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

Last October, the Illinois Funeral Directors Association posted some “Frequently Asked Questions” on their website. The FAQ page was intended to address questions and concerns raised by funeral directors and consumers about changes being made to the IFDA Master Trust. Page 6 of that FAQ was addressed to the Illinois families that had purchased an IFDA preneed contract, advising that “consumers should feel perfectly confident” in those contracts, and that “guaranteed preneed contracts are guaranteed to provide services in full”. With regard to non-guaranteed contracts, the IFDA represented that the contract’s “principal is protected by the funeral director who sold them”.

If the Class Action Complaint filed last November is an accurate barometer of consumer confidence, the IFDA leadership missed the mark with the public that it’s members serve. Documents also suggest that IFDA leadership has been less than candid with the funeral directors they have pledged to serve.

The current IFDA website offers an explanation that suggests cooperation with regulators, and the presence of financial circumstances that caught everyone off-guard. For consumers, the IFDA offers assurances to the preneed purchaser that the transition will have “very little, if any, impact on them because both ‘non-guaranteed’ and ‘guaranteed’ preneed contracts contain protections for consumers”. The IFDA represents the following:

In the case of “guaranteed” preneed contracts, Illinois law clearly states those contracts are guaranteed and funeral directors are to provide those services in full. 

The message to funeral directors is that they must service these contracts regardless of what is in trust to pay them.

Time to step back and look at theIllinois law and the IFDA preneed contract.

The requirements of guaranteed preneed contracts are set out in 225 ILCS 45/1a-1. Pretty typical of the provisions imposed by other states, but not quite consistent with the IFDA representation. In general, there are two promises made through the guaranteed preneed contract: the purchaser promises to timely pay the sales price according to the contract’s terms, and the contract seller promises not to charge the purchaser any additional amounts for the goods and services described in the contract at the time of the beneficiary’s death.

When the preneed seller and the preneed provider are the same party, the funeral home is on the hook to service the contract regardless of how well the trust performs. But, the funeral home’s legal obligation to perform a preneed contract becomes more complicated when a third party seller is involved. Illinois law authorizes third party preneed sellers so long as disclosures are made in the preneed contract. The $264 million question: the who is the seller of the IFDA preneed contract?

The IFDA has probably used different versions of a guaranteed preneed contract form over the years, but a 2006 form provides clear definitions of “Trustee”, “Provider”, “Purchaser”, “Beneficiary”, and “Depository”, but no definition of “Seller”. There is a single reference to Seller, where the Purchaser is required to acknowledge an explanation of the contract. The context of that provision would suggest the funeral director is the seller. However, Paragraph 15 of the contract muddies the waters.

Per Illinois law, preneed sellers are allowed to retain a portion of the purchaser’s payments. Paragraph 15 is intended to authorize the retention of such amounts, but references the “Trustee, Provider and Depository”. Which one of these entities is the seller? (We can probably rule out U.S. Bank Corp.)

Without the benefit of the agreements and documents that may exist between the IFDA and its member funeral homes, the answer may be reflected by conduct and the application of the Golden Rule. Not that Golden Rule, but rather: he who has the gold, rules.

This would not be the first time an association’s leaders placed control of its master trust above the interests of consumers and its members. The Minnesota Department of Health had such an experience. That association even challenged regulatory orders for the dissemination of information to funeral home members. In the end, the association was forced to enter a Stipulation and Consent Order, and to provide information to its members.  Individual funeral homes also signed consent orders that allowed them protect the consumers by assuming control of the trust funds sold in their name. 

Resolving the problems of the IFDA Master Trust will be far more difficult than following the Minnesota example. If the $160 million of life insurance held by the master trust is key man insurance, the IFDA’s valuations need to factor in the proper tax consequence. Hopefully, the IFDA board members purchased some errors and omissions insurance coverage at the same time they purchased those key man policies.

