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

During the long and tedious Chapter 436 hearings, some Missouri funeral directors joined consumer advocates in using the NPS failure as reason for recommending that legislators impose 100% trusting on the preneed transaction.  Those funeral directors generally advocated the use of insurance or joint accounts as safer methods of preneed funding.  During regulatory meetings, comments were also made about how the insurance policies or joint accounts were 'guaranteed'.   The realities are that each of these forms of funding has its advantages and disadvantages, and that there are no absolute guarantees.

The AIG failure underscores that even the largest of insurers may be vulnerable to the current financial crisis.   While most life insurers are safe, the only guarantees offered by insurance are the rates of return promised by the policy terms.  As witnessed by the Texas insolvency proceedings for Lincoln Memorial life, the insurer's promises are only as good as the assets held in its reserve accounts.  After that, the policyholder must look to guaranty funds for assistance.  Consequently, funeral directors should periodically review the financial statements of the insurance companies they use for preneed funding.

With regard to keeping those preneed funds at the local bank, the funeral director is assuming risk (and liability?) when he exceeds the FDIC insurance coverage.   By holding the consumer's payments in a joint capacity, the funeral director is also exposing the funds to the claims of the funeral home's creditors.   Losing a lawsuit for damages that exceed the firm's casualty insurance put the consumers at risk. 

In contrast, the funds placed in a preneed trust are not the assets of the bank or the funeral home.   By virtue of the terms of the preneed contract, the funeral director usually has the risk of investment performance (and under the current circumstances, that's more risk than what some funeral directors want).  But in contrast to insurance and joint account contracts, the trust provides the death care operator some say in how investment risk should be handled.

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Who do you turn to when grass isn’t being cut, or the grave marker falls over? Or, who can approve the transfer of the ownership of my mother’s grave space? 

Ultimately, the answer depends on who owns the cemetery. But, determining who owns the cemetery can often prove confusing to both the public and the cemetery regulator. 

A recent Manteca Bulletin article about the ‘friends’ of the East Union Cemetery would seem to be just another story about a pioneer cemetery that has no funds for care and maintenance. But a closer examination suggests a situation where concerned citizens signed on to serve on a cemetery association board without understanding the accompanying responsibilities. 

East Union Cemetery is located in Manteca, California, a community of 50,000 that is located 80 miles east of San Francisco. As with most “public” cemeteries, East Union Cemetery is required by state law to file reports for authority to continue operations. But apparently, East Union Cemetery failed to file those reports a few years ago and the California Cemetery and Funeral Bureau began to send out notices.   When no one responded, the state began to investigate, and issues of ownership, missing funds and accountability began to surface. 

News reports indicate the cemetery had an endowment fund of $800,000 as recently as ten years ago. But then, one member was accused of embezzling funds and the cemetery association board membership dwindled down to two members. 

With the state still conducting its investigation, Manteka’s citizens responded to the situation by forming a new and expanded cemetery association board. However, reports and regulator press releases suggest that the new board may have exceeded its authorities in the zeal to address the cemetery’s needs. Subsequent to the appointment of the new board, the state seized the cemetery’s remaining funds and submitted a proposed agreement to the cemetery association. Shocked by this turn of events, the new board resigned, and pointed a finger at the cemetery regulators. 

The facts suggest the cemetery association board did not appreciate the laws governing cemetery care funds. It may be that the new board followed a course of action that had transpired over the past ten years. Endowment care (or perpetual care) funds are intended to provide income to subsidize the cemetery’s maintenance expenses. Most states’ cemetery laws prohibit the fund fiduciary from invading principal to meet the cemetery’s needs. 

The California Cemetery and Funeral Bureau is caught between a rock and a hard spot. Well-intended citizens stepped up to a situation that demanded attention, but acted without knowing the rules.   The Bureau’s press release and Q&A posting help tell its side of the situation. 

Individuals who have an interest in serving on a cemetery association board need to appreciate the responsibilities that accompany that service.   Those responsibilities will be defined in part by the association articles and bylaws, applicable state cemetery laws and the agreements and documents that bind the association.   As witnessed by a lawsuit filed recently in Brooklyn, New York, those legal documents have life beyond the grave. 

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Dear Donna,

Once the liquidation plan is finalized, and the procedures for paying claims are implemented, could we please revisit the issue of the Missouri installment contracts?

Yes, you have been patient and polite regarding my inquiries.  But, until this past Monday, I did not know how significant an issue these contracts were.  If I am interpreting Note 3 from the Statement of Assets - Explanatory Notes correctly, Missouri consumers owe $23 million on outstanding NPS preneed contracts.  As I explained in my May letter, these consumers are paying too much. 

Thanks, again.

Bill

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Why did you agree to that?

That's the question I have been getting to the Chapter 436 Working Group recommendations regarding i) the deposit of all purchaser payments to trust, and ii) some form of periodic statement to the consumer.   One answer would be that we see too many news reports like this one.  

