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

For many Illinois funeral homes, April 15th served as a bitter reminder of Merrill Lynch and the financial losses suffered by the IFDA master trust. The final Merrill Lynch settlements (approximately $41 million) were received in 2012, and taxes had to be paid on those funds this past tax day. Funeral directors have questioned how those settlement payments could be taxed as income after the losses suffered when Merrill Lynch (as trustee) terminated the key man policies sold to the trust by a Merrill Lynch investment broker. After all, the aggregate settlement payments ($59 million) did not come close to covering the write downs taken by the trust ($76 million). But, Merrill Lynch took the position that a write down in a funeral home’s trust value for policy surrenders did not represent an investment loss. To compound the situation, Merrill Lynch filed a final Form 1041qft for each funeral home that transferred out of the master trust and treated the trust as terminated.

The question is whether Merrill Lynch could have characterized the value write downs so as to afford the funeral homes a capital loss carry over that could be applied to the settlement payments and future income. If one assumes the lowest Form 1041qft tax rate of 15%, Merrill Lynch could have saved the IFDA master trust participants income taxes of approximately $11.5 million.

With Merrill Lynch now out of the IFDA picture, funeral homes may want to turn to the IFDA’s new trustee for assistance. If the write downs can be properly characterized as losses that can be used as capital loss carryovers, it may be worthwhile to have those ‘final’ 1041QFT returns amended. As fiduciary of the Wisconsin Master Trust, the IFDA trustee may have already contemplated this issue.
 

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More than one funeral director has expressed the opinion that the State Board should never have been given rule making authority. We'll never know, but if the State Board had rulemaking authority 22 years ago, it could have implemented rules to help enforce NPS' 1990 settlement agreement, and thereby avoided that company's collapse. But equally important, rule making authority provides the State Board the means to clarify the ambiguities and gaps that exist in Senate Bill. No 1. This is as much to assist the preneed seller who has a business practice that does not fall neatly within the law as it does the State Board attempting to address how that practice should be regulated.

But, Missouri's first attempt to pass a 'conventional' preneed regulation has been a trying exercise for the State Board, its staff and the industry, with mutual frustrations getting the better of everyone. All concerned may have been spoiled by the level of cooperation exhibited when emergency regulations were needed to keep Missouri's preneed industry operating. Had it not been for those emergency regulations, Missouri's preneed industry would have come to a screeching halt for months.

Following the passage of the emergency rules, the State Board staff recommended that the industry's other SB1 complaints be tabled to provide the financial examination process the time required for Division personnel to 'get their arms around the issues". That made perfect sense to this author, that is until the insurance assignment became the focal point for the Board's first regulation.

The political realities are that the State of Missouri needs revenues, and the excess insurance proceeds paid to funeral homes should be paid to the State pursuant to RSMo 208.010.7(4) before refunded to the families of assistance recipients. If funeral homes use the spend down provisions to their benefit when meeting with families, then they should also have a duty to comply with Chapter 208. But, the problem has been that families were allowed to exclude insurance policies for asset testing without a preneed contract, and the drafters of SB1 were focused on NPS and the sale of preneed contracts.

SB1 has flaws, and the Division once acknowledged that corrective legislation would eventually be needed. Our question is whether the Board's first regulation is indication that the State now has a double standard when it comes to preneed regulations and the need for corrective legislation: a restrictive interpretation of SB1 for the industry and a liberal interpretation for itself?

Like SB1, the Board's first regulation proposal was forced by the State, and has its own flaws. The proposal is too broad in attempting to define all insurance assignments and beneficiary designations as the consideration that triggers SB1. The proposal also extends the preneed contract fee without an explanation of the examination procedures needed for the transaction. Then to buttress the position that the regulation binds all outstanding insurance assignments, the State relies upon a confidential legal memorandum as having put the industry on notice. If the industry does not find the State's rationale credible, many funeral homes may refuse to comply. We find it frustrating that the State could accomplish most of what it wants without sacrificing credibility. That credibility will be important to getting funeral homes to embrace the future changes required for compliance with SB1. It remains to be seen whether the State will be flexible with the industry in achieving their mutual goals.

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Three years ago we asked that question with regard to the power struggle occurring between the Missouri State Board of Embalmers and Funeral Directors and the Missouri Division of Professional Registration staff. That post was influenced by our experiences with preneed regulators from other states, who range from elected politicians to the revolving door bureaucrat. I would always prefer the experience and stability of a Dennis Britson or a Mack Smith, but they honed their skills over decades, and Missouri is under a bit of pressure to get reform rolling. With the Missouri Legislature having vested preneed supervision with the industry, we saw hope that Missouri could establish a unique structure where the experience of the industry would mesh with a staff with long term commitments. But silly me; the regulations drafted in response to a December vote on insurance assignments provide the answer to “Who is the Boss?” It is the Governor.

I must confess that my mind drifts at times when I attend the State Board meetings. Okay, I also check emails from time to time when the Executive Director gives her reports. But, the regulation proposals leave me wondering whether I was in the wrong room last December. But, Mr. Otto did whisper to me from time to time during the meeting I thought was the State Board’s. Maybe we were at a MFDEA meeting? Then again, I recall a unanimous vote that defined the insurance assignment as a preneed contract that was to be exempt from the $36 fee.

My warning from the “Who is the Boss” post in 2010 was this:

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

It is obvious the Governor doesn’t read this blog. Since 2010, an elected politician has made insurance assignments our preneed reform priority. I get it. The excess insurance proceeds could help offset the benefits paid to nursing homes, and Chapter 208 requires a Chapter 436 preneed contract. The State doesn’t want to revisit Chapter 436. It would be easier to manipulate the language of SB1 to get the desired result. (It’s not like the industry doesn’t do it too.) It took the State Board 18 months to offer a compromise, and one that was a win-win for the state and the industry. But, you are overplaying this hand by demanding the $36 per contract fee.

For the past two years, the industry and Board members have asked what the Division really needs in terms of fees to conduct exams. The answers have been evasive at best, but I could defend that response because the examination procedures are work in progress. But, your regulation proposals indicate that “The costs for the Board to administer preneed contracts is the same per contract, regardless of the value of the preneed contract.” If that is the case, then what is the cost per contract to perform a preneed examination? I find the Division’s budget for the State Board confusing, but the numbers attached to the agenda are significant. Is the Division receiving more that it needs, and if so, where do those funds go?

Up to this point, the examination procedures have focused on recordkeeping and confirming that consumer funds were deposited to banks and insurance companies. At some later date those procedures will need to look at how those funds are administered and paid out to funeral homes. But, until then, why is the $36 fee required on a transaction where the funeral director does not receive funds until after a death has occurred?

Three years ago I defended the slow pace of the Division, and advised the industry that reform required a shared responsibility between the Division and the State Board.  Accordingly, please respect the Legislature and let the State Board perform its role for reform under SB1.
 

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If you haven’t noticed, there has been some turnover among the associations’ preneed fund managers. With the threat of additional litigation in Wisconsin, this trend could continue. But not all of the turnover has been as publicized as what we have seen in Illinois and Wisconsin. After 20 years at the helm, Merrill Lynch recently gave notice to the Michigan Funeral Directors Association of its resignation. There are no search protocols for preneed fund managers, and so Michigan borrowed from the retirement fund community by publishing a request for proposal (RFP). While the MFDA should be commended in their effort to bring transparency to their program’s asset management, they missed (or ignored) an opportunity to shift more investment responsibilities to the financial industry. Instead of using FINRA Rule 2111 (“know your client”) to their advantage, the MFDA structured the RFP to perpetuate (and extend) the funeral director’s controlling role in investment decisions.

Hidden investment charges have been ‘part of business’ in the death care industry for decades, and this author has contemplated whether ERISA’s fee disclosure requirements could ever be incorporated into preneed trusts by the Federal Trade Commission. The Michigan RFP focused on the same ERISA fee disclosure requirements, which could lead one to assume that association’s leaders did not want to make the same mistake again. The Michigan RFP also raised another ERISA concept worthy of the preneed industry’s consideration: the 401K approach to investment by individual contract. We too have wondered why larger programs have not looked at data from individual contracts and the sponsoring funeral homes to build an investment options matrix.

But, the Michigan RFP can be faulted for cutting off the diligence requirements of FINRA Rule 2111. To insulate the Association from solicitations, the RFP provided summary information about the program and required all inquiries to go through an ERISA consultant. Prospective fund managers were required to submit investment strategies on limited facts and without direct communications to the Association. It is understandable that the Association would want to narrow the field before initiating an exchange of confidential information with prospective managers, but the screening of candidates should have preceded the request for investment strategies. Subsequent to the screening, the MFDA should then have provided detailed information pursuant to a confidentiality agreement. Under FINRA 2111, this sequence would have expanded the fund manager’s diligence responsibilities regarding investment strategy recommendations. The nature of the questions posed by the candidates would also have helped the MFDA in its assessment of the candidates. Instead, the RFP narrowed the fund manager’s diligence to an old investment strategy with a history of mixed results and challenges.

Within the context of ERISA retirement funds, RFPs may take a formula approach to finding a replacement fund manager. But the preneed industry is fragmented by 50 different state laws, and by program issues such as whether non-guaranteed contracts are sold, the association’s role as a seller versus an agent, investment restrictions, and trusting percentages. Injecting preneed asset management with a dose of ERISA could help to discourage hidden fees and improve the quality of fund managers, but the industry also needs an alternative to the strategy of offering funeral directors three investment options to choose from.
 

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Both the Memorial Business Journal and the Funeral Service Insider commented last week on the Milwaukee Journal Sentinel’s February 7th article regarding the former executive director of the Wisconsin Funeral Directors Association. Several issues were raised that should be included in future industry debate, and in particular, I would agree with Mr. Isard’s questions whether association executives are qualified to manage a master trust. But the following comments beg an immediate response:

“The whole situation with [the] Wisconsin Preneed Trust went off the rails when the goal shifted from trusting funds to investing funds.”

“The assumption that these trust funds are in the investment business is a mistake. We’re not. We’re in the trust business. From my view, that is a presumption of a preservation of principle. With a trust, you have an obligation to be prudent.”

Those comments suggest that trusting funds and investing funds are somehow mutually exclusive. While the comments may reflect the views of much of the death care industry, they also reflect a failure to understand the fiduciary’s duties. When entrusted with the money of another, the fiduciary has a duty to invest those funds consistent with the purposes of the trust and the interests of the trust beneficiaries. The fiduciary’s investment duties are governed by other laws, and a majority of our states have adopted the Prudent Investor Act. Wikipedia provides the following explanation of that Act:

In enacting the Uniform Prudent Investor Act, states should have repealed legal list statutes, which specified permissible investments types. (However, guardianship and conservatorship accounts generally remain limited by specific state law.) In those states which adopted part or all of the Uniform Prudent Investor Act, investments must be chosen based on their suitability for each account's beneficiaries or, as appropriate, the customer. Although specific criteria for determining "suitability" does not exist, it is generally acknowledged, that the following items should be considered as they pertain to account beneficiaries:

• financial situation;
• current investment portfolio;
• need for income;
• tax status and bracket;
• investment objective; and
• risk tolerance.

The majority of preneed trusts involve a single seller/provider and guaranteed preneed contracts. Under such circumstances, the funeral home operator has assumed the investment risk when the preneed contract is performed as written. Fiduciaries (and fund managers) have viewed the operator as the account beneficiary for purposes of the Prudent Investor Act. But depending upon state law, and whether the contract is ‘re-written’ at the time of death, the preneed purchaser may bear the investment risk. Accordingly, the fiduciary and fund manager should not completely ignore the preneed purchaser as the account beneficiary for purposes of the Prudent Investor Act.

Neither fiduciaries nor fund managers want to bring the preneed purchaser into the Prudent Investor equation for obvious reasons. But are suitability of investments for two that dissimilar? We would suggest not if the objective is to have investment performance track the prearrangement’s purchase price increases. As we noted in a March 2010 post about the IFDA master trust, the purchaser of a non-guaranteed contract was unhappy because the return on her non-guaranteed contract (1.7%) did not keep pace with the price increases of her planned funeral (4.2%).

Determining who to include as an account beneficiary in the Prudent Investor equation only gets more complicated when the preneed trust is an association master trust with dozens, or hundreds, of funeral home operators. If the master trust includes a healthy percentage of non-guaranteed contracts, the number of account beneficiaries could swell to the thousands. If the association is not the preneed seller (as is the case in Missouri, but not Illinois), what interest does the association have in the trust so as to justify being considered an account beneficiary? There are arguments in support of the association being such a beneficiary, but can those interests ever outweigh the funeral operator and the non-guaranteed contract purchaser?

One could argue that the Wisconsin Master Trust was never fully on the rails. The Association determined early on that a depository account could not keep up with rising funeral costs. Rather than seek legislation that would clarify the trust’s investment authority, the Association leadership sought regulatory permission to allow the master trust to embark on the path of investment diversification. The program derailed only after the executive director enmeshed his personal objectives with those of the association and then conspired with the fund managers to treat the association as the master trust’s primary account beneficiary.
 

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On January 14th, Missouri Governor Jay Nixon will be sworn in for his second term, and we are wondering whether the Governor’s plans for 2015 are influencing the direction of Missouri’s preneed reform. With commentary such as that published by the St. Louis Post Dispatch, the Governor may have his eyes on a 2015 campaign for national office. At a minimum, Governor Nixon could be targeting an old rival’s U.S. Senate seat. Either way, the Governor faces a nagging situation with NPS, and may feel compelled to accelerate preneed reform and deflect the criticism that has persisted for almost five years.

When National Prearranged Services collapsed in 2008, NPS funeral providers were especially critical of how then Attorney General Nixon settled the 1991 NPS lawsuit. The Attorney General’s office responded that they did the best possible with the weak enforcement powers provided by Chapter 436. Missouri’s Republican administration countered with a review committee formed for the purpose of finding industry consensus for preneed reform. But, the industry struggled to agree on key issues, and the State’s regulators took the lead in drafting Senate Bill. No. 1. In 2009, a newly elected Governor Nixon inherited the NPS fallout and a prior administration’s effort at preneed reform. Now four years later, the NPS fallout has somewhat abated (but not resolved), and there isn’t much to show in terms of preneed reform.

In contrast to the mortgage crisis or the state budget crisis, the NPS situation will not benefit from the recoveries of the nation’s economy or the financial markets. The Cassitys’ emptied the cupboards, and funeral homes are dependent upon the fixed recoveries negotiated with the state insurance guaranty fund. Most NPS providers are finding ways to cope, but one industry group persistently reminds the Governor and legislators of their discontent. The Governor would like to counter their criticism with evidence that preneed has been made safer under his watch, but it can take years to implement effective reporting and examination procedures.

As we noted in July 2011, a sudden increase in the number of financial examinations suggested that the Division was being pressured to accelerate the process. Shortly thereafter, the Division staff also began to press the State Board to define the insurance assignment as a preneed contract. The State Board and the Division staff disagreed on the insurance assignment issue, and frustration began to develop as the issue was pressed in subsequent meetings. That frustration culminated with a December 12th unanimous vote by the Board members to define insurance beneficiary designations as a preneed contract, but a preneed contract that would be exempt from the $36 preneed fee. Division staff warned that the distinction may not be legal. Within hours of the vote, the Governor’s office announced a Board appointment to replace Todd Mahn, the Chairman who had called for the vote.

The Governor’s website for Missouri’s Boards and Commissions states

"I am always looking for qualified, energetic applicants to serve on Missouri's 200-plus boards and commissions. Please spread the word. I would greatly appreciate it if you would encourage your colleagues and friends to review the vacancies and complete an application."

While this author has disagreed with some of the positions taken by Mr. Mahn, I do not question his commitment to the industry, or to the State Board. Nor did the former Chairman lack for enthusiasm and energy while serving the Board. But, rather than replace a Board member with known health issues that was serving on an expired term, the Governor replaced the younger Chairman.