If the IFDA and its membership are in a dispute over the management of the master trust, the Illinois Comptroller holds the key to breaking the logjam.

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I learned the preneed business from an organization that used the term “preneed counselor”. Consumer advocates, and many funeral directors, rail at that characterization, and insist a salesman is a salesman, no matter what you call them.

For purposes of debate, I would agree that all preneed counselors are salesmen. However, not all preneed salesmen are counselors. While both have to make a living, the counselor places an emphasis on education. But, the distinction between the counselor and the salesman is made difficult by the fact both tend to be compensated on the commission basis. This rubs the public and many funeral directors in the wrong direction; a fact not lost on proactive preneed sellers.

The Catholic Cemetery ran “Point – Counter Point” articles in its December and January editions on the advantages of commissioned-based programs and salary-based programs. Rich Peterson, of the Archdioceses of Seattle, led off with a description of how his “Pre-Need Sales Counselors” perform outreach to a Catholic population that is scattered across a large geographic area. Demographics and geography force the Pre-Need Sales Counselor to go to the families.

Richard Touchette, of the Dioceses of Albany, uses salary-based “Family Service Representatives” to perform outreach to an ‘entrenched’ Catholic population. In contrast to its Seattle counterpart, most of the outreach performed by the Family Service Representatives is done at the Dioceses’ cemeteries.

As Mr. Peterson explains in this article, all preneed programs have costs such as training, staffing and advertising. Mr. Peterson could have gone farther and addressed the costs associated with contract administration, regulator compliance and document development. However, the program that must seek out its targeted audience will always have greater costs per sale. These organizations must be more “proactive” in making their connections to families. The salesmen must spend substantial time away from the cemetery’s offices. Cemeteries and funeral homes with ‘heritage’ may adopt a more passive approach to preneed marketing, and can better handle preneed sales with a salaried staff that remains on the grounds.

Another factor in the commission vs. salary issue is applicable state law on trusting requirements. When a state sets its trusting percentage at 100%, or even 90%, the preneed program must be funded to some degree from the cemetery’s general revenues. Mr. Touchette’s cemeteries are subject to a much higher trusting requirement than Mr. Peterson’s. Consequently, the Dioceses of Albany cemeteries cannot recapture all of these preneed costs at the inception of the sale. A high trusting requirement is even more detrimental to a cemetery than a funeral home.

Funeral homes are not called upon to perform a preneed contract until there has been a death. When state trusting requirements prove too high to fund a preneed program, a funeral home can turn to insurance funding and use the commissions paid by insurance companies to pay counselors/salesmen and offset program costs. In contrast, cemeteries often deliver preneed property and merchandise prior to the purchaser’s death, which precludes insurance funding. Consequently, cemeteries must use trust funding or constructive delivery.

The proactive preneed program will always be distinguished by marketing and outreach that consummates a transaction someplace other than at the operator’s offices. While all cemeteries and funeral homes strive for the heritage that brings families to their door, most face challenges and competition that require them to reach out to their families. Few individuals have the personality and commitment to walk into a family’s home to discuss mortality. For better or worse, the industry has compensated these individuals on a commission basis.

With NPS, the worst was encouraged with commission rates that allowed salesmen to make six figured salaries at the expense of elderly consumers. As one of the states hardest hit by the NPS failure, Missouri’s legislators will be pressured to impose tougher trusting requirements on all preneed programs. Rather than punish all preneed programs by instituting 100% trusting, Missouri should consider a cap on the commission that may be paid to the preneed salesman.

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A trade newsletter recently reported on funeral homes forming buying groups to negotiate better terms with casket vendors. Through cooperative alliances, the funeral homes can achieve the numbers required to negotiate better discounts from vendors. Those same economies of scale also benefit preneed programs that utilize trust funding. The larger trust not only provides the operator leverage in negotiating terms with a fiduciary, the trust provides the asset manager the critical mass required for a sophisticated asset allocation model for proper diversification.

