging cemeteries that lack revenues for maintenance, and reconciling the conflicting goals of cemeterians, funeral homes, monument vendors, local governments and the public.  

Neglect is already a problem for cemeteries established before perpetual care was a requirement, and it will become an issue for cemeteries that are not proactive in enforcing existing PC requirements.  In a sense, there are two different problems and finding a way to provide care for the older, "public" cemetery will be the greatest challenge.  Frequently the answer to this situation is more taxes and county/municipality control over the cemetery.   

With regard to cemeteries that have 'inventory' to sell, enforcement of perpetual care requirements is the priority.  However, with the costs of funeral and burials on the rise, the death care industry will be reluctant to accept requirements that drive up the cost of a grave space. 

While many cemetery operators have embraced the need to properly fund and administer perpetual care trusts, laws need to better enforce PC funding requirements and afford fiduciaries more flexibility in how PC funds are invested. 

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