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

While the reasons are open to debate, it is common knowledge within the funeral industry that a small percentage of consumers cancel their preneed contracts. Consequently, some funeral directors tend to view their preneed block of business with a degree of certainty. Performance of the contracts, and recognition of the revenues, seems to be just a matter of timing. A few state laws reflect the perception that performance of the preneed contract is a ‘lock’. For 37 years, Missouri law allowed preneed sellers to withdraw trust income. Nevada’s law has similar provisions. Preneed trust income became a source of funds that could subsidize funeral home operations.

While the preneed subsidy had long been a source of frustration for certain Missouri officials, they were powerless to stop the practice until the failure of National Prearranged Services. With the 2009 passage of Senate Bill No.1, Missouri officials feel they have a law that they can use to force a new business model upon the funeral industry.

In the case of the California Master Trust, the Department of Consumer Affairs has taken a similar position with regard to an administrative fee that has been paid to participating funeral homes for decades. Consistent with the historic industry view, the CFDA response relies in part upon the preneed guarantee and the risk assumed by the funeral home.

The position becomes tenuous when the administrative fee is judged on terms of whether a necessary service has been rendered to the trust, and whether the amount paid is reasonable for the services received. It is apparent from the documents that the DCA will also apply that analysis to what the CFDA has charged the trust. Depending upon how this controversy is resolved, other states’ regulators may ask whether the administrative fees charged to the master trust are appropriate.

As a recent Funeral Service Insider comment suggests, some industry associations have also become dependent upon the preneed subsidy. The classic guaranteed argument loses traction when facts such as those in Illinois emerge. By one account, non-guaranteed preneed contracts accounted for one third of the contracts administered by the IFDA.

But, in defense of the CMT, preneed trusts are labor-intensive enterprises where the funeral home, administrator and fiduciary have shared responsibilities. In its challenge of a different CMT issue (the maintenance of preneed records within California), the DCA acknowledges this reality while discussing the funeral home’s recordkeeping duties. Effective field examinations will require that certain preneed records be maintained at the funeral home. But, is it reasonable to impose greater administrative requirements on the funeral home without allowing any compensation to be paid to them?

The emerging regulatory challenge to the preneed subsidy is premised on the position that the funeral home’s right to preneed funds does not vest until the contract is performed. That position is consistent with Missouri’s efforts to improve portability. But, regulators must also find a consistent and reasonable position with regard to the services that they mandate from the funeral home. 

(The Funeral Service Insider excerpt was included by special permission from Kates-Boylston Publications and Funeral Service Insider.)

 

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In contrast to how the IFDA situation was handled, the California Department of Consumer Affairs has taken a public approach to disclosing its issues with the CFDA’s master trust by posting its website an audit report and the Association’s reply.

The DCA is unhappy with the Association, and the master trust fiduciary, with regard to (among other things) the fees that have been charged to the trust, the authorities that have been delegated by the fiduciary, and their refusals to respond to certain audit inquiries and document requests.

The audit report reflects a very literal interpretation of the applicable California laws. A close reading of the report should leave one scratching his/her head on a few of the issues (hint: corpus issues). But, auditors have no choice but to apply the laws that are applicable to the entity under examination, and unfortunately, the California preneed law and rules are dated and disjunctive.

For those who summarily advise that the audit report and the DCA actions reflect yet another example of a preneed program gone bad, that is not the case.

The DCA website includes the April 29th response from the law firm representing the Association. I doubt the attorneys knew that the letter would end up on the DCA website, but the reply is very illustrative of the issues that exist with a dated, and ambiguous, law. While the Association has made some serious missteps with regard to some of the law’s ambiguities, the auditor’s interpretations of the law and its requirements are inconsistent or unreasonable in some respects. Accordingly, the DCA would be well advised to accept the offer extended in the “Conclusions” on page 46 of the reply.

The crucial issues raised by this dispute are relevant to all master trusts, and will be addressed in future posts. Hopefully, the DCA will continue to make the discussions and eventual resolutions public so that death care regulators and preneed program administrators can take note.
 

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The Missouri State Board of Embalmers and Funeral Directors met June 15th and 16th to consider legislative proposals offered for technical corrections to SB1. In a prior post, this author took exception to one of the proposals made by a Board member to raise Missouri’s trusting requirement from 85% to 100%. However, a majority of the State Board did not, and voted to include 100% trusting among its proposals to the Missouri Legislature later this year.

While the submitted proposal stated this was ‘a consumer protection matter’, the Board discussion was addressed to the fact insurance funded preneed provides the funeral home a better return. Trust funded preneed was criticized for lacking the investment vehicle to recover the 15% of consumer payments retained by the funeral home when the contract is sold. So, how does the 100% enhance consumer protection?

Historically, trust funded preneed in Missouri has been a liability to industry. When allowed to keep 20% and withdraw all income, funeral homes have been left to service a contract on an amount that may not even cover the costs of merchandise after 15 years.

SB1 takes three key steps towards rectifying that situation. First, the ‘retainage’ the seller may keep has been reduced from 20% to 15%. Second, the trust is now required to accrue all income. Third, and most elusive, SB1 now allows sellers to pool their trusts for investment purposes.

Prior to SB1, sellers were prohibited from commingling their trusts. The accounting systems available in the 1980s were not sophisticated enough to track both consumer and seller funds when multiple sellers were involved.

In the defense of the Board’s position, a trust that averages a gross return of 4% will be hard pressed to pay the funeral home enough to cover its at need prices in 10 years. As more funeral homes are pressed to provide preneed, the growth in ‘guaranteed preneed’ eats into the long-term profitability of the business. An indirect answer to the justification to the 100% trusting requirement.

The weakness in this position lies in the alternative that funeral homes are forced to take: insurance funding and the costs to the consumer.

If the funeral home has to offer preneed, and it has costs associated with providing preneed, then insurance funded preneed becomes the vehicle of choice. One of the knocks on insurance is its costs to the consumer when coverage is purchased with installments.

For the older consumer who cannot afford a single premium policy, the financing of the policy over five or ten years will cause the cost of the funeral to increase substantially.

All forms of preneed are beginning to include separate charges or fees to the consumer. It becomes incumbent upon the consumer to approach the preneed transaction with more questions, including: How much is this going to cost me?
 

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