However, state laws are often a hurdle to independent funeral homes or cemeteries seeking to form a master trust that would commingle funds from multiple sellers. Laws such as Missouri’s Section 436.031 authorize collective investing by preneed trustees, so long as the funds deposited belong to a single preneed seller. This restriction reflects a legislative concern for the trust’s accounting of deposits, distributions, income and expenses.

Rather than close the door completely on collective investment trusts, the Michigan cemetery law signed into law last week left the door open to a new breed of master trusts.

Section 16 of SB 674 establishes a transition period for Michigan cemeteries to transfer their endowed care trusts to corporate fiduciaries. Subparagraph (2) of that section addresses the traditional master trust established by a single cemetery that has multiple trusts or a master trust among multiple cemeteries with common ownership. The subparagraph also references preneed trusts. The opening for pooling among unrelated trusts comes in subparagraph (3) where Michigan’s cemetery commissioner is given the authority to approve ‘other comparable methods of bundling or pooling of trust or escrow funds for investment purposes’.

The fiduciary services provided by national banks are subject to Federal regulations set out in 12 CFR Part 9 (“Reg 9”), and more specifically, collective investment funds are subject to 12CFR 9.18. State chartered fiduciaries and Office of Thrift Supervision chartered fiduciaries are subject to similar requirements. The fiduciary’s authority to pool preneed trust accounts is derived from 12 CFR 9.18(c)(4). The regulation sends the fiduciary back to state law for its authority, and prohibitions. In the absence of express authority (and express prohibitions), the fiduciary is in ‘no man’s land’ with whether it is required to follow the requirements of Reg 9, which include a written plan, audits and asset valuations.

The Michigan law seems to appreciate that Reg 9 requirements go beyond what should be required of a preneed master trust, and appropriately, make the non-traditional master trust subject to a case-by-case approval. The test will be whether the proposed pooling arrangement has sufficient accounting procedures to protect participating operators and their consumers. Missouri is particularly sensitive to this issue in light of the NPS failure, and its procedures for trust rollovers.

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A Los Angeles Times story about Jerrigrace Lyons, California’s ‘death midwife’, generated ten days of entertaining barbs and counter-barbs on an SCI chat board. The article describes how Ms. Lyons assists families that choose home funerals in lieu of a funeral home.

One of the posts challenges a fellow funeral director for the assistance he provided a family, stating in uncertain terms that such services exposed the funeral director to legal and professional liability. Because the post was somewhat tactless, the liability issues were skirted in subsequent responses. Undeterred, the poster ("Chuck") challenged consumer advocates and fellow funeral directors on the liability issues.

But, Chuck’s main point has to do with the funeral director’s exposure for professional liability when assisting a home funeral. Chuck attempted to bait consumer advocates into providing a statement that funeral directors should be liable only for the services they provide. Out of better judgment, the consumer advocates advised ‘no can do’.

Incompetence or mistakes can trigger professional liability, but professional liability can also result from the funeral director's failure to discharge an obligation imposed by statute or regulation.

The standards required by a funeral director's license differ from state by state. Only a handful of states prohibit home funerals. Consequently, it stands to reason that most states permit the funeral professional to assist families who want to explore the home funeral alternative. But as with any profession, it is incumbent upon the funeral director to understand what is required by his/her license, and to ascertain from a meeting with the family whether the circumstances and the family’s intent comply with applicable state law.

As another poster explained, some states’ definition of “funeral directing” impose an obligation on the licensee (whether it be the funeral director or the establishment) to maintain control of the body until the final disposition is made. In such states, the funeral director may have an obligation to witness the committal.

Funeral directors willing to assist with home funerals probably do so out of a commitment to professionalism rather than the prospect of revenue. To disparage funeral directors ‘for crossing the line’, or to label families who chose home funerals as ‘crackpots’, serves only to discredit the professionalism of the death care industry.  

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