It may not have been the Governor’s intent, but the appointment could be taken as message to State Board members to ‘get with the program’. But the Governor, and the Division, risk losing the confidence of both the Board and the industry. Someone has lost sight of the first issue discussed at the 2008 legislative meetings: who should have jurisdiction over preneed. Several state agencies attended that meeting, and none expressed any interest in assuming jurisdiction over the preneed transaction. As explained in a 2009 post, financial and insurance regulators often struggle to provide effective preneed oversight because they tend to focus on the ‘backend’ of the transaction (that part of the transaction they are most familiar). The front end of the transaction can take many different forms, which can push the transaction outside the normal scope of the agency’s jurisdiction. (For example, the Nebraska Insurance Department has jurisdiction over preneed sales, which includes trust funding.) When State Board members ‘stepped up’ in 2009 to retain jurisdiction (and demonstrate that the industry could provide meaningful self regulation), a collective sigh could be heard from the Missouri Division of Finance and the Missouri Department of Insurance. The Missouri legislature signed off on State Board jurisdiction, and in doing so made a trade off: reform would rely upon the collective experiences and training of six State Board members instead of an appointed department official. Governance by a board will never be the most efficient or expedient path to action.

In SB1, the State Board was given the task of protecting consumers against another NPS by developing procedures for preneed reporting and auditing. However, the Board is dependent upon the Division of Professional Registration for staffing, legal counsel, funding and reporting administration. Together, the Board and Division crafted a mission statement for the financial examinations that was to be the cornerstone of Missouri preneed reform. From this observer’s perspective, the State Board members never understood how the insurance assignment fit in to that mission statement. Explanations given to the State Board were unpersuasive, leaving an industry to wonder whether the issue was fee driven.

It may have taken the State Board a year to reach an agreement on the insurance assignment issue, but we believe the Chairman made the right call. This issue had a greater importance to the Division than it did the State Board, and there is speculation that the $36 fee, Chapter 208 and the state budget played a factor. Regardless, a resolution was needed so that the Board and the staff could turn to more substantive reform issues, including whether SB1 provides sufficient audit powers and protections. If the Division can look no further than the funeral home’s records, would SB1 have even stopped NPS?
 

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On December 12th, a Missouri coalition of NPS preneed providers will have a second opportunity to state their case for legislation to establish a NPS recovery plan. As we noted back in September, that coalition should anticipate a tepid reception from the State Board of Embalmers and Funeral Directors (and much of the Missouri funeral industry). Funeral operators may be sympathetic to the harsh economic realities of the guaranty fund’s ‘fixed recovery’, but few operators perceive how those future financial losses are ‘their problem’. Legislators cannot be as dismissive because the coalition is warning that it is a matter of time before funeral homes start to fail, and when that happens, consumers will ultimately suffer the financial loss. Not knowing whether two funeral homes or twenty funeral homes are at risk, the legislature gave the coalition a hearing to present a plan. The details remain vague, but it has been reported that the plan calls for a “mandated” preneed trust. If those rumors prove accurate, the plan has two major hurdles that could block its takeoff.

In concept, a state wide, cooperative preneed trust could provide financial relief to the NPS provider. A master trust could provide participating funeral homes the economies of scale to reduce administration expenses and increase investment performance. As a collective group, the NPS providers may be able to achieve a return that not only offsets the cost increases of the future preneed business, but also some of the costs of the NPS contracts yet to be performed.

But, any thought of using investment returns of future business to fund old business would have to be closely regulated. The trust cannot take investment returns from Funeral Home A contracts and allocate them to Funeral Home B contracts. Nor can the trust take investment returns from non-guaranteed contract a001 and allocate them to NPS contract b002. With the proper administration, the investment return of Funeral Home A’s new guaranteed contracts (or old Pre-SB1 guaranteed contracts) could be split with Funeral Home A’s NPS contracts. Such a split would occur only after the proper income/expense allocations have been made to originating accounts. Under Missouri law, the consumer of one of those new accounts could chose to designate a new provider, and transfer the entire account value (including the amounts allocated to the NPS contracts) to a new trust. Consequently, the level of administration required for such allocations would be complicated. If the NPS recovery plan should seek to short cut that administration with a fixed rate of return (and using excess investment returns to fund the NPS contracts), then the plan should be rejected.

The other hurdle to takeoff is the plan obtaining the requisite trust assets for economies of scale. The rumor is that the NPS recovery plan would require all Missouri preneed sellers to participate in the trust. (If mandatory participation can be required for the Obama health plan, then it can be required for the NPS recovery plan.) Kansas regulators floated a similar idea a few years ago and quickly withdrew the suggestion after hearing the initial response from operators.
 

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We previously discussed how the funeral home or cemetery assumes most of a preneed trust’s investment risk when selling a guaranteed preneed contract, and therefore should be afforded a role in the trust’s investment decisions (Fund Managers: Is Your O&E Coverage Current?). But in that same post, we were careful to point out that there are no absolutes. More funeral homes are switching to non-guaranteed preneed. And, a certain percentage of guaranteed preneed contracts are also re-written at death when the family switches funeral homes or revises the prearranged funeral (or burial) arrangement. Yet, preneed fiduciaries seem to ignore these facts when relying upon uniform trust code provisions for their authority to exchange investment powers for a hold harmless agreement.

Death care fiduciaries first need to determine whether there are any conflicts between the applicable state death care law and the broader uniform trust code. Fiduciaries in states such as Missouri and Kansas are bound by statutes which require the trustee to retain investment oversight. Such conflicts will be reconciled in favor of the more specific death care law.

If the death care law is silent on investment delegation, the applicable uniform trust code may not necessarily authorize the trustee’s exculpation from investment oversight. Some states’ trust code conditions the fiduciary’s investment exculpation upon 1) the appropriateness of the trustee’s selection of the investment advisor, and 2) upon the notice given to trust beneficiaries. Illinois’ Trusts and Trustees Act is a good example of such a requirement. But too frequently, the fiduciary views the funeral home, or cemetery, as the sole beneficiary of the death care trust for purposes of both requirements.

Assuming notice could be given to each and every preneed contract purchaser, a court would likely evaluate the sufficiency of that notice from the perspective of the elderly preneed contract beneficiary. Would the average preneed purchaser understand the implications of the investment delegation? Or, could that purchaser effectively monitor the investment decisions made pursuant to the delegation? The fiduciary’s reliance on the uniform trust code for authority for exculpation under such circumstances should be deemed unreasonable. The validity of the exculpation may also hinge on the investment advisor’s assumption of applicable death care compliance requirements. If the agency agreement does not properly incorporate a death care law’s investment restrictions (or standard), the fiduciary has not exercised ‘reasonable care, skill and caution’ in establishing the scope and terms of the delegation. Yet, I hesitate to fault the fiduciary for trying. The strategy for seeking the exculpation is often in response to the unreasonable expectations of both the industry and its regulators.

As witnessed in California, regulators often interpret archaic preneed laws so as to argue that a ‘preneed contract is the equivalent of a savings account’. Those statutes reflect the preneed transaction from a generation ago. By applying that law out of the current context, a fiction is used to establish a standard that all fiduciaries could fail. The regulator’s position seeks to make the fiduciary a guarantor of the purchaser’s deposits to trust. The reality is that every trust investment has risk, even our government’s bonds. This exposure is applicable regardless of whether the preneed contract is guaranteed or non-guaranteed.

On the other side of the table, the industry is coming to demand that the trust offset more than just the costs of performing the preneed contract. Lagging membership revenues are an issue for many state associations. The mortgage crisis hit many preneed trusts, and preneed sellers expect those losses to be recovered without additional risk. Greater trust returns are also needed to offset the cremation trend. Of course, the asset management required for higher returns comes at a greater cost to the trust.

The reality is that the industry will continue to be request better returns from the death care trust. As with other trusts, the circumstances may dictate that as expectations rise, a fiduciary may best discharge its duties by delegating the investment responsibilities to an investment advisor. As discussed in the linked law review article, the model uniform code should be used to support the delegation of investment duties. But, in contrast to the classic trust situation, the death care trust is a creature of statute, which has the consumer’s protection as its purpose. While the preneed seller may be allowed to step into the settlor’s shoes for purpose of authorizing the delegation, the seller cannot override the preneed statute by exculpating the fiduciary from investment liabilities. At a minimum, the fiduciary needs to stand ready to override investments that are unsuitable or clearly imprudent. The two largest preneed scandals involved investments which were clearly unsuitable for the death care trust. Despite what Merrill Lynch may argue, I doubt any corporate fiduciary would have found the key man insurance policy to have been suitable for investment for a preneed trust. And if R.S.Mo. Section 436.031 had been written differently, NPS’ Missouri fiduciaries would have sought more information about the insurance transactions they were directed to make.
 

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Fiduciary Partners, the corporate fiduciary for the Wisconsin and Illinois master trusts, broke its silence this week with a statement to the Funeral Service Insider. The statement was made in response to criticisms previously reported by FSI, and reflects the receiver and fiduciary working together to get their “message” out and avoid the kind of litigation that has hamstrung the IFDA, its membership and the Illinois funeral industry.

FSI commentators used Fiduciary Partners’ link to the two states to drive home with funeral directors various preneed problems* including the management and investment of preneed funds, and the state of the guaranteed preneed contract and its impact on funeral pricing practices. While the issues need to be incorporated into a national dialog, Fiduciary Partners interpreted the FSI report as encouraging Illinois and Wisconsin funeral directors to assign blame to Fiduciary Partners. Consequently, Fiduciary Partners and the receiver felt compelled to respond.

As reported in a prior post, the WFDA leadership had muzzled Fiduciary Partners with a very strict confidentiality provision through an amendment to the master trust. Accordingly, the statement given to FSI has been made with the receiver’s approval, and could be taken as having the WFDA’s endorsement.

To neutralize litigation over the trustee’s role in administering investments, Fiduciary Partners and the receiver sought to clarify that the company had a very limited role that never included the management of investments. The message goes on to reinforce the need for Fiduciary Partners to continue to provide administrative functions related to individual contract accounting and performance payments. The statement also conveys a tacit acknowledgement of the WFDA’s secrecy, with Fiduciary Partner’s commitment to a new transparency.

It is inevitable that comparisons will be made between Wisconsin and Illinois, and to conclude that litigation may also be inevitable. However, one stark difference exists between the two situations: Illinois funeral directors faced a recalcitrant board that refused to acknowledge and correct its mistakes. That leaves the question whether Wisconsin funeral directors will bring litigation to recover damages. As one FSI commentator points out, damages will be difficult to measure when the association reported inflated numbers (through the guaranteed rate of return). And as the other commentator points out, member funeral directors need to take responsibility for hiring executives and fund managers that are competent and professional. It was their hire of an inexperienced executive that ultimately directed the use of trust funds to establish an insurance company.

The multi-million dollar question to be asked is what if Fiduciary Partners had responsibility for investment oversight? Would the trustee have been able to check Mr. Peterson’s actions? In our next post, we will look at the hold harmless provisions so popular in the preneed trust agreement.

*Reprinted from the Funeral Service Insider – October 29, 2012
**Reprinted from the Funeral Service Insider – November 5, 2012

To obtain a full copy of the Funeral Service Insider, contact  www.funeralserviceinsider.com to subscribe.
 

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In the days that followed the Wisconsin Funeral Directors Association being placed into receivership, some of the WFDA’s sister associations were quick to point out they had ‘checks and balances’ that would protect consumers’ funds from the problems that tripped up the Wisconsin Funeral Trust. As we reported in our last post, a crucial ‘check and balance’ missing from the WFT was investment oversight. The fact that a trust has a corporate trustee does not necessarily mean that fiduciary has responsibility for monitoring the prudence of the investments. Corporate fiduciaries often look to uniform trust codes for the authority to delegate investment responsibilities. If a grantor wishes to use an outside asset manager, general trust laws will accommodate those wishes. The problem with preneed trusts (and cemetery endowment funds) is that there is more than one “grantor” to the preneed trust.

We have previously stated our support for allowing a relationship between preneed seller and a qualified fund manager. However, the fiduciary must provide a ‘check and balance’ to that relationship by maintaining responsibility for the investments. The ‘scandals’ from Missouri, Illinois, California and Wisconsin stem from a lack of investment oversight. Missouri’s regulators responded to NPS with a law that precluded any relationship between the advisor and the seller. Appropriately, the Missouri association obtained revisions to allow an agency relationship between its fund manager and the trustee. However, the Missouri law does not go far enough to require the disclosures we recommended in 2011. Funeral directors and consumers need to know that Missouri preneed fiduciaries ‘have their back’ when it comes to investment oversight.

Investment oversight is also a concern for cemetery regulators. Kansas’ cemetery regulators were dismayed to find that a corporate trustee had turned over the investment reigns to a Hutchinson cemetery operator. The operator hoped to cover declining revenues (and the failure to make trust deposits) with higher investment returns. For months, the operator attempted to hide the ball from the auditor, but eventually it was discovered that those investments had lost hundreds of thousands of dollars.

The investment supervision issue is also a concern for Nebraska regulators. As they prep the death care industry for legislation in 2013, they raise this issue:

Seller’s Power to Direct Investments

A question has arisen regarding the seller’s ability to direct the trustee’s investment decisions. Specifically, should the seller be able to instruct the trustee to deposit or invest funds in securities that do not meet the trustee’s own investment guidelines?

If it is determined that the trustee should be free from the seller’s investment influence, section 12-1107 should be amended to reflect this fact.
 

In what may be a perfectly legal arrangement, Illinois funeral directors have handed off investment oversight to their new fund managers. The master trust instrument carefully outlines the code provisions which authorize the delegation of investment authorities. But the document goes that extra step of exculpating the trustee from responsibilities for investment oversight. Where is the check and balance in that structure? Are the industry’s expectations so high that a trustee will not accept the fund without a hold harmless? If the industry does not establish its own ‘checks and balances’ with regard to investment supervision, the authority to participate in the investment decisions could be taken away.
 

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Recent document disclosures are reflecting that several factors contributed to the WFDA’s master trust deficiency (and the appointment of a receiver). Certain of those factors relate to the fees paid to fund managers and the association’s sponsorship charges. Those factors are relevant to other association master trusts, and we will explore them in subsequent posts. However, the ‘straw’ that broke this camel’s back came straight from the National Prearranged Services’ playbook.

The Wisconsin State Journal reported that it was the formation of a life insurance company by the WFDA’s Wisconsin Funeral Trust that prompted a regulatory audit by the Office of the Commissioner of Insurance. In 2009, the WFDA used the master trust to set up an insurance company to provide its members a preneed funding alternative to the trust. Wisconsin law requires 100% of the consumer payments to be deposited to trust. In contrast, insurance funding provides funeral homes commissions to offset the costs of a preneed program. This same reality led National Prearranged Services to form a life insurance company. NPS needed an insurance program in order to expand into 100% trusting states. To jumpstart that insurance program, NPS tapped its Missouri and Texas preneed trusts.

NPS exploited a provision of the Missouri law that exculpated the trustee from investment oversight when an independent investment advisor was appointed by the seller. Held harmless by state law, NPS trustees may not have looked further than the statements the seller provided. NPS then appointed an investment advisor that directed the trusts into policies issued by the sister insurance company. In a similar fashion, the WFDA amended its master trust agreement in 2009 to remove the trustee’s investment responsibilities and authorities, and to vest investment control in the fund manager of the WFDA’s choice. And to top that move off, the amendment made information about the trust and parties confidential. If the trustee was unhappy with the situation, it could resign, but it could not make “any public communication that may be reasonably considered derogatory or disparaging to the Association, the Trust, the successor Trustee or any party relating to the Trust.”

There are indications the WFDA funeral trust had been struggling for years to keep up with promised return. But, over the course of three years, the WFDA made radical changes that culminated in the formation of the insurance company. Who was the driving force behind those changes? When advice was sought in 2007 to allow the trust to diversify its assets, the legal opinion was directed to the WFDA executive director Scott Peterson, not the corporate fiduciary.
 

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A short three and a half years ago, the funeral industry reeled from the collapse of National Prearranged Services and the emerging story of the Illinois Master Trust. The NFDA was slow to respond to the crisis, and when it did, this blog joined the criticism. Fast forward to September 2012, and the NFDA responds to the Wisconsin Master Trust controversy with the same guidelines.

