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

Forest Hills’ preneed consumers were hoping for news of retribution, but Clayton Smart’s anticipated plea bargain was put on hold. If news reports are accurate, authorities from Tennessee (and perhaps Michigan and Indiana) have their sites on the individual(s) who facilitated the transactions that eventually left preneed trusts and permanent maintenance trusts depleted.

For the past few years, Mr. Smart has sat in jail while authorities built their cases. Until recently, Mr. Smart had not even employed an attorney. In what may be tipping his hand, Smart’s attorney now suggests his client has paid a steep price through incarceration. If Forest Hills consumers had their way, Mr. Smart would be condemned to a much warmer, and eternal, confinement.

It is most likely that Mr. Smart has been making his deal through testimony given, and to be given, with respect to his transactions in Michigan and Tennessee. Mr. Smart’s Michigan caper has been detailed by the Detroit Business Journal in an article titled The Grave Robbers. CNNMoney has also chronicled the story.

By these accounts, Mr. Smart had no prior experience in either the funeral business or the cemetery business. Yet, with the help of ‘sophisticated financial advisors’, a self-promoting speculator exploited the laws meant to protect the consumers of both industries.

The Tennessee authorities cannot possibly make the Forest Hill consumers whole. When Smart took control of the Forest Hill preneed trust funds, its insurance investments were surrendered at substantial losses. Smart’s advisors wanted to put the money to better use. Consequently, the authorities need to make an example of Mr. Smart, and his friends. 

Those victimized by NPS (and the IFDA?) are hoping for some of the same justice. However, the issue of justice in Missouri is complicated by rumors of complicity between the preneed company and some of its industry members.
 

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Missouri's funeral industry has been given 30 days to submit proposals for revisions to the preneed law that went into effect last August 28th.  By email, the State Board has provided the guidelines for submitting changes that will then be discussed by the Board at public hearings to be held in June.  The Board has it's own July 15th deadline to adopt any of the proposals and submit them to the Division of Professional Registration. 

For those operators who are displeased with the new law, the clock is running.

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The Topeka Capital-Journal has identified the essence of the Secretary of State’s plan for Kansas cemetery regulation: addressing cemetery problems before the trusts go upside down.

There are two types of cemetery trusts: perpetual care trusts and preneed trusts. Perpetual care trusts (or permanent maintenance trusts) provide the cemetery crucial funding for mowing, and the other expenses related to care of graves, markers, roads and trees. Preneed trusts are required when cemeteries sell services and merchandise (such as vaults and markers) where delivery is deferred to a later date.

Both types of cemetery trusts have a funding liability that serves as its waterline. It is fairly common for a trust to ‘take on water’ when the value of its assets falls below the required deposit balance. As the trust takes on water, the operator’s liability will become so great that it will flip the boat, and take all aboard down.

A cemetery trust going ‘upside down’ can be an indicator the operator has used the consumers’ payments to pay bills instead of making the required deposits. These are challenging times for cemeteries, and some operators may find it easier to ‘borrow’ from the consumer than to go to the bank for a loan or to implement difficult business changes.

The Kansas Secretary of State has taken the position that it only has the tools to spot those cemetery operations that are listing dangerously to one side or the other. To avoid the expense of salvaging a shipwreck, the Secretary wants the ability to intervene earlier. To identify troubled vessels, the Secretary of State’s legislative agenda would have required monthly reporting from the cemetery operator and the trustee. However, the Secretary’s plan ran afoul of the industry’s supertanker: SCI.

At a legislative hearing, SCI took the position that the burden of monthly reporting “would greatly overshadow any benefit which could otherwise be obtained through the more practical option of annual reporting.” For the large, public companies subjected to regular reviews by the Securities Exchange Commission and the Internal Revenue Services, a state mandate requiring monthly reporting might be redundant and burdensome. However, the industry continues to be dominated by the independent operator, for whom the Secretary is the principal regulator.

In the next Kansas legislative session, certain compromises need to be struck for the benefit of the consumer. More frequent reporting should help flag irregularities that are symptomatic of the troubled operator. Independent fiduciary reporting is also needed as a cross check to what the operator is filing. And, if this is redundant to an operator’s existing reporting systems, the law could provide the flexibility to allow an operator to ‘clep out’ of monthly reporting.

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The Springfield Journal-Register recently reported that Illinois' Cemetery Oversight Task Force made a recommendation to restrict preneed trusts to investing in government-backed securities.   While its difficult to actually find that recommendation in the Task Force's report, it is not a bad idea for the consumers who purchased a non-guaranteed preneed contract.  However, that type of restriction would hinder funeral homes that offer guaranteed contracts.

The safety provided by government-backed securities comes at a premium: a lower investment return.  Funeral homes and cemeteries are encountering cost increases that recently have outpaced the returns seen from insurance and trusts.  With regard to preneed trusts, investment return has often lagged behind cost increases because tax issues have been allowed to dictate investment policies.  

In the case of the IFDA, the trust resorted to insurance.  It is also very common to find preneed trusts invested exclusively in tax exempt bonds.  

If funeral homes and cemeteries are to offer guaranteed preneed contracts, applicable law should require trusts to adhere to the prudent investor rule.  While these trusts will always favor an asset allocation heavy with fixed income securities, a diversification is needed to provide protection and reasonable returns.  

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The General Laws Committee of the Missouri Senate will hold a hearing this Wednesday (April 7th) on SB 1025. This bill provides hope to many small, rural funeral directors who would rather avoid the preneed transaction and the regulatory morass of SB1.

The bill would add a new Section 208.010.5 whereby individuals seeking to spend down assets to qualify for assistance could establish an irrevocable trust of up to $10,000. The trust could only be used for funeral and burial expenses. The section would also exclude the arrangement from Chapter 436.

When a similar provision was included in last year’s SB1, the funeral directors association expressed concern that the arrangement would be abused. However, the requirements of SB1 have proven burdensome and confusing to the industry, extremely so for the funeral home that only accepts “pre-arrangement funds” as an accommodation.

A Chapter 208 final expense trust would provide the consumer and his Missouri funeral operator a much-needed alternative to the joint account contract.
 

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