The primary objective for these two recommendations is the establishment of an audit trail.  Require all payments to go through the fiduciary's hands, and require the fiduciary to give the consumer some form of notice.  If the regulator does not have the resources to monitor the transaction, give the consumer the opportunity to do so.  The recommendation does not deny the seller the right to recover sales expenses.

Yes, the procedure is burdensome, will add cost to the transaction, and will require change.   What are the alternatives?

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Concurrent with the hearing held on her Liquidation Plan, the Special Deputy Receiver posted a financial report to the Lincoln Memorial Life/NPS website. As with most financial statements, explanatory notes at the end of the report provide some insights to the failed NPS empire. While prior documents have disclosed that the companies have a deficient of nearly one billion dollars, the SDR report breaks that number down in terms of trust funded contracts and insurance funded contracts. 

Insurance funded preneed contracts account for almost $600 million of the unfunded deficit, twice the number of that for trust-funded contracts ($289 million).   The explanatory notes identify six trusts maintained by NPS. The notes identify Trust VI as that of Iowa, and the size of Trust IV would suggest that it was for Missouri. One of the other trusts may be a special account, and if one were to assume the other three are other ‘state trusts’, that would leave the other 15 NPS states as exclusive insurance funded states. There is no doubt that NPS exploited Missouri’s laws regarding trust funded contracts, but a greater harm was done to consumers through NPS' exploitation of state laws governing insurance funded contracts.

Of the NPS trusts, the Missouri deficit is the largest by far ($248 million). This number has been isolated to Missouri regulators as justification for raising the state’s trusting requirement to 100%. That argument ignores the fact that Iowa also has an 80% trusting requirement, yet only has a deficit of $23.5 million (a tenth of Missouri’s). The difference can be attributed to the difference in oversight and regulatory requirements. The argument also ignores the fact that Kansas, a state with a 100% trusting requirement, has a deficit of approximately $22 million (all of which is based on insurance-funded contracts).

Another explanatory note that may suggest that Missouri’s oversight is lacking is a note payable of $10 million owed by NPS to the Missouri preneed trust.  

Missouri’s Chapter 436 problems will not be fixed by going to a 100% trusting requirement. Oversight should be the state legislature’s top priority, and Missouri preneed sellers need to begin providing ideas and answers.  

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 While the completion of the document may have felt like a birthing process to the staff of Missouri's Division of Professional Registration, the Chapter 436 Working Group Recommendations more accurately reflects an industry position paper that has yet to be completed.   Faced with a deadline imposed by the Missouri legislature, the Division 'finalized' the Recommendations in an 11th hour meeting of the State Board of Embalmers and Funeral Directors.  The State Board meeting underscored that many industry members have yet to grasp how the preneed transaction is structured and administered by competitors.  This is best demonstrated by the State Board vote to revise the Recommendations to include the following:

·         The board recommended a 100% trusting requirement with no administrative or trustee expenses by a vote of 4-2.

 During various meetings, the issues of preneed sales expenses and trustee administration expenses having been erroneously interchanged by Committee members.  This confusion is due in part from Chapter 436 allowing all income to be distributed currently.  If the trust does not accrue income, the law requires the seller to assume responsibility for trust expenses.  Trustees normally look to trust income for administrative expenses.  If the trust has no income, the trustee is dependent upon the seller for reimbursement.  This aspect  compromises the fiduciary's duty to the trust. By its action, the State Board would perpetuate a major flaw in Chapter 436 (if trust funding is to survive at all). 

The State Board's objective is to protect the consumer, and to do so it must think comprehensively about the three forms of funding: insurance, joint accounts and trusts.   Is the consumer better served if trust funding is effectively precluded?   Of course not. 

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Trust a lawyer to add to the tension between clergy and the funeral director.  

A Kentucky priest felt the need to re-establish the ground rules for funerals conducted in his parish, and a local funeral director took offense.   Claiming the rules were "an intentional and wrongful interference" with his business, the funeral director brought suit against the Archdiocese of Louisville.  

The lawsuit has the unfortunate consequence of highlighting what some clergy disdain about today’s funeral: the commercial aspects of the death care profession. However, the lawsuit has also generated dialog about a tension that is also worthy of attention: reconciling the church’s message of hope with the funeral director’s focus on the immediate family.

The GetReligion blog has a thoughtful post regarding the Archdiocese lawsuit.  Denominations can differ substantially in their approach to funeral liturgy, and some provide very little training to its clergy when counseling parishioners facing end of life issues. Every funeral director has a story about a minister who alienated the family with a sermon unrelated to the deceased. But, even trained pastoral ministers are often placed in the awkward position when requested to officiate at a funeral by families they do not know, or for a deceased who did not attend a church.  

Funeral directors that serve denominations that have well established funeral liturgy should adopt cooperative approaches to working with clergy. Suing the priest makes no sense (unless, of course, those parish rules are causing families to cancel their preneed contracts). 

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