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

An important revision to Missouri's personal preference law goes into effect on August 28th.  The original law (R.S.Mo. Section 194.119) was confusing to funeral directors about whether an individual could override the preferences of his/her next-of-kin.  With the revision, funeral directors can more comfortably rely upon the individual's durable power of attorney when following the instructions of someone other than the individual's next-of-kin.  A recent article cited the law change as an important victory for gay rights, and the rights of those who have end of life preferences that are not shared by their family members.  While the law is an important development to elders and gays, they must take steps subsequent to the execution of a durable power of attorney to ensure the performance of their end of life plans.

 With the durable power of attorney, an individual (the principal) authorizes his/her partner (attorney-in-fact) to act on the principal's behalf with regard to legal or business matters.  Depending upon how the durable power of attorney is drafted, businesses can then rely upon the document for their protection.   While most businesses will accept the durable power of attorney, they are not required to, and may decline the transaction. 

As evidenced by a recent trade journal article, funeral homes and cemeteries are often counseled against taking sides in family disputes.   As reported in a prior post (Who's Funeral is it), some funeral directors are reluctant to accept a written disposition instruction that contradicts what other family members prefer. 

While it would be advisable to bring family members into the plan, that is not always possible.   If a couple anticipates familes will contest their end of life plans, it would be prudent to find a death care facility that will honor the durable power of attorney with knowledge of the potential for a family dispute.   I have been using the durable power of attorney for my gay clients for several years, and have always recommended that they coordinate with clergy and a death care company. 

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Mortuary Management’s July/August Colleague Wisdom column underscores how difficult it can be to run a trade association. I can empathize with the funeral home operators who took the time to provide their thoughts. As an attorney who specializes in the death care industry, I have to weigh the costs and benefits of membership in trade associations from two industries.

Every so often, the American Bar Association calls to solicit my renewal to the ABA. I was an ABA member back in 1986, the first year out of law school. After that first year membership, I never renewed again. Yet, they continue to call. And I will continue to decline, because the ABA is not a resource that is worth the cost (to me).   

In contrast, I do belong to the Missouri Bar Association.   The MBA provides services and programs that justify its membership costs to me. The MBA is not only a good source for forms and information, it provides some reasonable discounts for continuing education classes. However, I have not found that to be same for the Kansas Bar Association. The KBA seems to be marketing primarily to the trial attorney bar (a reflection of an economic reality).

If comments published in The Colleague Wisdom are representative of the funeral industry, the article reflects that funeral directors also tend to look more to their state association for the services and programs they need. It should come as no surprise but the level of satisfaction among funeral directors varies greatly. It is difficult to compare state associations because each has its own unique set of factors or hurdles. However, there seems to be certain common standards.

The Colleague Wisdom comments provide some insight to what industry members expect from an association, and why some do not participate. The comments also touch upon the revenues that subsidize the association. As Mr. Wigger so succinctly states: membership in a state association is a matter of weighing the costs vs. the benefits. One reality is that an association must impose costs in order to have the funds needed for programs and services that will attract membership. It is also a reality that some industry members will complain no matter what the cost. 

Some of the Colleague Wisdom comments have been highlighted in yellow, green and pink. The yellow comments seem to reflect an association’s perceived values. The green comments make note of a source of revenue, and the pink comments reflect criticisms. Associations need to be sensitive to criticism, and adapt to the membership’s needs. In order to do so, the association must seek input (even if it is done so by a coded survey). 

Now for the obligatory preneed comments:

Funeral directors who are opposed to preneed will need to appreciate that master trusts are an important source of revenue for association programs and organizational expenses. The master trust is an even more important revenue source for associations in states where continuing education is not required. But as one Colleague Wisdom commentator points out, association leadership must be careful with regard to the master trust becoming a competitor to its own members. In a sense, the master trust cannot help but be a competitor to larger independents that have their own preneed administration. The master trust may be the only way for the small operator to effectively compete for the preneed sale. Accordingly, it will become incumbent for association leadership to diffuse these situations through cooperation and attempts to find mutual benefits. 

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. 

With the NPS failure, associations may have an opportunity to expand their master trusts. But to do so, some state associations need to assess why funeral homes turned to NPS in the first place. Some funeral homes did succumb to the promises of profit, or looked forward to the Rep visit, but many did so out of dissatisfaction with their master trust. For some funeral directors (like those in Illinois), the state association may have a difficult task in regaining the membership’s faith.

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While approval of the SDR’s Liquidation Plan is imperative to providing funds for NPS contracts that are being serviced, and will be serviced during the next few years, funeral directors and consumers are raising valid questions about the Plan.   For the consumer who purchased a trust-funded contract from NPS on installments, the Plan fails to adequately address their situation.

Plan Paragraph 10.4 addresses the consumers who are making periodic payments on an NPS contract. The paragraph states in part:

            (ii) all payments must continue to be paid to the applicable Participating Association or else the coverage provided under the Policy will lapse; and

            (iii) the amount of the payment due to NPS (and, after assignment, to the Participating Association) may be prorated and reduced to the extent that the face amount of the Preneed Funeral Contract exceeds the death benefit face amount of the Covered Obligation.

The problem for consumers with installment contracts is that NPS charged fees that are not reflected in the “face amount of the Preneed Funeral Contract”.   NPS employed an installment plan that incorporated finance charges and a mortality expense, for terms of up to 10 years. Depending upon the age of the consumer and the term of payment, he or she may end up paying thousands of dollars in excess of the contract’s face amount. There is no justification for the additional mortality expense if the NPS trust was purchasing life insurance.