Granted: associations are cumbersome organizations that are dependent on volunteer members.

Granted: changing the mindset of a membership that has been historically opposed to preneed will be difficult.

Granted: it is a matter of time before another state association master trust fails.

We need to augment the advice offered the NFDA in 2009: eliminate from your trust evaluation guidelines any suggestions that a guaranteed rate of return is permissible. The days of set rates of return or book/tax cost of account for distributions are over.

The fixed rate of return approach allowed the Wisconsin and Illinois programs to avoid investment transparency and individual account allocations of income and market value. But, providing investment transparency in terms of the investments held by the trust, and the rate of return, can be more complex that the NFDA guidelines suggest. It is not uncommon for three or more investment pools to be offered by a master trust program. Administrators may have different ways to provide transparency at the trust level, in terms of in investments held by the trust and their rates of returns.

Whatever procedure is followed, the end result should be a ‘mark to market’ that will allow an auditor to reconcile each individual preneed contract’s value to the individual funeral home account(s), and in the case of master trusts, each individual funeral home’s account(s) to the aggregate master trust market value.
 

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When news of the Wisconsin receivership was made public, I anticipated some signs of support from other state associations. The strength of a professional relationship can be measured by the support given subsequent to a public indictment. But, when that support comes in the form of hackneyed advice, the accused is left to wonder about the relationship. It should not come as a surprise if the Wisconsin Funeral Directors Association leadership was frustrated or angered with the National Funeral Directors Association or the New York Funeral Directors Association over the ‘advice’ given through trade journals.

When asked by the Funeral Service Insider for a response to the Wisconsin ‘scandal’, the NFDA recommended its model preneed law and referred members to its “Guidelines for Evaluating Preneed Trusts”. How would the model laws have avoided the Wisconsin scandal? Does the NFDA advocate investment standards that would permit diversification and the prudent investor rule? Would those model laws make the Wisconsin program more competitive with insurance companies?

If one were to review the NFDA’s Guidelines for Evaluating Preneed Trusts, you would find a section titled Rate of Return. That section includes questions about whether the preneed program provides guarantees about the rate of return on investments. It would be reasonable for the WFDA leadership to infer from the Guidelines that fixed or guaranteed rates of return are an acceptable method of master trust administration. So, that leadership has to be asking itself why they are facing a securities investigation by including that same guaranteed rate of return in preneed contract forms and consumer marketing materials. The WFDA leadership could have corrected its program and avoided the securities issues if those Guidelines had been revised years ago to recommend market value administration and the limitation, and disclosure, of the association fees charged to the trust.

The NYFDA association advises the funeral industry that state associations are uniquely well-positioned to deliver on preneed safety and security, and argues that competent executive directors and educated volunteer leaders can deliver what no other entity can. The NYFDA goes on to assert that return of principal is more important than return on principal, and that trust programs start to go off the rails when too much authority and oversight is handed over to third parties (that want to make money on the backs of funeral firms and consumers). What is the WFDA preneed committee (or other associations) to make of that advice? Are they to direct the trustee in making investments? Are they to ignore the demands of trust participants for higher returns? Are they to ignore the fact that New York is the only state to have laws that require 100% trusting and that bans insurance funded preneed? The reality is that state association preneed programs are under increasing pressure to improve investment returns. Unfortunately, associations are contributing to that pressure with the fees they are charging the trust.

During the past six years, four state sponsored programs have “crashed” due to fiscal problems and noncompliance. Minnesota, Illinois, California and Wisconsin all seemed to have respected executive directors and educated volunteer leaders. What roles did internal fees and outdated laws play in each situation? Would these associations have lost program participants (and the accompanying sponsorship fees) if they had provided more transparency regarding investments and internal fees?

I agree with Ms. McCullough that association sponsored master trusts are uniquely well-positioned to deliver on preneed safety and security. The problem is that too many have not delivered either safety or security. How many of these programs adhere too closely to Ms. McCullough’s advice? The affidavit that served as the tipping point for the appointment of the Wisconsin receiver paints a picture of a dominant association executive and an active and engaged volunteer board. Where were the compliance attorneys and the corporate fiduciary during the preneed committee meetings? Were they even invited? While there will be more pieces to the Wisconsin puzzle, what is available today suggests that the WFDA should have sought the input of “experts” instead of excluding them.

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With the backdrop of another major preneed debacle, Missouri turns its attention (yet again) to the assignment of insurance policies to funeral homes.  On September 25th, the State Board of Embalmers and Funeral Directors will consider a regulation proposal addressing insurance assignments.  Is it, or is it not, a preneed contract?   The industry, and the staff, need an answer. 

The proposal establishes a presumption that all insurance assignments give rise to a preneed contract.  I don't have a problem with such a presumption so long as the funeral home is given the opportunity to rebut that presumption.  The regulation does provide a mechanism for rebuttal, but no guidelines are provided as to what would be excluded from the preneed definition.  Instead, the intent of each funeral director must be examined, and to compound matters, the proposal references 'intent' twice.  There is the question of whether the funeral director had intent to use the assignment for "payment in advance" for goods and services.  And, there is also the question of whether the funeral director had intent to form a preneed contract.  (We can reasonably predict the funeral director's answer to the latter inquiry.)

To avoid a circular inquiry in the mind of the funeral director (and an examination backlog), the Board needs to establish a set of facts that would reasonable exclude transactions that do not constitute the sale of an insurance funded preneed contract.  

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When news that the Wisconsin Funeral Directors Association and its master trust had been put into receivership, I anticipated that the association may have fallen victim to a perfect storm: when an antiquated preneed law collides with a volatile investment market. But, subsequent news accounts are painting a bleak picture of poor planning and poor oversight.

The Wisconsin preneed funeral law alludes to trusts, but contemplates depository accounts. That is very consistent with the approach taken by most states. Accordingly, many original preneed laws provide very little statutory authority to the preneed fiduciary. Fiduciaries are forced to turn to general trust laws for guidance. If the fiduciary is not knowledgeable about the purpose of preneed contracts, crucial decisions are often deferred to the program sponsor.

Somewhere along the line, the WFDA program added a guaranteed return to its preneed contract. For a state that has a depository based law, that type of promise might seem appropriate enough. But, that promise of a return changed the consumer contract from a purchase of funeral goods and services to an investment contract. The WFDA program crossed a line established by the Securities Exchange Commission in “no action letters” issued to other sponsors of preneed programs (including various state associations).

Besting a certificate of deposit return may not have seemed to be too much of a risk to the fund managers, but they may not have foreseen the 2009 mortgage crisis. “Trapped” by the guaranteed return, the fund managers may have felt that they had little choice but to implement a more aggressive investment portfolio. But, if the program always had an aggressive investment policy, the fiduciary could have exposure for the oversight provided that policy.

If the firm employing the master trust’s fund manager seems familiar (Morgan Stanley Smith Barney), it could be from the litigation swirling around Mark Singer and Clayton Smart.
 

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Per capita, Missouri funeral directors were hit hardest by the collapse of National Prearranged Services.  And those funeral directors who suffered the greatest losses continue to demand help from the State of Missouri.  Although Missouri re-wrote its preneed law just 3 years ago, the Legislature begins hearings today on whether more legislation is needed.

With the economy as it is, the NPS providers may not find a receptive audience in Jefferson City.  Finding a receptive audience among other funeral directors can even be difficult. 

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Federal Judge John Jones III has teed off (again) on the Pennsylvania Board of Funeral Directors. Awarding attorneys fees of more than a million dollars and issuing a permanent injunction against the State Board, Judge Jones rebuked Board members for their failure to show initiative towards a legislative fix to a Truman era problem. And, the situation for the State Board is about to get worse. Judge Jones will also preside over Rabbi Wasserman’s lawsuit against the State Board. The Rabbi made a very compelling case to the Tablet, and will likely find a friendly ear in Judge Jones. If these recent events are considered in the context of Ernie Heffner’s comments, one would have to wonder if the State Board is being hung out to dry by a trade association that has long endorsed the State’s enforcement of a protectionist law.

Contrary to the Judge’s perception, industry boards are better suited to applying existing law than re-writing it. The purpose for having an industry board is so that the members can provide experience and balance when applying the law to alleged violations. But if the law is broken, board members are dependent on attorneys for advice on how it should be fixed, and what to do until the law is changed. As Mr. Heffner points out, PFDA attorneys mounted a strong defense of the Pennsylvania law. The NFDA also provided support for certain provisions of the law. The Board’s legal team followed the course set by the industry attorneys. As a consequence, the State of Pennsylvania will now have to foot the bill for more than a million dollars in attorneys’ fees, with the possibility of more to come.

Pennsylvania represents a failure in legal leadership. But too often, an association defines the role of its general counsel in ways that encourage loyalty to its board (or to crucial members) at the expense of its membership, or worse yet, at the expense of the industry. Such was the case in Illinois when the general counsel approved years’ of board decisions that culminated in the near collapse of the master preneed trust.

If Pennsylvania is to find legislative solutions, it needs to be the collaborative effort of the State Board’s attorneys, industry attorneys, and the PFDA’s attorneys. Missouri should take heed from the Pennsylvania situation. For the better part of 2 years, the staff for the Missouri State Board of Embalmers and Funeral Directors has advised that the law is broken with regard to insurance assignments. The staff continues to pressure the Board to take action. The industry is opposed to the staff’s position on insurance assignments, and the MFDEA has recommended that funeral directors contact board members about their feelings. What the board members need is legal advice from the association and other industry attorneys. If the law isn’t broken, explain why. If the law is broken, but not to the extent the staff asserts, then recommend a fix.
 

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The staff for the Missouri State Board of Embalmers and Funeral Directors released the revised preneed renewal reports this week, and those revisions include a few new additional requirements.  Those requirements include a seller providing a ‘no tax due’ letter, proof of corporate status and any ‘doing business as’ filings.  However, the new requirement that will catch most funeral directors by surprise will be the new Section Q: preneed contracts funded by insurance assignments. 

Section Q seeks from the preneed seller information about each insurance assignment taken to fund a preneed contract.  Funeral directors will find the instructions somewhat confusing.  Those instructions advise that a report is to be prepared for each insurance company, but the spreadsheet format incorporated into the report suggests each column could be for a different insurance company.  The seller is also instructed to mark the spreadsheet with 'NA' if the section does not apply.  With the form instructions alluding to preneed contracts “sold” pursuant to Sections 436.400-436525 RSMo., most funeral homes will assume the assignment of an existing insurance policy is not covered by Chapter 436.  The instructions do not address policy beneficiary designations.

The staff scheduled an August 21^st  State Board meeting that includes “renewal update” on the agenda.  With the renewal forms having only been published on August 17^th, the staff hasn’t given the industry adequate time to provide input at the August 21^st meeting.  This should make for an interesting September State Board meeting, and for October chaos for Missouri’s preneed sellers (and those funeral homes dependent upon third party sellers).     

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Who can honestly say they saw this one coming?

 On July 5, 2012, the Missouri State Board of Embalmers and Funeral Directors filed a complaint with the Missouri Administrative Hearing Commission against a Missouri funeral home for alleged violations of Chapter 436, including several transactions that predate Senate Bill No. 1. So, three years after the passage of Senate Bill No. 1, the State Board has initiated its first formal proceeding against a preneed seller.  SB1 armed the State Board with several new tools, including the preneed financial examination.   Pointing to the massive fraud committed by National Prearranged Services, the State’s regulators convinced the Missouri Legislature that such tools were necessary to protect the consumer.  What misconduct did the new financial examination tool uncover that warranted a formal complaint: the funeral home failed to report, and adequately document, insurance assignments and beneficiary designations.

The crux of the State Board‘s argument is stated in Paragraphs 49 and 50 of the Complaint:

49.       A preneed contract is sold when a seller accepts an insurance assignment or is named as owner (prior to August 28, 2009) or beneficiary of a life insurance policy pursuant to an arrangement between the seller and the consumer to ensure payment for the final disposition of the consumer's dead human body and for funeral or burial services, facilities or merchandise upon the death of the consumer.

50.       ******  Funeral sold and entered into preneed contracts with those consumers specified in Exhibit A when ******* Funeral accepted insurance assignment or was named as beneficiary on an insurance policy when the consumer made such assignment or designation with the intent of paying ******* Funeral for the costs of his or her own final disposition.

The State Board’s position (with regard to insurance assignments and beneficiary designations made prior to August 28, 2009) is based on the following:

31. Section 436.005, RSMo (2000), set forth definitions for the Old Law and stated, in relevant portion:

(5) "Preneed contract", any contract or other arrangement which requires the current payment of money or other property in consideration for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required, including, but not limited to, an agreement providing for a membership fee or any other fee having as its purpose the furnishing of burial or funeral services or merchandise at a discount, except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

What the State Board is asserting is that Chapter 436 has always defined as a preneed contract any insurance assignment or beneficiary designation made in favor of a funeral home prior to the death of the insured.   That will come as news to most of the industry (99.9% or so), and cause some operators to ask what those six Board Members are smoking.  But for those individuals who regularly attend the meetings of the State Board, this position may not necessarily reflect the views of the State Board members.

The Board’s staff began pressing the State Board more than two years ago to provide clarification on when insurance assignments and beneficiary designations constitute a preneed contract.   At that meeting in Festus, Missouri, the staff also reminded the Board and the industry of the funeral director’s duties under Chapter 208 to make inquiries to the Third Party Liability Unit (of the Department of Social Services) before making refunds to families.   The insurance issue resurfaced last fall (with the conclusion of the initial onsite financial examinations).  Since then, the issue has been bounced back and forth like a ping pong ball between the staff and the Board.   The staff has made various proposals, which the Board has rejected. 

As we have previously suggested, this transaction is one which should be documented by a contract.  Some within the industry assert there is no contract.  I disagree.  The policy owner has made the assignment or beneficiary designation with the expectation that the funeral home will apply the proceeds to their funeral.  The funeral director understands that expectation, and often relies on Chapter 208 for recommending the assignment of insurance.  I agree with the staff in that the ‘professional trust and confidence’ contemplated by Section 333.330.2(14) dictates that this transaction be documented by a contract.  The staff would then argue that any contract made by a funeral home that contemplates future performance must be a preneed contract, and ergo, a Chapter 436 contract.  I disagree. 

Chapter 436 was first enacted in 1965, but was re-written in 1982.  The 1982 law provided the industry the first definition of a “preneed contract”, which was the same as that cited by the Complaint, except that it did not include the following: 

except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

There was sufficient confusion whether insurance policies were covered by Chapter 436 that the preceding phrase was added by legislation that took effect in 1986.  The 1986 legislation was hotly debated, and the product of various compromises, and the result included a horribly ambiguous definition.  A literal interpretation of the new “preneed contract” definition would find that an insurance contract is not a preneed contract ‘unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance’.    But when the seller or provider is named as owner or beneficiary, the contract of insurance is a preneed contract.   That bears repeating: the contract of insurance is a preneed contract.  What the heck does that mean?

The old law was poorly drafted, and ambiguous, in many respects.  There always has been confusion over the extent to which Chapter 436 governed insurance funded preneed.   The old law was written with one preneed transaction in mind: the trust funded guaranteed contract.   Joint accounts were addressed as the first afterthought, and then four years later, insurance was added as another afterthought.   For years the Board staff struggled with whether insurance funded contracts had to be deposited to trust.   And now, 30 years after the old law was enacted, the staff (or is it the State Board) wants to begin enforcing those ambiguous provisions?

What motivations does the staff have for pressing the State Board on the insurance assignment issue?   The need for clarity was the initial explanation given.  The next justification given was the need to protect the consumer.   Both of these have merit, but one can’t help but wonder if Chapter 208 may also provide a third motivation. 

