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

Several states have passed laws in the past few years mandating greater preneed oversight. But with state budgets in decline after the 2008 market crash, regulators are hard pressed to find a way to pay for consumer protection.

Colorado’s new law simply states that the contract seller shall bear the cost of its examination.

In failed legislation earlier this year, Kansas sought to finance preneed cemetery oversight through a per contract fee. Sources indicate that Kansas will attempt to implement a $20 per contract fee later this year through new regulations.

Missouri took a hybrid approach last year through seller/agent/provider license fees and a $36 per contract fee. Ten months into the mission to provide preneed oversight, the State Board of Embalmers and Funeral Directors do not have enough data to know how well this approach will work. The first reporting period is still four months away, and no one knows how many preneed contracts have been sold since August 28th. As a consequence, license fees will likely be increased, which hits the smaller operator the hardest.

In a 180 degree change from last year, the State Board is mulling whether to increase the per contract fee, knowing that most sellers pass that fee on the consumer. In response to pressures from consumer advocates, the State Board had originally taken the position that sellers should be required to absorb the $36 fee. The reality is that the costs of preneed oversight are passed on to the consumer in one form or another by the preneed seller, and the per-contract fee provides transparency to the consumer.

Agencies, such as the State Board, that are charged with licensing preneed sellers and agents, need to charge some form of fee to cover the administrative costs of licensure. However, there is justification that the transaction (i.e. the consumer) should primarily bear the cost of examinations and oversight. On the other hand, it is not equitable that consumers bear the costs of disciplinary proceedings for the operator that fails to materially comply with the law.

With the per-contract fee, consumers and operators are provided a clear benchmark of the costs of their state’s preneed protection program. Such a fee will place a burden on regulators who must budget for fixed program costs (such as dedicated staff).
 

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The Comptroller’s Office mailed out letters to funeral homes last week advising how to report the first contribution to the Pre-Need Funeral Consumer Protection Fund. The letter tracks the first few paragraphs of the “Senate Bill 1682 Information” page from the Comptroller’s website.

The funeral home letter includes two documents: a Fee Payment Record and a Bank Confirmation Form. For each contract sold, the funeral home must deposit $5 to the Consumer Protection Fund. The $5 may be funded out of the consumer’s payments. The Fee Payment Record will be used to record each pre-need contract for which the funeral home has made a deposit.

The Bank Confirmation Form is intended to establish an audit trail for the mass exodus of preneed funds from self trusted accounts, and from the IFDA master trust. This form serves to put funeral home’s pre-need trustee on notice that it will be required to provide records to the Comptroller’s Office.  

The Comptroller’s letter to funeral homes omits information that the website page provides consumers. Fiduciaries that are accepting Illinois pre-need trusts should take note of the Comptroller’s consumer information:

Notice to Consumers --- Your independent trustee must provide an annual notice to all consumers of the status of their funds including an explanation of any fees charged by the trustee, an explanation of the purchaser’s right to a refund and identification of the primary regulator of the trust or insurance company under state or federal law. Here are some suggestions for ensuring compliance with the new provisions:

· Be sure the corporate fiduciary or insurance company that you use is aware of this requirement.
· Be sure the corporate fiduciary or insurance company provides you with a copy of the annual notice.
· Retain a copy of this annual notice in your file.

Historically, preneed fiduciaries have defined their duties by treating the death care operator as the trust beneficiary, and the trust as a single account. The Comptroller’s trustee requirements reflect a trend that forces the fiduciary to factor the consumer into the beneficiary equation, and to provide an accounting on an individual contract basis.

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Missouri funeral homes will get their first glimpse of their State Board's proposal for self reporting for preneed sales.  Under the prior law, preneed sellers merely reported the number of contracts sold and their aggregate sales price. 

For Missouri regulators to properly assess whether 'old' Chapter 436 trusts and joint accounts are properly funded, the new reporting requirements will have to ask for data that funeral directors may find intrusive.  But the state with the trusting requirements closest to Missouri's has been self reporting for many years. 

Iowa makes its reporting forms available through its website.  Preneed sellers, preneed agents, insurance companies and banks each have their own reporting form. 

By addressing the forms now, Missouri's State Board will be affording funeral directors 3 months to prepare reports on all existing business.  Depending how well the funeral home has kept its records, this should be adequate to meet the October 31st deadline.

Funeral homes that used either trusts or joint accounts under the prior Missouri law may want to look at Iowa's form to anticipate what individual contract data could be required.  The Iowa forms also provide instructions and Q&A sections. 

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The next round of legislative proposals have been posted to the State Board of Embalmers and Funeral Directors website. At the top of the list is whether the trusting requirement should be raised from 85% to 100%. The proponent believes this will enhance consumer protections. He is not alone.

The Illinois Legislature heard the same from Rep. Dan Brady last year. And, the Funeral Consumers Alliance has been advocating the same position for years. But, does this requirement truly enhance consumer protection?

Competition dictates the type of preneed program a funeral home maintains. Metropolitan funeral homes often have no choice but to maintain proactive programs that require training, marketing, management and dedicated staffing. To offset program costs, the funeral home must receive revenue from the preneed sale. Setting the trusting requirement at 100% forces the funeral home towards insurance products, and their commissions. A legislative agenda that forecloses the trusting option makes little sense when insurance played a major factor in both the NPS and IFDA failures.

For the consumer’s perspective, a major weakness in the old Missouri law was the preneed seller’s right to withdraw income from the preneed trust. Without the accrual of income, the preneed contract became less portable as it aged. While SB1 may have other trust issues to address, it did fix the income accrual issue.

Some have argued that SB1 did not go far enough in providing the consumer refund rights to the income earned by a trust. The seller of the guaranteed contract is afforded the right to retain the income on cancellation because he takes the risks associated with the price guaranties. But prior to SB1, there was little authority for the non-guaranteed contract. If the preneed purchaser places a premium on refund rights, then the non-guaranteed contract authorized by SB1 is the better option.

With regard to Illinois law, the glaring weakness regarded the self-trusting provision and the lack of fiduciary oversight. With trusting already set at 95%, many larger funeral homes were already dependent on insurance funding. Deprived of revenues to maintain a trust program, funeral homes relied upon the IFDA. The lack of oversight and transparency lead to abuses by past IFDA leadership.

SB1682 took the crucial steps of requiring corporate fiduciaries, and imposing the prudent investor rule. But a question remains about who should provide oversight to the preneed fiduciary.

So, how does 100% trusting further enhance consumer protections in either Missouri or Illinois?

The debate over insurance versus trust has been waging for twenty years. While each has its strengths and weaknesses, the death care industry has done little to offer the consumer meaningful options for funding and price guarantees. Establishing barriers to either form of funding (or to non-guaranteed contracts) will do little to enhance consumer protections.
 

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