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

This blog commented a few weeks ago on Dan Hynes’ failure to follow through on his own legislation. Since that post, the new Comptroller revised the Annual Report to eliminate references to self-trusted funds. However, funeral homes that transferred out of the IFDA master trust will still find the report difficult to complete.

The Comptroller’s Annual Report includes a schedule called the Annual Statement of Funeral or Burial Trust Funds, which requires the trust fund to be accounted for as though it were a depository account. The schedule seeks contributions, interest and withdrawals. The schedule doesn’t contemplate the losses suffered by the trust when Merrill Lynch liquidated the fund’s insurance investments.

For transferred accounts, the IFDA made those entries to the schedule required to ‘zero out’ the account. The ‘withdrawals’ reported by the IFDA will not reconcile to what the successor trustees received.

Ms. Topinka’s staff will find audit trail from Merrill Lynch to the new fiduciaries difficult to follow when relying upon the Annual Reports due March 15th.
 

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Many Illinois funeral homes were surprised when they opened their mail this past week. The Illinois Department of Insurance wrote to each funeral home that was determined to have a claim in the $18,000,000 Fund established by Merrill Lynch for IFDA master trust participants. The letter included a check and a spreadsheet allocating the check amount by individual consumer contracts.

Each funeral home will need to review the spreadsheet and identify those contracts that were serviced or terminated, and those contracts that remain active.

The funeral home will be entitled to keep the amounts allocated to guaranteed contracts that have been serviced according to the terms of the contract. If the goods and services were changed from what was described in the contract, the funeral home may owe the consumer a refund.

For non-guaranteed contracts that were serviced, the funeral home must compare the credit provided the family to the total amounts received for the contract. The funeral home will have to add the ML funds to the amount received from trust when the contract was serviced. If the credit given the consumer on the contract is less than the sum of the trust distribution and the ML funds, a refund is due the consumer.

If the preneed contract was terminated, the funeral home will need to review the contract and the amount originally refunded. In most cases, the settlement amount will be owed to the consumer.

For the active preneed contracts described on the spreadsheet, the funeral home will be obligated to apply the ML funds to the trust (or insurance) that funds the contract. Funeral homes must anticipate that the Comptroller’s Office will hold them accountable for these funds. (Funeral homes tempted to retain the entire settlement check should see the preceding blog entry.)

If the funeral home is entitled to a portion of the ML fund check, the check could be deposited to an operating account. The funeral home should then promptly write a check to the trust for the active contracts. If all of the contracts on the spreadsheet are active, the funeral home may want to endorse the check over to the trustee. The trustee will need a copy of the spreadsheet for purposes of crediting the accounts with the proper amounts.
 

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A few years ago, a past president of the NFDA wrote in The Director that funeral directors should begin blowing the whistle on industry cheaters. This blog raised a concern over whether funeral directors understood applicable preneed laws well enough to become whistleblowers. A recent news article in the Morris Daily Herald contains facts to suggest an industry member decided to become a whistleblower. The results may have gone further than what the whistleblower expected.

The story comes out of Wilmington, Illinois, where preneed regulation is in a period of transition. At the center of the Illinois storm is the IFDA, Merrill Lynch and the Illinois Comptroller’s Office. From statements provided by a Comptroller spokesman, readers can connect the dots to conclude the funeral home under investigation had participated in the IFDA, and may have failed to deposit to trust the funds received on 8 preneed contracts. With the turmoil surrounding the IFDA, many funeral homes were reluctant to continue making trust deposits.

The Comptroller statements also reference a Freedom of Information request and a complaint. The chances are that someone with connections to a funeral home competitor made the FOI request, and filed a complaint. The Comptroller’s office responded with an examination, but then quickly referred the matter to the State Attorney’s office.

With SB1682 being less than a year old, many Illinois funeral directors remain confused about the law’s requirements. If the Wilmington situation proves to involve a funeral home that erroneously made deposits to a custodial arrangement, the new Comptroller may be sending a stern warning to Illinois funeral directors: get right with the law or face the prospect of criminal proceedings. It seems drastic, but it is also consistent with a trend where regulators are turning to local prosecutors. This is also the response of a newly elected Comptroller who may like nothing better than to have preneed oversight transferred to someone else, even if its piecemeal to a State Attorney’s office.
 

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Missouri cemeteries received a brief questionnaire last week from their primary regulator. The Office of Endowed Care Cemeteries (the OECC) has responsibility for enforcement of Chapter 214, the Missouri law that governs endowed care requirements and preneed sold by licensed cemeteries. The OECC would seem to be sizing up cemeteries as candidates for Chapter 214 preneed audits. If a cemetery is selling preneed pursuant to Chapters 333 and 436, the OECC can cross the cemetery off its list. But the likelihood is that most cemeteries selling preneed have opted away from Chapter 436.

What may not be apparent to consumers is the fact that many Missouri cemeteries claim exemption from Chapter 214 endowed care licensing requirements. Some cemeteries site exemption from these license requirements based on religious affiliations, or because they restrict grave space sales to family or association members. These ‘exempt’ cemeteries face new regulation requirements if they sell merchandise and services that would be deemed “preneed” by Chapter 436 (and the State Board of Embalmers and Funeral Directors).

Consumers can conduct their own survey of a cemetery offering to sell burial services, monuments, urns and vaults before there is a death.