If a consumer purchased a NPS trust-funded contract on installments within the past few years, he/she may want to review the contract with their funeral director to determine whether to continue making payments. For those who have paid in more than the contract’s face amount, consumers may want to seek further guidance from the SDR about the proration language of Paragraph 10.4.

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The American Funeral Director recently published Curtis Rostad’s rebuttal letter to a prior story titled “Debunking the Trust Myth”. That same story earned a post on this blog site. While I agree with Mr. Rostad’s views, the sad truth is that many death care trusts do not perform as well as the Indiana Master Trust. It speaks volumes when many Missouri funeral directors prefer insurance funding despite a state law that permits a 20% sales expense to be retained from trust funded contracts. While several reasons exist for the Missouri situation, expense, time demands, poor trust performance, and risk aversion are key factors. 

Until a critical mass is reached, death care trusts can be too expensive. Funeral directors are an independent lot, and most want to retain control of their preneed funds. (NPS will serve to reinforce this.) While pooling of preneed trusts would help address this hurdle, some state laws discourage the commingling of accounts because of the industry’s history of poor recordkeeping. 

Trusts require a commitment in time that many death care operators are often unwilling to provide. Fiduciaries need input from their death care clients about investment and compliance issues. Funeral directors and cemeterians are care-givers by nature, and many would rather delegate these responsibilities. In the absence of clear instructions, fiduciaries will default to more conservative investments.

It is difficult to provide quality asset management to small trusts. As a consequence, the small trust is often relegated to mutual funds or cash equivalents.   Even when the trust has sufficient assets to warrant a diversified portfolio, some operators are risk adverse and park the trust in conservative, but low yielding investments.  

Diversification is an important ingredient to improving trust performance. Today’s asset managers use diversification to guard against market risks, and to seek out growth and new sources of income such as dividend producing stocks.  To obtain the benefits of diversification, regulators and death care operators need to consider the economies of scale that pooled administration can provide. 

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If the President signs the Hubbard Act (H.R. 6580), the qualified funeral trust will have the capability to fund all of an individual’s final expenses. When enacted, Section 685 imposed a $7,000 cap on the preneed trusts that could elect special tax treatment. While the limitation increased annually, the cap was too low to permit funding of funeral and cemetery contracts. The cap also precluded cash advance related expenses from being included in many preneed contracts. The Hubbard Act may open the door to allow the Qualified Funeral Trust to become more of a final expense trust. 

The Hubbard Act would amend Section 685 for the 2009 tax year. We will need to wait for IRS guidance regarding any retroactive application of the amendment. However, the Hubbard Act would not impact the requirement that the trust must make a payout within 60 days of the beneficiary’s death.

It is interesting to note from the Congressional record that most trustees probably prepare the 1041 QFT without individual sub accounting. With regard to the Hubbard Act, the Congressional Budget Office reports that the Joint Committee on Taxation (the JCT) estimates the elimination of the QFT limitation will increase tax revenues $6 million over the next 9 years. This estimate is based on the assumption that trusts will produce more income that will be taxed at the higher rates. 

A 1041 QFT will be taxed at the lowest rate (15%) until its income exceeds $2,150. The next tax rate (25%) applies until the trust income exceeds $5,000. Assume the QFT maximum for 2008 ($9,000), and the trust has to have a return of nearly 24% before the second lowest tax rate is reached. If one were to assume the 1041 QFT has a trust of $25,000, the trust has to have a return of 8.6% (net of trustee fees).   Obviously, the JCT are looking at numbers that indicate that trustees are preparing the QFT without individual sub accounting. OUCH!

Assume a $3,000,000 preneed trust with 500 preneed contracts earns net income of 5%, or $150,000. With individual sub accounting, that trust’s 1041 QFT should have an approximate tax liability of $22,500. Without individual sub accounting, that same 1041 QFT will have an approximate tax liability of $51,543.50.   Even with the elimination of the Section 685 cap, the tax liability of the QFT with individual sub accounting will likely be taxed at 15%.   The difference equates to nearly 1% of the trust, or a good argument for better individual sub accounting.

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In response to a proposal that preneed trustees be required to provide periodic account statements to contract purchasers, a funeral director asked what liability he would have to consumers who question the trust’s performance during a year such as 2008.   Legally speaking: none. But ultimately, death care companies should be accountable to their families for the decisions they make with regard to preneed funds, including where those funds are placed and how well they are invested. With regard to certain contracts, NPS providers may not be responsible for the promised funeral, but consumers will punish the funeral home that turns its back on those contracts. The funeral home put the consumer at risk by agreeing to do business with NPS. Similarly, if a funeral home fails to devote the time and resources required for proper management of its preneed trust, consumers should ask if they are assuming too great a risk that the facility will be in business when the funeral is needed. 

Realistically, periodic trust statements to individual purchasers provide a ‘tickler’ that alone will not flag a troubled preneed program. A systematic trust reporting system is needed. Such a trust reporting system must also afford the public sufficient information to assess the financial strength of the preneed program. Yes, there will be a cost to both consumer and the funeral home, but a trust reporting system will reward the funeral home that devotes the energy and resources required to properly administer their families’ preneed funds.   

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