It would be political suicide for any candidate to suggest that Missouri needs to raise taxes.  Instead, state agencies look for other ways to generate revenues, whether that be through fees or charges.  Accordingly, someone in Jefferson City may also be looking at the funeral home’s obligations under Chapter 214.  In conjunction with that 2010 meeting in Festus, the staff has incorporated a MO HealthNet page on the State Board website.   That page is meant as notice to the industry that funeral homes have a duty to make inquiries to Department of Social Services before making refunds back to families.   (You funeral directors can now add tax collector to your job description.)  But that duty only applies to Chapter 436 contracts.

The Complaint seems a heavy handed attempt to force the State Board to define the insurance assignments as Chapter 436 contracts.  While there is need for clarity and consumer protection, neither the old law nor SB1 was intended to regulate the assignment of an existing insurance policy.  SB1 is intended to regulate the sale of contracts where performance is deferred to a future date, and the administration of the consumer’s payments.    The staff must twist SB1 provisions to reach the conclusion that all insurance assignments give rise to a preneed contract.   That approach is not much different from the one NPS used with the old law. 

So, what are those State Board members to do?  Here is a proposal for their consideration.

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For some Missouri funeral homes, the ‘disagreement’ over the Section 436.405.1.(8) and insurance assignments has been brought to their doorstep.  In January, the State Board and their staff debated the issue of whether insurance assignments and beneficiary designations made in favor of a funeral home should constitute a preneed contract. The State Board rejected the staff’s interpretation of the fore mentioned section, and now the auditors seem to be pressing that disagreement to the Missouri’s funeral homes by way of the Chapter 436 financial examination.

This blog went on record in opposition to the staff’s regulation proposal as too broad, but there is also a need to go on record for the need for better consumer protection in these transactions.

When an assignment of insurance (or the designation of beneficiary) is made, it is done so in anticipation that the funeral home will apply the death benefits to the insured’s funeral arrangement. But have there been any promises about the prices or the right of the insured’s family to use another funeral home?  Such issues should be set out in an agreement between the funeral home and the insured so that the insured’s family is not left to guess. 

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In a recent article, Bruce Ruston provides a detailed account of the drama behind the IFDA master trust and its divesture of the key man insurance policies. It is a long, costly story about an organization that pushed the legal envelop in several directions with disastrous results: a master trust without a corporate trustee, insurance investments to avoid Rev. Rul. 87-127, fixed returns, high administration fees, and the stubborn defense of a twenty year mistake. The Rushton article is appropriately critical of the IFDA’s legal counsel. But, to better evaluate that criticism, consideration should be given to those facts reported in the various lawsuits and the Secretary of State’s Consent Order that reflect an organization ran by an iron-fisted executive.

That evaluation should start with Robert Ninker’s 1985 decision to reach out to a young, newly licensed insurance salesman. By 1985, there were ample signs that the IRS was building its case for the taxation of preneed trusts. Mr. Ninker cannot be faulted for making life insurance the preferred alternative because it eliminated income reporting to consumers. Many trusts did not have the consumers’ social security numbers and couldn’t report income if they wanted to. So, insurance was proved a means to avoid the reporting problem. But, Mr. Ninker’s decision to turn to Ed Schainker, an insurance salesman with two year’s experience should have caused the association’s attorneys to raise questions.

Mr. Schainker did what salesmen do, he looked through available products, picked one with a high commission and put together the proposal. The proposal not only skirted the Illinois preneed law requiring preneed purchaser approval, it failed to satisfy the requirements of an insurance policy (ie that the master trust have an insurable interest in the ‘insured’ funeral directors). With such obvious problems, why didn’t the IFDA attorneys apply the brakes to the proposal?

Fast forward ten years, and the IFDA lawyers had cause to remind the client in writing of the firm’s concerns about the authority to act as trustee, and to suggest that the association resign. At that point in time, Mr. Ninker was still the boss. Okay, clients do, from time to time, reject their attorney’s advice.

Fast forward another twelve years, and, Mr. Ninker has retired and the Comptroller has finally forced the association’s hand on the trustee issue. With the IFDA attorney in Mr. Ninker’s chair, the association went to Regions Bank, a leading name among death care fiduciaries, for a proposal. That proposal put the key man insurance issue squarely in the attorney’s lap, and rather than acknowledge a twenty-year mistake, the attorney challenged Regions. In the end, there was no client to hide behind.

The decision to defend the investment “to the end” suggests the law firm may have been ‘in over its head’ from the start.
 

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Every funeral home and cemetery feels the pain of this economy, but that pain runs deeper for Missouri and Illinois funeral directors. Per capita, Missouri funeral homes bore the greater brunt of the NPS collapse. In the same year NPS collapsed, the IFDA master trust was forced to divest its key man insurance policies and force substantial losses on preneed accounts. While both states’ funeral directors were angered by the losses, Illinois funeral directors have been faster to accept some of the responsibility for their preneed failure, and to work towards change. Recent comments of MFDEA representatives reflect an association in denial, and on the path of further alienation.

In February, the Missouri funeral association held a legislative day that called for members to blitz state legislators on three bills: SB767, HB1769 and HB1770. When the Missouri cemetery association voiced opposition to SB767, that bill’s sponsor sought input from the State Board of Embalmers and Funeral Directors. The State Board called a meeting to discuss the three bills.

 With regard to each Bill, the funeral association was afforded the opportunity to explain the bill and their intent for the legislation. With regard to the two House bills, the association stated its intent was to elevate the professionalism of the industry. Really?

One of the bills, HB1770, proposes to prohibit preneed sales by any person other than a licensed funeral director. One association representative offered to the State Board that if preneed sales had been restricted in such a nature years ago, the industry would not have suffered through the National Prearranged Services collapse. Such reasoning requires everyone to turn a blind eye to the fact that NPS’ demise was accelerated by a program that was sold by licensed funeral directors. NPS maintained two separate sales programs, and the one sold by funeral directors made promises that were too good to be true.

The association’s twisted logic is further magnified by HB1769. Through this bill, the association supports a new two-year degree/certificate requirement for funeral directors that would eliminate the current apprenticeship program. To make the education requirement more palatable, current licensees will be exempted. Absent from the bill (and any other association proposal) is a requirement for continuing education. So, the association sees a need to educate the state’s future funeral directors, but no need to educate those funeral directors who sold NPS preneed contracts.

When the three bills were met with criticism and opposition at the State Board meeting, association representatives (and supporting Board members) became defensive and accusatory by admonishing the opposition for blocking education needed so badly by the industry. In reality, the bills were opposed because they are protectionist in nature, and poorly written. When the association had ‘floated’ these issues at prior Board meetings, they were met with many of the same criticisms. Such actions only serve to erode the association’s credibility and effectiveness.

In contrast, the recent successes of the IFDA can be attributed to industry representatives who became involved in the association, put aside their differences, and searched for common ground. Through that approach and hard work, the IFDA is earning back credibility with the industry, regulators and legislators.
 

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For the past three and half years, many Illinois funeral homes teetered on the brink of financial crisis when the IFDA master trust was forced to write down the value of preneed accounts invested in a special tax exempt fund. As reported last week by the NFDA’s Memorial Business Journal*, the “new” IFDA has negotiated settlements that could restore a significant portion of the write down of the tax-exempt fund. Credit is due to those funeral directors who made a commitment to change the leadership at the association.

The settlement of a class action suit must be approved before funds can be distributed. A hearing on the settlement has been scheduled for June 12th.

The larger of the two settlement funds will be distributed pursuant to Paragraph 4 of the Consent Order (page 13) approved by Illinois Secretary of State. The Consent Order defines “Eligible Pre-Need Contracts” as a contract that was not only subject to the value write-down, but also outstanding as of July 31, 2010. This definition will exclude preneed contracts that were written down in value, but serviced prior to July 31, 2010. In contrast to the settlement administered last year by the Illinois Secretary of State, these settlements will be paid to the trustee instead of the funeral homes.

The terms of the class action lawsuit settlement agreement will govern how that fund is to be distributed.

*"Reprinted with permission from the February 23, 2012 issue of the Memorial Business Journal. To subscribe please call 609-815-8145."
 

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The U.S. Government Accountability Office (GAO) released its latest report on the state of state regulation of the death care industry.  As it did in 2003, the GAO selected a handful of states to review in depth, and Illinois was one of those states for 2011 report.  The Illinois review is set out as Appendix IV of the GAO report, and paints a bleak picture of preneed oversight in the Land of Lincoln. 

The Illinois review advises that the Office of the Comptroller has 10 staff positions and 10 field audit positions to provide supervision of preneed and crematories.  While it is the Comptroller’s intent to audit each preneed seller at least once every five years, budget constraints have limited audits to those businesses with the most preneed.  Otherwise, the Comptroller will target sellers based on annual reports that either reflects ‘abnormal fluctuations’ or the lack of a corporate trustee. 

And when the Comptroller does find problems, her staff complains that the law provides them little power to address the situation.  The GAO was advised that the disciplinary process is extremely slow and costly.  That latter comment should raise some eyebrows in Illinois.  It was the Comptroller’s office (albeit a prior officeholder) that pushed through amendments to the Funeral or Burial Funds Act just a short two years ago, and now the staff claims the law has no teeth.

The Illinois review ends with the Comptroller’s office on the defense.  Industry representatives challenged whether the Comptroller’s 2010 legislation provided any additional protections.  The Comptroller responds that “there is no way to be sure if the changes to the laws would have prevented these kinds of incidents, but that there may have been the ability them earlier”.  (Obviously someone left out a few words, but they also failed to confer across the hall with that other someone who was more honest about the law’s lack of teeth.)

The review concludes with the statement “[F]urther, state regulators in Illinois stress the importance of consumer education and whistleblower protections to help prevent and detect future problems.”  If the Comptroller lacks funding and enforcement powers under the current law, who is fooling who?  Can additional legislation be too far away?

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Every funeral director has faced the situation where Mrs. Smith comes in with an insurance policy and her funeral plans. Often, Mrs. Smith has gone to trouble of designating the funeral home as the policy beneficiary before having discussed her plans with the director. Often funeral directors file the policy and plan away until Mrs. Smith’s time of need. Frequently, the file includes nothing more than Mrs. Smith’s policy and funeral preferences, and this is troubling for Missouri’s new preneed audit staff.

Although Missouri’s preneed reforms went into effect more than 2 years ago, the new examination process has gotten off to a slow start. The first hurdle was funding. The new law imposed a $36 per preneed contract fee. New licensing fees were also imposed. However, these fees were tied to annual reports and renewals that were not due until October 31, 2010.

The Division of Professional Registration has also had the task of hiring preneed examiners and establishing audit guidelines. Defining those audit guidelines has proven difficult due to fact Missouri has hundreds of funeral home sellers that have been operating with little regulatory input or oversight for 25 years. Consequently, every single examination poses its own unique issues. But the one issue that must be surfacing with regularity is Mrs. Smith and her insurance policy.

After ‘practicing’ on the State Board’s industry members, the examinations began in earnest this past summer. By the Board’s September meeting, Mrs. Smith and her insurance policy were on the agenda. The staff floated a proposed regulation regarding a definition of preneed that would trigger Chapter 436 reporting requirements when Mrs. Smith walked through the funeral home’s door. Once the funeral director was put on notice of the insurance beneficiary designation, he must either report it or take action to reverse the designation.

The staff’s reasoning is that a contract has formed when the funeral director is put on notice of the policy designation. That contract is for a funeral arrangement that is not immediately needed, and therefore falls within the definition set out in Section 436.504(7). The staff further argues that this interpretation is needed to protect the consumer when the only evidence of the contract that exists was a ‘handshake’. While the staff has a point regarding the risks of the handshake, this transaction falls outside the legislative intent of SB1.

SB1 regulates the industry’s ‘sale’ of preneed contracts where consumer funds are paid to the funeral home or cemetery. The law’s intent is to make sure the preneed seller deposits those funds to trust or a joint account, or pays them to an insurance company. In contrast, Mrs. Smith may have purchased her Prudential Life policy from the same agent who sold her car and home insurance.

But, the staff’s concerns are not without merit. If Mrs. Smith’s children do not know of either the insurance policy or the handshake with the funeral director, they may go to another funeral home. The staff also asks what it is to stop the funeral director from retaining the insurance proceeds when the family has gone to a competitor.

To ensure Mrs. Smith’s wishes are fulfilled, the funeral home should document the policy designation with a written contract (which provides for a return of the proceeds if a different funeral home is used). The contract should also spell out the promises with regard to prices.

However, Missouri consumers would be better served if SB1 fees were spent towards audit procedures that focus on preneed sales, and not Mrs. Smith and her insurance policy. Missouri’s Chapter 333 provides the State Board with authority to implement additional protections when the funeral director accepts an insurance policy in exchange for a handshake.

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The licenses required to sell or service preneed in Missouri must be renewed annually, with the deadline for filing the required paperwork falling on October 31st. Technically, these licenses expire on Halloween unless the State Board staff has renewed them by that date. But, it is human nature to procrastinate, and many licensees wait until the final days to file their paperwork. With 545 licensed providers, 331 licensed sellers and 179 licensed preneed agents, the deadline paperwork handled by the State Board staff is substantial.

Regulation proposals discussed at the State Board’s September meetings underscore the frustrations the staff have with the licensing deadlines and the paperwork submitted by licensees. The proposals would add pressure to licensees having renewal paperwork filed weeks (instead of days) prior to Halloween (so that the staff would have more time to review the paperwork before renewing the license).

The ‘rub’ for the State Board staff is that SB1 sets Halloween as both the deadline for filing paperwork and the expiration date of the licenses. The law fails to provide a window for the administrative review of paperwork. Before dismissing this as the staff’s problem, sellers should consider that SB1 also allows a consumer to void his/her preneed contract if the seller did not have a license when the contract was sold.

The problem for the staff is that a number of sellers are submitting renewal reports that have not properly completed. Sellers who only use one form of funding are omitting the schedules for the funding vehicles they do not use. The renewal forms also require a summary of all contracts sold during the reporting period. If the summary is left blank, the staff has no way of knowing whether the fee accompanying the renewal is correct.

For the most part, the current renewal report form is the same as last year’s. However, sellers that use joint account funding need to recognize the report has a new Section M that requires information about the preneed contracts sold prior to the current reporting period. If the seller waits until October 31st to file the renewal, and omits the Section M report in error, the State Board letter received in November will seem like a late Halloween trick.
 

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Earlier this week, the Missouri State Board of Embalmers and Funeral Directors posted their agenda for the September 27-29th meetings, which includes 65 pages of regulation proposals or revisions. The Board has probably heard the same complaint that we have: what the industry needs is less regulation, not more. However, regulations can serve a useful purpose in clarifying ambiguities in applicable law (and Senate Bill No. 1, and this past year’s SB 340 have their share of ambiguities and conflicts).

While most of proposed regulations involve death care licensing issues, the proposals do include some preneed issues. One of those issues is the exemption of cemeteries from Chapter 436 and another is the relationship (or non-relationship) between the preneed seller and the trust investment advisor. Both issues have been addressed in earlier posts to this blog. The debate continues.

The Board’s agenda also includes a modest legislative agenda. Well, modest but slightly controversial. The Board’s decision to raise the trusting requirement from 85% to 100% remains the main proposal.
 

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As discussed in prior posts, the Missouri preneed audit process begins with a notice to the preneed seller for the production of documents and data. After a review is made of the documents, data and the annual reports filed with the State Board, an on-site examination is scheduled with the seller. Most Missouri preneed sellers are unsure of what to expect. To an extent, Missouri has borrowed from the Texas Department of Banking examination manual in developing preneed audit procedures. However, Texas has the benefit of years of reporting and exams. Missouri is playing catch up, and the desk audit of the seller’s documents, data and annual reports are the State Board’s first in depth look at how funeral homes have structured their preneed programs.

SB1 made substantial changes to Missouri’s trusting requirements, and one purpose for the desk audit is to determine if the seller’s preneed contract form and trust agreement are compliant. But, the desk audit will also be used to match trustee reports to outstanding contracts, and determine whether the proper funding has been maintained.