If the consumer is purchasing a monument or marker, and is making a single payment, ask whether the contract complies with Section 214.385 and provides for prompt delivery.

If the purchase of the monument or marker is being made with installments, with delivery deferred to the future, ask the cemetery for documentation regarding the trust or escrow account used for the payments. The cemetery will have to either comply with Section 214.387 of Chapter 214 or Section 436.435 Chapter 436.

If the cemetery is offering to sell burial services or vaults prior to a death, a portion of the consumer payments should be deposited to either a 214.387 trust or a 436.435 trust. If the cemetery claims to be exempt, or can’t answer the question, the consumer has reason to be concerned. Such concerns should be addressed to either the OECC or the State Board of Embalmers and Funeral Directors.

Finally, ask the cemetery about their endowed care license. If it does not have a Chapter 214 license, ask to see its Chapter 333 preneed seller license. If the cemetery is not licensed as an endowed care cemetery, it has no option but to be licensed as a preneed seller under Chapter 333.
 

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In the end, Clayton will likely spend many of his final days in a federal penitentiary. The Memphis Commercial Appeal outlines the plea bargain to be entered by Clayton Smart to conclude criminal investigations in Tennessee, Oklahoma and Michigan.

Comments made to the Commercial Appeal story express outrage with the prosecutors and the plea bargain. Consumers will not be made whole, nor will Mr. Smart be summarily executed.

The costs of the Smart investigation and prosecution have to be staggering. The transactions span three states, multiple state regulatory jurisdictions and various local and Federal prosecutors. With the prospect of securing testimony against all of those who abetted Mr. Smart, prosecutors have moved to bring the matters to faster conclusion.

It is unlikely that three different courts will agree that Mr. Smart’s 4 years at 201 Poplar has paid his debt to society. His cooperation will count for something, but the harm to consumers can’t be ignored.  

With budgets in decline, regulatory agencies and prosecutors need to find the means to work together when the facts indicate fraud or theft have occurred.  The preneed regulator will be the first to suspect something is wrong, but in the end, may lack the resources to press for prosecution.   Prosecutors may lack the facts and knowledge of the preneed law to determine whether a crime has been committed.  Better coordination between regulators and local prosecutors is needed.
 

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The ‘deadline’ for Missouri preneed sellers to ‘voluntarily’ report their pre-SB1 trust funded sales is a mere two weeks away. Again, this is a voluntary report. As such, missing the ‘deadline’ or failing to use the Board’s form carries no penalty to the preneed seller. So, why file?

The reason expressed by one State Board member was that the report would give preneed sellers the opportunity to demonstrate their trust was appropriately funded. Funeral directors active before the 2009 Missouri Legislature advised their legislators that the actions of NPS were not reflective of the industry as a whole. Legislators were informed that the vast majority of funeral homes put the consumers’ funds in the bank.

Missouri preneed sellers have three funding options: joint accounts, trusts and insurance. The issue of whether joint accounts are properly funded was addressed with the first provider renewal reporting filed this past October 31st. With insurance premiums posted to an insurance carrier, the Board decided trust funding would be their second priority.

The voluntary trust report is the opportunity for those sellers to put their money where their mouth is. Granted, the financial examinations proposed by the Division are far more intrusive than what had been discussed. But, the failure to back up the talk to the legislature will ring hollow in the face of the Board’s initial efforts to back up the industry’s representations.

Individually, funeral homes need to approach the voluntary reporting as another step in organizing their records in a manner to expedite the eventual financial exam. The goal is to get the exam over with a minimum of disruption and problems.

While many sellers are professing to be ‘as clean as a whistle’, most sellers will have issues. In the absence of regular oversight and guidance, funeral directors were left to interpret the law on their own. Mistakes were made, and the State Board would rather help correct those mistakes than pursue disciplinary actions that clog the administrative hearings docket. Accordingly, sellers could use the voluntary trust report to identify any issues they may have, and to outline their own corrective plan. Be a problem solver.

For those sellers who decide to make the Board examiners earn their keep, the expense of oversight will be pushed higher. The $36 per contract fee will prove inadequate, and the discussion will turn to increased fees. If the data should prove that a disproportionate amount of examination time was spent on small sellers who made no effort to comply, the larger preneed sellers will force the cost of the system to be more equitable. Under Illinois law, the preneed regulator has the authority to tag such a seller with a $20,000 audit fee. That represents 555 preneed contract fees that must be borne by the seller, not the trust or the preneed consumers.
 

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At age 78, Darrell Bennett should be spending his days on a Florida golf course. Instead, he is back in Michigan trying to salvage his life’s work. Like so many funeral home owners, Mr. Bennett handed over the keys to someone he trusted and took back a note for the purchase price. According to stories published by the MonroeNews and Fox News in Toledo, Brad Prochnow not only failed to make good on Mr. Bennett’s note, he also kept preneed payments made by consumers.

With rising cremation rates, preneed funding failures, and the allure of retirement, a growing number of funeral home owners are thinking about an exit strategy. The decline in funeral home profitability will require more of a plan than taking back a note.

Mr. Bennett hopes that the industry will learn from his experience and take steps to better safeguard consumers’ preneed funds. Another lesson to be learned is that a proper succession/exit strategy involves planning, financial analysis and due diligence. Hiring a consultant or an accounting firm may seem an unnecessary expense, but a view of Mr. Bennett’s interview would suggest otherwise (youtube).
 

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