For the State Board examiners, the first look at a seller’s records includes all outstanding preneed contracts. Missouri’s first preneed law was written in 1965, and some funeral homes have contracts dating back that far. Consequently, the initial desk audit could be a lengthy process for Missouri’s larger funeral operators.
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A few weeks ago, we wrote on the approach being taken by regulators of posting discipline proceedings on their website.  The purpose of the posting is to inform consumers of such issues so that they can make additional inquiries.   The concept is now a reality for the Missouri State Board of Embalmers and Funeral Directors.    

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The examination of a Missouri preneed seller begins with a request that certain documents be submitted to the State Board within 3 weeks. The purpose for the document production is to allow the examiner to perform a desk audit of the seller’s operable documents before an on-site visit is made. From those documents the examiner will determine the funding methods used, the compliance of the preneed contract form (and other documents) with Chapter 436, possible funding deficiencies, and possible administration issues.

An important distinction that Missouri funeral homes must make is that the request is aimed at its preneed business written as a seller. The document request does not include preneed written on a third party seller’s preneed contract such as Missouri Funeral Trust, American Prearranged Services, National Prearranged Services and Funeral Security Plans.

The Board's document requests are as follows:

• A current statement from your state or federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have identifying the payments, earnings, and distributions for each active preneed contract.

If the seller has trust funded preneed, the State Board is requesting a statement from the trustee that sets out aggregate payments, earnings and distributions for each active (outstanding) preneed contract. This requirement will prove problematic for most preneed sellers, particularly for their trusts established under the prior law. While many preneed trusts report income for purposes of Internal Revenue Section 685, they do not maintain records of the aggregate income and expense per consumer account. It is also unlikely the income distributions have been tracked by account.

With this request, the State Board is also putting the seller on notice that the trustee must be authorized to exercise trust powers within Missouri. Foreign chartered institutions have special requirements to satisfy this requirement.

• A current statement from any/all applicable insurance companies with which you have insurance- funded preneed contracts for each active preneed contract.

This seems fairly self explanatory. But, the funeral home needs to distinguish insurance assigned for a spend down for that insurance written concurrently with a prearrangement. Some insurance companies have taken an aggressive position on what constitutes a spend down, and the examiners will have the right to review both types of transactions.

• A current statement from your financial institution/s of preneed joint account/s for each active preneed contract.

If the funeral home used joint accounts, the State Board wants a copy of the current bank statements for the certificates of deposits and depository accounts. If funeral home receives individual statements, this production could require some work. Some banks provide a composite statement (that shows all the CDs). The funeral home may need to cross reference the account numbers to specific contracts.

• A copy of a ledger or computerized report showing all outstanding preneed contracts.

The State Board is looking for a comprehensive list of all outstanding preneed contracts. The current annual report only reflects those contracts sold during the last reporting period. It would probably be sufficient if the outstanding contracts were reported by funding (one report for trusts, one for insurance and one for joint accounts).

• Copies of agreements(s) with providers, agents, funeral director agents and if any contracts are funded by trust a copy of the trust agreement with the trustee.

The State Board is looking for all relevant agreements to the preneed seller program. SB1 was passed in response to National Prearranged Services, and its practice of representing a funeral home without an agreement. While SB1 does not require an agreement between a funeral home and funeral director agent, not all funeral director agents are employees of a funeral home. If a funeral home allows an independent agent to sell preneed on its behalf, an agreement exists. If that agreement has not been put in writing, and the agent violates Chapter 436, a swearing contest will ensue.

If the seller uses trust funding, the State Board is looking for the trust agreement and all contracts or agreements related to the administration of the trust. Many of the preneed programs offered to Missouri funeral homes involved the outsourcing of administration, and the examiners will need to know where to direct questions that may stem from that administration.

• A copy of the trust agreement with the financial institutions for any preneed trust.

Yes, this is a redundant request, and no, the seller doesn’t have to provide the trust agreement twice.

• A blank preneed contract currently used by you as a seller.

The examination will eventually review old contracts (and their compliance with the prior law), but the Board is concerned primarily with the current contract form’s compliance with SB1.
 

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The new era of preneed exams and audits got off to a slow start in Missouri, but now there are indications the process is picking up speed.   The first notices of preneed financial examinations went out to sellers last January, and some are now going through on-site examinations.  A second wave of examination notices has gone out, and the State Board has begun preparations for the first examination reports.       

While the examination process will continue to evolve, the process will likely involve the following stages:

• The notice and request for documents
• A desk audit of the seller's documents
• An on-site examination
• An exit interview
• An examination report and the seller response
• (If violations are found) a request for a corrective plan proposal

In our next blog posts, we look at each of the stages in more depth.

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As reported by the Memorial Business Journal*, the Illinois Funeral Directors Association has taken back the helm. For the past three years, the IFDA has been a floundering ship in risk of sinking. The master trust that paved the Association’s growth, has been threatening to bring it down. The IFDA took a crucial step to righting the ship when it relieved the ‘Calvert Group’ as plaintiff in the master trust lawsuits. IFDA leadership still faces several challenges to the Association’s survival, but taking charge of the master trust litigation was crucial. Now they must chart a course for resolution of the litigation. IFDA members will be asked to temper their expectations, and that may require an understanding of the master trust and how it crashed.

The Association built a massive master trust through the participation of hundreds of funeral homes from Chicago to Cairo. The program advisors sought to provide what members wanted: simple contract forms, contract data inputting, no risk investments, a consistent return, immediate payouts, and no tax statements. Those advisors also sought to provide the Association a growing source of revenue to support lobbying efforts, educational programs, conventions and even a museum. While all may have seemed good for twenty years, IFDA Services, as the trustee, was playing by its own set of rules. The architect who designed the master trust exploited a provision in the Illinois law that was intended to allow the small operator to avoid the costs of a corporate fiduciary.

In the absence of institutional oversight, the program was more akin to a defined benefits plan or a fraternal insurance company than a trust. The program architect ignored the fundamental fiduciary duties of the preneed trustee, and treated consumers’ payments as though they belonged to the Association. Having crossed that threshold, the program began purchasing an insurance product that would never have been a suitable investment for a preneed trust. The program has been flawed for many years, with many individuals contributing to its problems.

Many IFDA members are measuring their damages by the “values” reported by IFDA Service before the crash, and will not want to settle for less. But, the reason the Comptroller pulled the plug on the program was because, among other things, the master trust promised more than it could deliver.

 *Reprinted with permission from the July 21, 2011 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

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Preneed scandals in Illinois, Missouri, Texas, and California have state regulators moving to implement new audit procedures. But with new laws passed in the wake of NPS and state master trust problems, the frequency and scope of the future audit could change dramatically.  It is no secret that the scope of the preneed audit in Missouri is work in progress. When asked how the audit was being revised for its licensees, Illinois regulators politely declined to provide their written guidelines. Regulators in Kansas and Nebraska are also evaluating their audit procedures. But, the legal battle being waged in California provides a glimpse of one regulator’s intent to change the scope of the preneed audit.

The Ninth and Tenth Causes of Actions from the California Attorney General’s lawsuit against the California Master Trust allege that defendants either failed to maintain, or to produce, the preneed records required by law and regulation. California Code of Regulations, title 16, Section 1267 sets out those records that must be maintained by the funeral home. The regulation dates back 30 years, and reflects a view of the preneed transaction that is no longer consistent with the view taken by the Attorney General, and with the direction of the audit and lawsuit.

In a nutshell, the regulation asks for records which are intended to confirm whether the preneed payments were deposited to trust. The underlying principal is that the preneed contract represents a sale that the funeral home will book to its GAAP financial records. The regulation defines the funeral home’s cash receipts journal and general ledger as preneed records. The requirements contemplate that the funeral home will book these sales and payments for compliance with income tax reporting. By requiring the financial books and records, the preneed auditor can then track a consumer payment from funeral home receipt to the preneed trust. While the funeral director might not fear the preneed regulator, he is not likely to hide the income from Uncle Sam.

However, the California litigation is not about money that didn’t make it to trust, it is about the administration of the trust assets. In attempting to investigate the administration of the trust, the preneed auditor went beyond what the regulation calls for. The best evidence of the expanding scope of the audit is the defendants' response letter to the Cemetery and Funeral Bureau audit findings. The response letter indicates that one funeral home was cited for failing to have the following records:

• All correspondence with the trust administrator
• Copies of contracts that provide services to the trust
• Records of administrative costs
• Records of administrative costs allocated among the trustee and its vendors
• The portfolio of trust investments

When questioned about its authority for the requests, the Bureau reply stated that the trustee failed to make available “complete financial records for all preneed contracts and arrangements”. This answer fails to clarify what trust and financial records the funeral home must maintain on its premises.

What seems to come through from the California litigation is that original approach to the audit, ensuring the funds made it to trust, and leaving trust oversight to the independent CPA and an opinion, failed the California consumer. But, could the Bureau have better protected the consumer if the financial records have been kept at the individual funeral homes? (No, not without additional guidelines on the management of master trusts and pooled accounts.) And even if such regulations existed, it would be expecting too much from the auditor whose duties entail visits to hundreds of the funeral homes.

While the field auditor is an important element of the preneed compliance program, the program has to include the administration of preneed trust. Does this mean the funeral director must maintain correspondence and records related to the trust’s administration? The best course of action would be to establish a file for all trust related documents and correspondence. With the increase of preneed portability and the sale of non-guaranteed contracts, the funeral director's reliance on the ‘guaranteed contract defense’ becomes more tenuous. In a limited sense, the funeral director is becoming a fund manager on behalf of the consumer.
 

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The Missouri State Board of Embalmers and Funeral Directors staff has some new faces, and in contrast to most rookies, these newcomers are playing pivotal roles in developing examination procedures for the state’s preneed funeral sellers. The Division of Professional Registration chose personnel with prior auditing experience, but as these ‘rookies’ are learning, there is little in the way of guidelines for the examination of trust funded preneed. Missouri’s preneed heritage only makes their task more difficult.

With one of the nation’s more generous trusting requirements, Missouri is dominated by preneed trusts. Until SB1’s passage in 2009, the State Board lacked rulemaking authority to address the numerous gaps and ambiguities in Chapter 436. Chapter 436 also governed the sale of vaults and burial services, which brought cemeteries into the mix. Allow an industry to operate 25 years without examinations or rules and you get a hodge podge of seller programs, each operating differently from the next guy.

Like Forest Gump’s box of chocolates, the preneed examiner may experience a surprise with each seller he/she visits. While these surprises may not necessarily constitute violations of Chapter 436, they can be challenging when seeking a certain continuity from seller to seller. It is that continuity that will help define the examination procedures to use with the preneed trusts established prior to SB1.

As a consequence, Missouri’s preneed examination procedures remain a work in progress. The initial exams will probably take longer, with the examiners comparing notes and revising the draft procedures with each examination. For the time being, those procedures will focus on whether preneed sellers and providers are complying with new preneed contract and licensing requirements, and with the handling of that the preneed payments are being made to the proper funding agent. One of the procedures to be tested by the examiners will be a consumer letter.

As a part of the final stages of the preneed seller exam, the State Board staff will generate a consumer letter with information from the annual report filed by the seller. The letter will go to each consumer who is making payments on a contract, or who has lapsed in making payments. A sampling (5%) of the seller’s paid in full contracts will also receive the letter. The letter will set out the consumer’s contract number, the sales price and payment balance (as reported by the seller), and the request that the consumer contact the examiner only if the consumer’s records conflict with that data.

As reported by the blog in February, Illinois also has a consumer statement requirement, but it differs from Missouri in that the preneed fiduciary must send out the statement, and provide information about expenses and the trust ‘inventory’.

Funeral directors are fearful that such consumer notices will cause confusion, and lead consumers to believe the funeral home is in trouble. While problems may be encountered, the consumer notice is one of the few procedures available for detecting the small percentage of funeral directors who pocket the consumer’s payments. But if handled correctly, the statement could be used to help to maintain consumer confidence in the funeral home.
 

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Missouri’s preneed regulator, the State Board of Embalmers and Funeral Directors, will meet June 2nd to continue its discussion of agenda for the upcoming legislative session. Due to the lead time required to formulate legislation, the State Board is forced to begin discussions before its 2011 legislative agenda (SB325) even becomes law on August 28th. With the examination process having only begun this past January, the State Board does not even have the basis to evaluate crucial provisions of Senate Bill No. 1. Accordingly, the State Board faces decisions about what its legislative goals should be for the next year.

For the June 2nd meeting (and its prior May 18th meeting), the State Board staff went back to the various legislative proposals made during the summer of 2010 as a starting point. The temptation of Board may be to go through those proposals and evaluate each one on its merits. But the better approach would be to evaluate each proposal in terms of need and consistency with the legislative intent for SB1.

For example, page 9 of the June 2nd agenda includes changes intended to take preneed trusting to 100%. The proposal was discussed on May 18th, put up for a vote, and then withdrawn for further discussion on June 2nd. While it would be worthwhile to have a discussion on the merits of the proposal (including how 100% trusting would benefit both the consumer and the industry), the more important questions are whether the proposal is needed, and whether it is consistent with the legislative intent of SB1.
 

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For a brief period, the Illinois Comptroller posted a notice that sidestepped the inquiries made by funeral directors about the application of their Merrill Lynch settlements. The OIC website has since be revised.

One of the inquiries to the OIC may have involved whether the settlement funds could be applied to the litigation costs for pending lawsuits against Merrill Lynch. But for the litigation brought against Merrill Lynch, the funeral homes would not have received the settlements paid by the Department of Insurance. However, the settlement funds fall far short of the actual damages suffered by the funeral homes and consumers, and the argument may be that a portion of the funds could be used to continue the litigation.

Specifically, the Comptroller’s answered as follows:

It is the position of the OIC that we do not have the authority to instruct industry members on the proper disbursement of the funds.

In the following paragraph, the Comptroller warns:

During the review of future annual reports and audits, we will examine the method in which the funds are handled to assure that industry members acted in a good faith manner and in the best interest of consumers when determining the disposition of the funds.

While the litigation argument has merit, the Comptroller probably had concerns about the other uses funeral homes may have for the settlement funds. The notice may seem evasive to the industry, but it did not necessarily foreclose the application of funds to litigation that may benefit the consumer. But, funeral homes should pay heed to the warning that they will be held accountable for how settlement funds for active contracts are applied.
 

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Many state preneed regulators share the point of view that the payments made toward a preneed contract belong to the consumer until the prearranged funeral is provided. This perspective was adopted by the California Attorney General in its Eighth Cause of Action brought against the California Funeral Directors Association and its Master Trust. The AG criticizes the CFDA for investment decisions that are fairly representative of those taken by the industry as a whole.

Early on, the CMT relied upon bond funds that specialized in zero coupon government bonds. The AG points out that U.S. Treasury Bonds and similar bond funds outperformed the CMT at less risk and with lower fees.

When the bond market crashed in 2001, the CMT experienced substantial investment losses and changed investment course. The CMT began diversifying, and purchasing mortgaged back securities, foreign bonds and notes, corporate asset-backed securities and other types of securities. The AG criticizes these investments by stating “these types of investments are not insured bank accounts, are not bonds that are legal investments for commercial bank (sections 1001 et seq. of the Financial Code lists certain legal investments for commercial banks), are not government bonds, and do not comply with the Uniform Prudent Investor Act (as discussed below).”

The AG goes on to argue that the investment policies of the CMT should be set by the risk and return objectives of the preneed contract beneficiaries, and faults the defendants for having set investment policies based on their own needs.

Other states’ preneed regulators (and cemetery regulators) share the California AG’s point of view. It is common to hear a regulator characterize the preneed trust as a depository account or to express the belief the industry would be better off if preneed funding were left to the insurance companies. These regulators need to take the blinders off.

The CMT, like so many preneed trusts, went into tax exempt investments after 1988 because of Revenue Rul. 87-127. The Internal Revenue Service pushed for an income reporting method that proved impractical and burdensome. To compound the situation, the IRS applied the ruling retroactively to certain states. California was one of those states. Prior to the ruling, funeral homes had no reason to require the consumer’s social security number when selling a preneed contract. Consequently, many California trustees could not comply with the ruling with regard to existing contracts.

The ruling required grantor statements to be sent to consumers, and the consumers complained. So, funeral homes instructed their preneed fiduciaries to go into anything that didn’t require a grantor statement. While the CMT went to zero coupon bonds, the IFDA went into the poorly conceived key man insurance. Other trusts went into annuities. Various approaches were taken because the IRS could not provide reporting guidance once it changed the rules.

In stating that the preneed funds must be invested pursuant to the contract beneficiary’s objectives, the California AG has ignored the fact that a majority of these preneed contracts are probably guaranteed. Under that arrangement, the funeral home has assumed the investment risk. From a practical approach, how would the investment advisor determine the objectives of the thousands of preneed beneficiaries? In a prior post, this blog reported about an Illinois contract beneficiary’s complaint about the IFDA Master Trust. In contrast to the losses suffered by the member funeral homes, the beneficiary experienced a modest return on her non-guaranteed contract. Her complaint was that the return was not enough to keep up with rising funeral costs.

The California AG argument that the CMT must comply with the Prudent Investor Rule in a way that does not expose trust principal to risk is the equivalent to handcuffing both of the investment advisor’s hands behind his back.

Of the investment complaints made by the California AG, the one which would seem to merit the most attention would be the relationship between the former investment advisor and a CFDA board member. That CFDA board member also served as a trustee for one of the advisor’s funds, for which he received compensation. That relationship warrants an inquiry whether the relationship was disclosed and the compensation appropriate and reasonable.

The AG’s argument that the investment advisor must be independent from the seller is one shared by Missouri regulators. The Missouri regulators are quick to point to the abuses committed by NPS and its investment management firm. (See our post titled “The Zeal for Independence”). Those abuses were so bad that the Missouri legislature passed a provision prohibiting a relationship between the seller and the fund manager. This author thought the provision went too far. (See our post titled “Regulating Out of Context”). With the passage of SB 325, the Missouri Funeral Directors Association has convinced the Missouri legislature that it did go too far.

Regardless of whether the fund manager is a fiduciary employee or an independent investment advisor, that fund manager should appropriately look to the preneed seller for input about investment objectives. For the larger trust, the fiduciary and fund manager should adopt a written investment policy that, among other factors, considers the trust’s mix of guaranteed and non-guaranteed contracts. If the fund manager is an independent investment advisor, the relationship should be documented with an agreement that discloses all forms of compensation. Consistent with the SEC efforts to reform mutual funds, the disclosure should address any 12b-1 fees. The agreement with the fiduciary should also disclose all relationships the investment advisor has with the preneed seller.

To the extent the preneed contract is guaranteed, the regulator needs to recognize the seller’s economic interest in the trust’s performance. But, fiduciaries and sellers need to consider the growing number of non-guaranteed contracts and the possibility that the guaranteed contract may be serviced by a different funeral home. While the seller may have the prevailing economic interest, not all of the trust may be considered his for investment purposes.

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A breakdown in communications between the CFDA and the Cemetery and Funeral Bureau has resulted in the California Attorney General filing a lawsuit that can be appropriately described as vitriolic. The “California lawsuit” could provide some valuable ‘what to avoid” lessons for regulators in other states.

In an unusual move, the Bureau went “public” last year by raising a number of issues with administration of the California Master Trust. Some of those issues did warrant an explanation. One issue involves the actions taken by the CFDA subsidiary in response to the 2000 market crash. The subsidiary implemented a plan to stabilize the master trust value after the collapse of a bond fund. Another issue regards the administration fees charged the master trust subsequent to the collapse of the bond fund. A third issue regards the subsidiary’s policy to pay a portion of the administration fees to participating funeral homes.

The CFDA countered with arguments of how its actions were within California law. Those arguments have merit, and were covered by this blog in July 2010. (See California Master Trust: serious missteps, but not another IFDA.) The CFDA proposed that the issues be reviewed in the context of relevant facts, having the Bureau apply thirty year old laws and regulations to the CMT’s circumstances. Instead, the California Attorney General adopted a “quick kill” strategy that employs a two prong attack: involve the consumer and apply the law strictly.

In taking the controversy to the consumer, the California AG has been disingenuous when using such terms as “conspiracy”, “concocted”, and “kickbacks”. In doing so, the AG may end up galvanizing the CMT membership, and getting anything but a quick kill.

The AG’s legal arguments are also somewhat disingenuous. As the title suggests, this blog entry will focus on the AG’s call for a truly independent trustee. In future entries, we will look at some of the AG’s other legal arguments.

In the “First Cause of Action” of the petition, the AG makes the argument for how the CFDA’s administrative subsidiary has assumed unlawful control over the preneed funeral trust. Granted, the CFDA may have gone too far in assuming control over the trustee’s appointment of agents (and discounted the interests of consumers with non-guaranteed contracts), but the AG ignores the fact the master trust consists of thousands of preneed contracts that originates in hundreds of funeral homes. This fact makes the fiduciary dependent upon the funeral home in a number of ways.

The trustee needs preneed contract data for accounting (much in the same way the regulator’s auditor is dependent on the same records to perform his job). As with other states’ master trusts, the association performed a vital role in providing crucial contract administration. Contrary to the AG’s citation to the California probate code, these are administrative functions the corporate fiduciary must delegate. The trustee cannot account for the preneed contract as a depository account.

The trustee also needs input when setting investment policies. The AG would suggest that the preneed trustee cannot look to the funeral home. This ignores that the vast majority of the preneed contracts are guaranteed, where the funeral home has assumed the risk of investment. It also flies in the face of the numerous “No Action Letters” issued by the Securities Exchange Commission.

The manner in which the trustee prepares trust tax returns impacts both the funeral home and consumer. The most efficient approach (Federal Form 1041QFT) has a cost to the funeral home. Consequently, the preneed fiduciary will want the funeral home’s approval.

The ‘independent preneed trustee’ may seem to be a quick and easy answer to regulators, but only if the courts ignore the facts and realities of administering a preneed trust.
 

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Continuing the theme that effective preneed regulation requires the occasional update, the Missouri legislature is poised to pass the first ‘patch’ to SB1, the 2009 legislation that ‘re-wrote’ Chapter 436. Senate Bill No. 340 will make four noteworthy changes to Chapter 436.

Concerned that preneed sellers would use variable annuities to fund preneed contracts, Missouri’s insurance regulators sought to have SB1 limit the use of annuities to the single premium variety. This proved burdensome to funeral homes committed to insurance funded preneed. The single premium requirement denied the funeral home the use of variable pay annuities for consumers who either do not qualify for life insurance, or who cannot afford the premium of a life insurance policy. SB340 appropriately allows variable pay annuities to be used to fund preneed contracts so long as death benefits are never less than the premiums paid.

While SB1 preserved the use of joint account funded preneed, small operators encountered problems with banks and the Patriot Act. SB340 will allow POD accounts to be used in funding preneed contracts.

SB1 provided for retroactive application in certain respects. But, with regard to preneed trusts in existence prior to August 28, 2009, SB1 provided for historic law treatment with regard to income distributions to sellers and the use of income to pay trust expenses. Section 436.031 authorized the distribution of trust income to the seller provided the mark to market requirement was satisfied. The section also obligated the seller to pay trust expenses and taxes because of trust income withdrawals. SB340 will delete that provision, and it isn’t clear the intent for this change.

Section 436.031 of the prior law also allowed a preneed seller to designate an investment advisor, and in doing so, relieve the trustee of all asset management responsibilities. This provision was exploited by NPS, and was pivotal in conversion of millions of dollars of preneed trusts to worthless insurance. Seeking a completely independent trustee, SB1 imposed restrictions on who could serve as an investment advisor to the trust. While the NPS experience proved the need to keep the fiduciary responsible for asset management, SB1 went too far in driving a wedge between the asset manager and the seller. SB340 will create an exception to that restriction for the “external” investment advisor who satisfies Section 436.440.

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Microsoft’s early efforts to force regular program updates were a nightmare. Like a gremlin that visited at night, the update often changed default settings that you never completely understood in the first place. Sometimes the update would impact the compatibility of other critical programs. To avoid the hassle of these updates, I toggled off the Microsoft updates for several years. And then when a drive failed, dozens and dozens of MS patches and updates had to be downloaded and installed, costing me time and expense.

The preneed regulatory systems set up by various state legislatures in the 1980’s have begun to crash for the same reason: a failure to update. Preneed has changed since the days when bonds paid double digit returns and preneed programs were the fad. California was no different from most states where preneed opponents outnumbered preneed proponents. Legislative compromises favored the traditional operators who opposed preneed, and the resulting law was disjunctive and confusing.

As time passed, more and more California funeral homes began to offer preneed. In most cases, it started as an accommodation to the consumer who sought to put funds aside. Eventually, competition not only drove all funeral homes to offer some form of preneed, it also drove them to factor preneed into their business plan. The investment markets also became more complex.

But, the California funeral industry left the preneed law update toggled off, and instead, stretched the law’s ambiguities the best it could to “authorize” new business practices. And, the preneed regulators (first the State Board, and now the Bureau) often played the same game. The Bureau and the CFDA are now locked in a lawsuit (over an antiquated law) that will leave both sides bruised and defensive. The posture taken by the AG suggests the fight could be nasty. But the facts suggest, the State should look to make prospective changes.

NPS exploited the weaknesses of Missouri’s 1986 law, and that company’s collapse gave Missouri regulators the ammunition required to force a new preneed operating system on its funeral industry. The 2009 law has its flaws, and needs changes (other than those in SB340), but preneed life continues in Missouri. Missouri regulators would like to go back in time to change some of the prior law’s flaws, but the push to make retroactive changes has been measured.

In Illinois, the IFDA put together a master trust and an insurance program that pushed the envelope beyond the Comptroller’s tolerance. The Comptroller’s responded much in the same vein as the California regulators did. While entrenched in a lawsuit, the Comptroller pushed his legislative agenda through the legislature. But, Illinois got more of a preneed system patch than a new operating system. Eventually, Illinois is due for a significant preneed system upgrade.

Nebraska is another state that may be due for some form of a preneed update. With a reporting system based on tax cost basis, preneed regulators want to introduce market value into the computation for income distributions. The objective has merit, but the 1987 law can only be stretched so far.

Getting a preneed law that works for both operators and regulators will never be a “one and done” project. Occasional updates will be required.
 

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For most Illinois funeral homes, March 15th is the due date for the filing of their preneed data with the Comptroller’s office. For those funeral homes that bolted from the IFDA after the master trust melt down, this has been an extremely frustrating process. The majority of funeral homes must file on line, with supporting documentation to be mailed no later than March 16th. Those funeral home operators of Irish descent will have reason to hoist an extra brew come St. Patty’s day: the Comptroller’s office has ample reason to change the contract reporting requirements yet again.

The 2010 reporting forms were changed to reflect SB1682’s elimination of depository accounts. However, the annual reports are still premised on the old IFDA master trust structure that credited consumer accounts with an amount of fixed interest. For each consumer preneed contract the funeral home is required to report beginning principal and interest, additions of principal and interest, withdrawals of principal and interest, and ending totals of principal and interest. In essence, the annual report views each consumer account as a passbook saving account.

No need to beat a dead horse, but the IFDA master trust was wrestled away from the association because the Comptroller determined the trust could not sustain itself. Contracts were being credited with interest rates greater than the trust’s investment return.

In response to the situation, the IFDA selected Fiduciary Partners to succeed Merrill Lynch as the master trust fiduciary. The switch to Fiduciary Partners includes a needed change in the investment strategy of the IFDA master trust: diversification through pooled funds.

To determine whether the IFDA master trust (or score of master trusts spawned in the mass exodus) will be self sustaining, the Comptroller’s office will need to revamp its annual report to track such contract issues as sales price, deposits to trust, and market value allocations. In light of the IFDA’s past use of insurance vehicles, Illinois fiduciaries should anticipate providing detail of their trusts’ investments and transactions.

Other states’ preneed regulators are also drilling down to the individual contract with new reporting requirements. Most notably, Nebraska revised its 2010 annual report to include new disclosures regarding market values, with all preneed sellers to provide individual contract data in an Excel format. The data must also be backed up with trust asset listings and transaction reports. Missouri has also implemented individual contract reporting, and Kansas has legislation pending that will impose similar requirements on cemeteries that sell preneed.
 

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The Springfield Journal-Register reported last week on the latest lawsuit to hit Merrill Lynch, the IFDA and the law firm that represented the Association.

One aspect of the lawsuit focuses upon the claim that the key man insurance policies sold to the master trust were not suitable investments. Without an insurable interest, the policies could not provide the tax consequences sought for participating funeral homes. Piercing through the “it’s an insurance policy argument”, the allegations are directed at whether Merrill Lynch has violated securities laws. With the implication of securities laws, the Illinois Secretary of State’s jurisdiction has been triggered.

The article also reports on the lawsuit’s allegations against the law firm that represented the IFDA. Concerns over the investments date back to 1987 (which coincides with the issuance of Rev. Rul. 87-127), when the lawyers sought regulatory approval of the plan. While that approval was never provided, the IFDA moved forward, and the law firm is now being blamed for ‘giving the green light’.
 

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We don’t like to be reminded of our mortality. Cemetery operators face this issue with many marker and monument sales. An illness may lead a husband and wife to begin making plans, which often includes the purchase of a grave space and a marker. But, it is difficult for many individuals to view a marker complete except for a date of death. Consequently, it is common for the couple to defer delivery of the marker until some future date. Unfortunately, some cemeteries (or monument dealers) go out of business, or change ownership, and the marker goes undelivered.

Until the law changed in Missouri in 2010, cemeteries were required to either deliver the marker within a reasonable time, or place 110% of the wholesale cost of the marker in a segregated account. The Missouri law now requires cemeteries to trust or escrow 80% of the marker’s purchase price when delivery is deferred. The new law presents two dilemmas for the cemetery.

In the situation where the marker is to be paid with installments, the cemetery will often defer delivery until the purchase price is paid in full (or at least until the cost of the marker has been received). Many consumers need the flexibility of installment payments to meet the costs of the marker. However, the cemetery has little recourse if the family ceases to make payments, except to defer delivery of the marker. Under the new Missouri law, cemeteries will be required to deposit 80% of those payments to trust or escrow, even if the contract only involves a 12-month installment period, and a prompt delivery on the last payment. This will add another layer of expense to the marker sale.

For the consumer who does not want to see his/her name on the marker, the cemetery also has the dilemma of rising costs. The costs of granite and bronze have risen dramatically over recent years, and show no signs of leveling off. With a marker, the cemetery has a product that it may be willing and able to delivery, but may be forced to defer, and in doing so, is also forced to watch the profit of the transaction being eroded over time.

Consumers who need the flexibility of installment payments should not be surprised if cemeteries pass on the additional costs imposed by Missouri’s new law. Similarly, consumers who don’t want to see their name on the marker (for which they have already paid) may also be required to bear additional expenses when delivery is deferred.
 

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If their preneed contract is trust funded, Illinois consumers should soon be receiving statements from the bank or trust company that administers their account. These statements are one of the new requirements imposed by SB1682. The contents of the statements are governed by Section 2.h of the Funeral or Burial Funds Act.

The Comptroller’s Office sought the consumer statement in part to require accountability for the fees and expenses being charged by the IFDA. The Comptroller has brought legal proceedings to force the Association to refund a portion of the fees charged to the master trust. The California Master Trust faces similar complaints from the Cemetery and Funeral Bureau.

One allegation common to both master trusts was the fact the fees being charged were based on a ‘value’ other than the trust’s market value. The regulators have also challenged the reasonableness of the fees.

Another emerging reform issue that could impact this new Illinois disclosure requirement is whether the fiduciary (or its affiliates) receives a 12b-1 fee.

Consequently, Illinois preneed fiduciaries have cause for being cautious when reporting how much the preneed trust arrangement is costing the consumer (and the funeral home).
 

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The start of Missouri’s new era of preneed oversight began when document requests were mailed to sellers on January 3rd. Sellers were requested to provide the following documents by January 28th:

· A current statement from your state or federally chartered financial institution’s authorized to exercise trust powers in Missouri of any preneed trust accounts that you have identifying the payments, earnings, and disbursements for each active preneed contract.

· A current statement from any/all applicable insurance companies with which you have insurance-funded preneed contracts for each active preneed contract.

· A current statement from your financial institution/s of preneed joint accounts for each active preneed contract.

· A copy of a ledger or computerized report showing all outstanding preneed contracts.

· Copies of agreement(s) with providers, agents, funeral director agents and if any contracts are funded by trust a copy of the trust agreement with the trustee.

· A copy of the trust agreement with financial institution for any preneed trust.

· A blank preneed contract currently used by you as a seller. 

If a seller established separate trusts for “Pre88” contracts, “Post88” contracts and “SB1” contracts, all trust agreements should be provided in response to the request. If the trustee has contracted for services (whether it be with the seller or with a third party), copies of the service agreements should be included. Sellers should have revised their preneed contracts since the passage of SB1, and so samples of relevant preneed contract forms should be provided.

From the trustee, the financial examiners will expect a report of the trust assets and a transaction report. The asset listing will be used to determine the trust’s compliance with the prudent investor rule, and the transaction report will be used to determine compliance with deposit requirements, distribution documentation and expenses charged to the trust.

Sellers should also anticipate that the financial examiners may request additional documents or reports before scheduling the on-site exam.
 

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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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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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While the Comptroller succeeded in getting SB1682 passed, and into law this past February, the office hasn’t revised its annual preneed reporting form to reflect the law’s changes. The report contemplates depository accounts and self-trusted accounts, which were eliminated by SB1682.

Funeral directors, accustom to the IFDA’s assistance, may also find the trust report section confusing. The annual trust statement requests a break-down of trust funds by principal and interest. With diversified portfolios, the report would make more sense if it sought deposit balances, income and account values.

With transition at the Comptroller’s office, funeral homes will be forced to muddle through the upcoming report. The Comptroller’s office will need to be lenient with funeral homes attempting to comply. Eventually, the Comptroller’s office needs to step back from the old forms and procedures, and seek input on how to revise the annual report for easier compliance by the Illinois industry.
 

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Triggered by the NPS collapse, preneed reform rolled out of the Missouri legislature like a tsunami. When the funeral industry was slow to organize and respond to the situation, legislators worked with state officials to imposed sweeping changes. While SB1 does reflect input provided to the State Board by the industry, the law has flaws and omissions that need to be addressed. It will take time to determine how best to revise SB1, but for the current legislative session, I have a short Christmas wish list:

• A continuing education requirement – as a profession, funeral directors have an obligation to stay abreast of new issues and changes. Aside from preneed reform, the industry is in transition in many aspects. Few professionals like forced educational requirements, but the time has come for the Missouri funeral industry.
• Section 208.010.4 – no one can fault the local MO Healthnet worker who interprets this section to require an assistance applicant to purchase a Chapter 436 preneed contract. This law needs to be revised to clarify that other acceptable forms of final expense funds may be excluded for asset testing.

Merry Christmas!
 

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The Illinois Funeral Directors Association is living out its own version of A Christmas Carol, with the Ghost of Yet to Come having painted a fate similar to that of Scrooge.

The court decision reported by the Memorial Business Journal* has all but sealed the fate of the Association. While the attorneys can continue to maneuver (and file appeals), the IFDA’s future is dependent upon how its board responds. But, the Ghosts of Christmas Past and Christmas Present offer little hope for the Association’s members. Everything rests on whether the IFDA Board can change course and demonstrate the leadership required to win back the trust of its current (and past) members.

If the situation in Illinois is like that seen in other states (including Missouri), the IFDA board must confront the frustration of larger operators who have felt ignored for years. Unlike Scrooge’s nephew Fred, many of these operators are neither paupers nor inclined to extend hospitality to an ailing, dysfunctional organization. But these are difficult times for the funeral industry, and operators must begin to search for common ground. The demise of an association will result in a vacuum that will be difficult to fill as reform picks up speed.

*Reprinted with permission from the December 16, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

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The Missouri State Board of Embalmers and Funeral Directors will take another step on December 7th towards the process of defining the examination process for preneed funeral contracts. True to mantra that has been repeated over the past several months: this is a work in progress that will evolve as more is learned.

The agenda for the December 7th meeting includes an attachment titled “Financial Examination Process – FAQ”. For the most part, the FAQ is rehash of what discussed at the Board’s October meeting. The FAQ sets out in general terms the steps that will be taken in an examination.

One issue that is not clear from the FAQ is whether the examination will review preneed contract forms for compliance with applicable law. If so, the seller’s contract forms should be included in the Paragraph 2a review request. Including the contract review as a part of the prep work for the on-site exam should cut down on the time spent on the seller’s premises.

Paragraph 2f should prove a crucial step in the process of resolving issues before they reach the Board. If the staff and examiners merely write up the issues and defer all decisions to the State Board, the Board will need to schedule more meetings.

Finally, the FAQ does not offer much with regard to the review of serviced contracts. While the staff’s proposal to review all outstanding preneed contracts drew the most comments, the serviced contract review could prove more instrumental to disclosing compliance errors or fraud.
 

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Yesterday, the St. Louis Post Dispatch reported on the federal indictments handed down against six NPS officials. The article includes two statements that hint at the legal strategies to be employed by NPS and federal prosecutors.

"We have anticipated this (indictment) for a number of years, and he is looking forward to finally confronting these allegations line by line in court," Rosenblum said.

In 1992, Missouri filed a civil suit against National Prearranged that led to a court agreement on minimum deposits into trust accounts. That deal wasn't followed, and the defendants concealed their transactions from regulators in Missouri and other states, the federal indictment alleges.

The first statement, made by Doug Cassity’s attorney, is a posturing statement that warns of a long public trial. The message is twofold: we’re going to make you spend a lot of money and we’re going to flyspeck the actions of Missouri regulators. Mr. Cassity’s legal team will likely assert that NPS complied with Missouri law, and did nothing to conceal its actions. Earlier this summer, NPS attorneys commented that the company was doing fine until regulators intervened in 2008. (If that were the case, why would Mr. Cassity have been anticipating the indictment for a number of years?)

Basing a defense on any failure of the State Board serves as a subterfuge. However, the federal prosecutor must respond by showing how NPS concealed its actions. With some Missouri funeral homes criticizing the former Attorney General for having let NPS off the 1992 hook, a NPS trial serves as a stark reminder to Governor Nixon of the lax enforcement of Chapter 436.

Missouri funeral directors should anticipate a get tough response from the Attorney General’s Office like that taken recently in Bates County.
 

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In a move to remain autonomous from the funeral industry and its oversight, the Missouri cemetery industry met with its regulator during the summer of 2008 to discuss reform legislation. Disagreements precluded effective legislation from being passed in 2009, but extensive changes was passed in 2010, and became effective on August 28, 2010. Now, the Missouri cemetery regulator has the task of implementing the law, and notifying cemetery operators and trustees of the new requirements.

Missouri’s Cemetery Endowed Care Trust Law (Sections 214.270 et seq) is administered by the Office of Endowed Care Cemeteries. A brief summary of the new law’s requirements can be found on the OECC’s website.

The new law makes substantial changes to perpetual care trusts (Section 214.330), sales documents (Section 214.282) and the preneed merchandise sales (Section 214.387).
Some perpetual care trusts define capital gains as income.

The new law incorporates the uniform principal and income act, precluding capital gains from being treated as income. This change is being imposed retroactively to existing trusts, thus forcing many cemeteries to amend their trust agreements. But, the new law does authorize fixed distributions that can exceed the trust’s income.

The new law also imposes the following requirements on perpetual care trusts:

A. Trust records must be made accessible to OECC examiners.
B. Trust instruments must be filed for approval.
C. Sales documents for interment rights and merchandise must comply with the Law, or the contract can be voided with interest refundable to the consumer.
D. The OECC can order the trustee to suspend your PC distributions.
E. PC deposits must be made on a monthly basis (instead of semi-annually).
F. The PC requirements have been raised for certain interment rights.

With regard to preneed, cemeteries must start from scratch. The prior law provided a low trusting requirement for services (opening and closings), and a segregated account requirement for marker and monument sales. To avoid the funeral licensing and trusting requirements of SB1, Missouri cemeteries must now comply with RSMo. Section 214.387. (To read a prior post on the new trusting requirement click here.)

Section 214.387 will require a cemetery to establish either an escrow account or a new trust, and comply with the following:

A. Escrow agents must be independent of the cemetery.
B. Escrow agreements and trust agreements must be filed with the OECC for approval.
C. Twenty percent of consumer payments may be retained but all subsequent payments must be deposited to a trust or an escrow account.
D. If a trust is used, all income must remain in the trust.
E. Deposits must be made within 60 days of receipt by the cemetery.
F. Preneed reporting to the OECC will begin in 2011.
G. New sales contract forms are required.

Banks that serve as a cemetery trustee will soon be receiving a letter advising of the new requirements. Missouri cemeteries will have more than New Year's resolutions to prepare for 2011.

 

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Missouri is one of the few states that does not impose a continuing education requirement for funeral directors. Where continuing education is required, the state funeral director association typically sponsors programs that satisfy the CE requirements, and provides revenues needed to supplement the association’s budget needs.

The passage of SB1 has provided the Missouri Funeral Directors and Embalmers Association with an opportunity to reach out to members (and non-members) with classes about the new law’s requirements. However, the MFDEA faces challenges in reaching the Missouri industry: attendance is not mandatory, the economy is down, funeral directors are taking a wait and see approach, and the interpretation of the law’s requirements by the Board/staff is muddled.

Since the law’s passage in August 2009, Board members and staff have expressed frustration with the industry. Funeral directors did not attend legislative hearings or Board meetings in the numbers that were anticipated. Response to the new licensing requirements has been slow, and accompanied by complaints.

The past two years have been demanding and time consuming for the Board and its staff. Those two years have been marked by trial and err processes, some of which have succeeded and some of which have been jettisoned. For an industry that rarely attends a Board meeting, the result has been confusing.

The proposed examination procedures discussed at the State Board’s October 27th meeting include controversial provisions that will likely change before the Board’s meetings in December. Reviewing every outstanding preneed contract of every seller would be time consuming and excessive. Under certain circumstances, such a procedure may be warranted. If a seller cannot provide indicia of what his outstanding preneed liability is, then the Board has no recourse but to look for every contract.

However, there will be an on site examination of every seller. And, there will be a review of at least a sampling of the seller’s contracts. The exam will also involve a review of the performed contracts. At the conclusion of the review, the examiner will conduct an exit interview to advise the seller of the findings. These minimum procedures will provide the Board and the staff an opportunity to educate each seller regarding issues on non-compliance. But, the next steps of the examination process will provide sellers an opportunity to educate the Board and its staff.

The examination procedures represent the best efforts of the staff, with input from the Board and other states’ preneed regulators. Preneed is not only unique from state to state, but often from seller to seller. And, there are Missouri funeral homes that will argue the current Board membership is not a fair representation of preneed sellers.

So, after the exit interview is conducted, the examiner will return to the Board offices to prepare a report. That report will be sent to the seller to so that it may provide comments, rebuttal and proposed corrections. Then the examiner and staff will have to opportunity to revise the report that is filed with the State Board. Then the Board will decide what actions should be taken. If the Board/staff and the seller are in disagreement, a hearing will follow.

The rebuttal report and Board hearing will provide sellers the crucial opportunity to educate the staff and the Board about practices and procedures that were not adequately addressed in the Chapter 436 hearings, or subsequent Board meetings. Pressures to pass a law, and then implement that law, have resulted in the Board (and staff) pushing aside issues. One on one with the Board, sellers will have the opportunity to slow the process down and address SB1 and how it’s being interpreted and applied. For staff that has only dealt with problem programs, or Board members familiar with their approach to preneed, the rebuttal report and hearing will continue Missouri’s preneed educational process.
 

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The earliest form of preneed consisted of a depository account at the local bank. Often, the paperwork included a statement of goods and services describing the individual’s preferences. The account was set up so that the funeral director could access the account upon the consumer’s death. The statement of goods and services would then be followed for the funeral. This arrangement was convenient to both the consumer and the funeral director. But, a recent news report out of Louisiana serves as a reminder of how the depository account has been too convenient, forcing states to take it away.

As preneed proliferated, state legislatures imposed safeguards to protect the funds paid by consumers. With the exception of New Mexico, all states now have trusting requirements. When those trusting requirements were initially imposed, a few states made exceptions to allow small funeral homes to continue to use the depository account. Abuses now threaten to eliminate the depository account as a form of preneed funding.

Illinois was the most recent to eliminate the depository account. In response to IFDA abuses, SB1682 now requires Illinois funeral homes to move their depository accounts to a corporate fiduciary and to revise their preneed contracts. Some Illinois funeral directors are painfully learning that the new law precludes them from using their local bank and familiar contract forms.

Missouri’s 2009 law preserved the depository account, but with substantial reporting requirements. Funeral homes dependent upon the depository account were required to report those contracts this past October 31st. Those reports will be used for on-site exams to begin in 2011. The future of depository accounts in Missouri will depend on how well funeral directors have complied with both the old and new requirements.

As discussed in a prior post, funeral directors who have been forced from depository accounts, or who must meet new requirements, need to seek legal assistance when revising their preneed contract form. The old practice of preparing a statement of goods and services is not enough for compliance with the new (and most old) preneed laws.
 

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That’s the question a member of the Missouri State Board asked of his staff last Wednesday during a discussion of controversial examination procedures. Prior to the NPS fiasco, the answer to that question would have been “the Board is”. While SB1 (appropriately) continued to vest preneed supervision in the State Board, the new law also vests concurrent authorities in other state bodies.

From state to state, preneed supervision is assigned to either elected politicians, appointed agency directors or industry boards/commissions. As the Missouri Board was reminded this past week, the criticism made of vesting preneed supervision in an industry board often includes the characterization of having “put the fox in charge of the chicken coop”. But the advantage of having an industry board as the preneed supervisor is the experience those industry members bring to a complicated transaction.

If the Missouri funeral industry looks east to Illinois, it will find peers regulated by an office with a Tuesday election. The Comptroller candidates who would rather transfer preneed to another state agency than wade into a crisis that offers few answers. If Missouri funeral directors then look to the west, they will see that the fate of Kansas cemetery regulation is also dependent upon Tuesday’s elections. But after a year of meetings and warnings that changes are coming, the Kansas Secretary of State election could mean a new direction (or no direction at all).

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

While Missouri funeral homes may be frustrated by the past year’s changes, the Missouri reform process has been slow and measured in part because the Division of Professional Registration is contemplating its role when someone asks “Who’s the Boss?” In the future, effective preneed supervision must be a shared responsibility.
 

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The Missouri State Board of Embalmers and Funeral Directors has released its proposed preneed examination procedures. The release comes just 24 hours before the Board’s October 27th meeting, and so few funeral directors will be prepared to ask questions.

The proposal contemplates different procedures for ‘compliant sellers’ and ‘non-compliant sellers’. With most of the industry concerned about some issue of compliance, the proposal begs the question how the determination of non-compliance is made. The timing of the release and the October 31st renewal deadline suggest that the failure to timely file a properly prepared seller’s renewal may be the easiest way to fall into the non-compliant stack.

The October 27th meeting only allows an hour of discussion of the proposal, so the industry will have to anticipate the time for questions and discussion will occur at the Board’s December meetings.
 

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Regulators in California, Missouri and Kansas have already implemented strategies that are intended to make preneed fiduciaries more accountable to the consumer. Over the past few weeks, this blog has covered new reporting requirements in Missouri and the audit drama playing out in California. In Kansas, the fiduciary for a failed cemetery has been sued for various breaches of state law. Because the pool of experienced preneed fiduciaries is relatively small, the events transpiring west of the Mississippi River will influence many Illinois fiduciaries to spend some time with SB1682.

One SB1682 requirement that has already caused a rift between funeral homes and preneed fiduciaries is the annual statement requirement. Illinois law now requires the trustee to report to the preneed purchaser receipts, disbursements, and “an inventory of the trust” (including expenses).

Recent statements reflected substantial account decreases, and that has strained the relationship between the funeral home and some of its consumers. While funeral homes would rather avoid inflaming consumers with news about deteriorating accounts, the fiduciary is bound by law to provide the consumer an annual accounting.

IFDA members can deflect some consumer complaints, but eventually, the buck will stop with the funeral director. To regain consumer confidence, funeral directors should be prepared to show they have a plan for the funds entrusted with them.
 

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On September 9th, Missouri’s State Board of Embalmers and Funeral Directors conducted its first public meeting since forwarding new (and extensive) reporting requirements to preneed funeral sellers and providers. In no mood to entertain complaints from the industry, the Board advised licensees to “do their best”. In response to criticism of the new trust reporting requirements, the Board advised that fiduciaries are only being required to certify individual account data regarding transactions for which they have oversight responsibilities. Fiduciaries are not being required to certify the preneed contract data for which the seller is responsible (purchaser and beneficiary names and addresses).

What the preneed fiduciary is being required to certify is aggregate trust data regarding deposits, income and expenses. With regard to each preneed contract, the trustee must also certify the 5% origination fee and 10% sales expense that have been paid to the seller, and the market value of each contract. The State Board advised the industry that these reporting requirements will likely change next year. For example, the current report does not contemplate the amount deposited to trust per contract, or whether the preneed contract is guaranteed or not (which is necessary to determine whether the 10% sales expense is appropriate).

The course of reporting requirement changes will be influenced by the industry’s efforts as a whole to comply with the October 31st renewal requirements, and the January 31st voluntary reporting request.
 

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California funeral directors face a September 13th deadline that could have substantial financial consequences, including the repayment of trust distributions.

A July 1st letter sent by the California’s Cemetery & Funeral Bureau to funeral homes in the California Master Trust outlined the regulator’s rejection of the Association responses regarding the Master Trust audit. An impatient Bureau gave funeral directors 3 weeks to respond. That deadline was quickly extended to August 11th. Then the week before the August 11th deadline, the Bureau granted another extension to September 13th.  On the eve of the deadline, there is nothing on the Bureau's website to suggest another extension is in the offering.

The Bureau is demanding several significant changes to be made to the administration of the California Master Trust. But one demand that may prove problematic for the Association will be the Bureau’s demand that funeral homes repay to consumers’ trusts the administration fees that have been paid out over the years. The Bureau has rejected the Association’s proposal for prospective procedures to document the fees.

Within the past year, Nebraska preneed sellers were also called upon to replenish trusts for the method in which income taxes were paid. The Nebraska examinations also went back several years, and involved substantial amounts.

With new reporting requirements, Missouri funeral homes will also have to explain trust and joint account shortages. Some Missouri funeral directors have failed to appreciate how Missouri law distinguishes between trusting and joint accounts. Missouri’s old preneed law allowed sellers who used trusts to retain 20% of the consumer’s payments, and to withdraw income (subject to the mark to market) requirement. Those provisions don’t apply to joint accounts. With regard to the new Missouri law, sellers also need to grasp that the 10% sales expense is permitted only with regard to trust contracts that are guaranteed. With regard to Pre-SB1 trusts, sellers could be held accountable for income, taxes and expense distributions that cause the trust to drop below aggregate deposits.

Illinois preneed sellers have a similar limitation on their claim to the 5/15% permitted under their preneed law. While the lawsuits that have embroiled the IFDA claim about 1/3 of the master trust’s contracts were non-guaranteed, it’s not clear the funeral homes made that distinction when claiming their ‘administrative fee’.

For those funeral directors who participate in a master trust, the California drama is worth watching. While the Association is crucial to negotiating a resolution, the Bureau has taken its fight to the individual funeral homes. Will other state’s regulators follow suit?
 

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Missouri preneed law (past and present) authorizes three forms of funding: trusts, insurance and joint accounts. Of the three, joint accounts have been used by many rural funeral homes that did not want the hassles of trusts and insurance. But with new reporting requirements, these funeral homes are on the clock to pull together information and seek certifications from bankers who, up to this point, haven’t been required to review a preneed contract.

With regard to their joint account funded contracts, the funeral home with a seller’s license has two renewal forms that must be filed by October 31st. The seller renewal form includes a report of contracts sold since August 28, 2009. That report has to be certified by the bank that maintains the joint account.

The provider renewal form requires a report of all active joint account contracts sold prior to August 28, 2009. In contrast to the seller renewal form, this report does not have to be certified by the banker. But, the State Board is requesting that funeral homes with joint accounts file a third report by January 31, 2011. While the January report is voluntary, it will require a bank certification for the number of contracts, the total face of the contracts and the amount paid by the consumer.

The refusal (or failure) to file the voluntary report will likely affect the nature and timing of the funeral home’s financial exam. The State Board has to perform a financial review of each “seller” once every five years. The State Board also has the authority to perform a financial review of providers. Regardless of whether the funeral home gave up the joint account contract when SB1 went into effect, the State Board will eventually review the contracts and accounts listed on the Provider renewal form that is due on October 31st.

In preparing the joint account reports, funeral homes need to read the instructions carefully. The forms are seeking information about the contracts sales price, what was deposited to the joint account and any distributions that have been made. Unlike trust-funded contracts, all consumer payments have to be deposited to a joint account (there is no 20% retainage for the joint account contract). Nor may the funeral home withdraw income from the joint account.

For the funeral home that takes the defiant stance about their preneed, be sure your contracts and CDs (or depository accounts) are in order. If you have doubts about the compliance of the contract forms or the amount in the bank, you may want to seek guidance from the Board’s inspectors.
 

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Missouri’s preneed seller renewal forms include reports regarding each contract that is funded either by a trust, a joint bank account or an insurance contract. What may not be apparent to both funeral homes and funding agents is the requirement under SB1 that the funding agent attest to the accuracy of the information set out in the seller’s report.

 While the report forms accurately track the provisions of SB1, some banks officers may balk when asked to provide their signature to the form.

Banks, whether they issue joint accounts or serve as a preneed trustee, are dependent upon the funeral home for accurate information regarding the preneed contracts reported to them. While the intent of the report is to obtain financial information regarding each contract, there will be a few bankers hesitant to sign for fear they are being asked to certify the completeness of the contracts reported, or the accuracy of data reported about the purchasers and beneficiaries.

 If a Missouri funeral home finds itself caught between a hesitant banker and the October 31st reporting deadline, it should make an inquiry to the State Board to determine if the certification can be revised to the following:

The undersigned, after being duly sworn, on his/her oath states: (1) I am over 21 years of age and am authorized on behalf of the financial institution set out above to attest to the information set out in this report; (2) the preneed contract information set out in columns 1 through 6 of this report has been provided by the seller identified above; and (3) the joint account information set out in columns 7 through 13 is complete and correct to the best of my knowledge.
 

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In August 2009, the members and staff of the Missouri State Board of Embalmers and Funeral Directors put in a lot of overtime to keep the preneed industry operating. Senate Bill 1 established brand new licensing requirements for preneed sellers. Without a license, a seller’s preneed contracts could be voided. However, the State Board lacked authority to issue a seller license until SB1 went into effect. With regard to August 28, 2009, the State Board faced the task of licensing hundreds of funeral homes, and responded by providing the industry an abbreviated process for obtaining the initial preneed seller’s license.

With the renewal of a seller’s license, the Missouri funeral home faces a much longer and detailed form (and process). The seller renewal form advises that the applicant may file their annual report upon receipt of the form. Realistically, the seller is precluded from filing the renewal and report until after September 1st. The annual report must include all contracts sold through August 31, 2010 (and beginning with August 28, 2009).

Depending upon how quickly its contracts are processed, the seller will have less than 60 days to work with trustees, banks and insurers to pull together the data and documents required by the renewal form. The failure to timely file the renewal form and report will cost the seller $200 and the authority to sell preneed until the license is renewed. Consequently, Missouri sellers would be best advised to begin working with their funding entities as soon as possible.
 

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License renewal packets mailed to Missouri funeral homes in August are a little thicker than what has been sent out in prior years. The new renewal forms include five new preneed reporting forms: a Preneed Seller Annual Report, a Preneed Provider Renewal Form, a Report form for Trust Funded Pre-Need Contracts, a Report form for Joint Account Funded Pre-Need Contracts, and a Report form for Insurance Funded Pre-Need Contracts.

The latter three reports are voluntary, self-reporting forms that the State Board ‘requests’ be filed by January 31, 2010. In future posts, this blog will address those forms and the motivation for complying with the State Board’s request.

As between the two renewal report forms, the shorter provider license renewal form may be the source of anxiety to some Missouri funeral directors. The instructions for Section E state:

List all preneed contracts that were in existence with a preneed provider as of August 27, 2009 pursuant to 436.053 RSMo, if any.

Missouri has a long history of third party preneed sales organizations, and Chapter 436 has always made a legal distinction between the seller and the provider. Over the course of the last twenty-eight years, the synonyms APS, NPS, FSP and MFT can be found on the majority of preneed contracts sold in the state of Missouri. Missouri funeral homes opted for third party sales organizations for various reasons, including the avoidance of accounting and recordkeeping issues. Accordingly, funeral directors who interpret the Section E instructions to require the reporting of their third party contracts have reason to be alarmed.

However, the instructions refer to Section 436.053 (of the ‘old Chapter 436’), which authorized funeral homes to use joint accounts to fund preneed contracts. This old provision allowed funeral homes to sell the joint account contract as a provider without registering as preneed seller. The intent of the report seems to be the reporting of joint account contracts written prior to the effective date of Senate Bill No. 1, and not the reporting of all contracts sold on behalf of the funeral home by a third party seller. This is bound to be one of the issues raised with the State Board of Embalmers and Funeral Directors when it meets during the second week of September.
 

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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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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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The State Board of Embalmers and Funeral Directors gave notice last week of hearings to be held in June regarding proposals made to correct or revise SB1.

If the Board follows the course taken in meetings held earlier this year, the proposals will likely be published to the Board’s website. These postings will provide Missouri licensees and preneed consumers the opportunity to provide the Board feedback on the proposals. Appropriate feedback and questions would likely be incorporated by the Board in its questioning of the proposals.

The following hyperlinks provide the proposals and explanations of the Preneed Resource Company. Start drafting!
 

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For more than 20 years, Nebraska preneed sellers have filed an annual report that accounts for the aggregate contributions and distributions from their trust funds. The annual report form also computes the amount of income that must be accrued to the account if the seller elects to withdraw excess income from the trust. In its quest to determine whether preneed trusts are adequately funded, the Department of Insurance has made a request for individual contract data that supports the annual report.

Nebraska’s request for individual contract data reflects a trend developing with other Midwest death care regulators.

Individual contract data reporting was a priority in failed legislation by Kansas regulators.

Missouri’s State Board of Embalmers and Funeral Directors has acknowledged the need to determine whether existing preneed trusts are adequately funded, and that objective requires some detail about what comprises the trusts established under the prior law.

Missouri cemeteries are about to embark on preneed sales under a new law, and regulators have already expressed a need to know about those sales.

While many death care operators may challenge the individual account data request as burdensome or intrusive, operators harmed by NPS or the IFDA insurance debacle, have reason to be providing such information.

The degree an NPS provider suffers ‘damage” by honoring a preneed contract depends on several factors: the age of the contract, the casket, the funeral home’s current atneed prices, to name a few. To challenge that more than the guaranty association payout is needed, the industry must be willing to provide hard facts based on actual contract data. If the active NPS contracts are included in a state’s annual reporting, a basis has been established for a database for tracking the NPS consequence to the industry.

The same is true for Illinois funeral directors seeking to recover for the IFDA asset meltdown. Recovery has to be based on contract data.
 

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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 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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A recent news report titled “Broken Trust” served to fan the emotions of Illinois residents who purchased a preneed contract from the Illinois Funeral Directors Association. The facts involve a 103 year old lady who purchased the contract 16 years ago, and experienced a 32% drop in the contract’s value in one year. The news report quotes from the funeral home’s website:

“By locking in today’s funeral costs and ensuring that the necessary funds are set aside, you help relieve yourself of unnecessary future worry and your survivors of an unexpected expense.”

The news report then adds: “For the Graces and thousands of other families in Illinois, it did not work that way.”

The news report goes on to add commentary for consumer advocates advising against the purchase of preneed. However, the news report is very misleading and serves to confuse consumers because of an important fact: Mrs. Grace purchased a non-guaranteed contract.

Contrary to what the article suggests, the Grace family did not lock in the 1994 purchase prices of the funeral home’s goods and services. They have every right to be upset about the recent drop in value, but so do hundreds of Illinois funeral homes.

Over the course of 16 years, Mrs. Grace’s preneed contract has realized an increase of 1.66%. Not a great return. The goods and services selected in 1994 to have gone up at a rate of 4.2%.

While a difference of $4,500 may exist between the value of Mrs. Grace’s contract and the current cost of the 1994 goods and services, the Grace family is not obligated to purchase that same funeral.  The family may choose less expensive goods and services.

The Illinois Comptroller has published various consumer guidelines regarding preneed contracts. All have an explanation of the differences of guaranteed and non-guaranteed.

To avoid unnecessary distress, consumers should read available disclosures closely, review the preneed contracts, ask questions of the funeral director, and involve other family members in the process.

For Illinois families who own a non-guaranteed preneed contract with diminished values, if you demonstrate flexibility over the casket selection, most funeral homes will reciprocate with regard to their services.
 

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In rejecting the $18 million settlement forced upon IFDA members, an Illinois Circuit Court is telling Merrill Lynch Life Agency to dig deeper into its pocket to compensate funeral homes. As reported by the Springfield Journal-Register, the $18 million represents the revenues the insurance broker received from the sale of key man insurance to the IFDA master trust. Apparently, Merrill Lynch convinced the Illinois Department of Insurance (DOI) that the funeral homes’ damages should be measured in terms of the benefit that Merrill Lynch received. But as the editor of the Memorial Business Journal* suggests, the Circuit Court seems more inclined to consider a ‘deeper’ measure of damages, and that will require the parties to the litigation to assess the master trust’s true loss.

The master trust collapse is framed by a ‘value’ that was set by a fixed return (2%) on consumer deposits. Based on that ‘value’, the loss is reported to be close to $100 million. But, one question funeral directors may be forced to answer will be whether the trust could have attained that value with the investment restrictions imposed by the members and the expenses taken by the IFDA. Another issue that may be raised is whether the IFDA’s past executives and attorneys bear some of the responsibilities for either selecting the investments or approving them. If so, comparative negligence may force the IFDA to shoulder responsibility for a portion of the damages.

The situation begs for a negotiated settlement, and it is unfortunate that time and expense was wasted on an end run with a regulator that had little, if any, authority over the IFDA master trust.
 

*"Reprinted with permission from the March 4, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145."

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The fear of SB1 drove the Missouri cemetery industry to push for Chapter 214 legislation in 2009, only to have the wheels come off at the stroke of midnight last May. While legislation was passed, the original bill was gutted, and the resulting changes were incoherent and confusing. It was no surprise that the industry would pursue a bill to correct what was done in 2009.

An industry bill was introduced in the 2010 session as SB754. However, that bill was quickly replaced by a Senate Committee Substitute. The substitute bill incorporates changes sought by the State, the speed in which the bill was produced signals regulators’ recognition that Chapter 214 reform is needed.

Over the next several weeks, the death care industry and consumers need to take a close look at SCS SB754. Legislators will only provide the parties so many attempts to ‘get it right’. And while this bill contains several needed changes, it also has provisions that beg for questions, and answers. Take preneed for an example.

Section 214.387 will govern how the cemetery industry is to sell preneed in Missouri. Prior to last year’s legislation, Chapter 214 provided minimal oversight of preneed sales of markers and services. If a cemetery wanted to sell a vault on a preneed basis, it had to comply with Chapter 436. Chapter 214 did not contemplate trust funded preneed.

Section 214.387 takes a page from the ‘old’ version of Chapter 436 by requiring Missouri cemeteries to deposit 80% of a consumer’s payments to an escrow account or a trust if the preneed contract defers delivery. Last year’s model of 214.387 first established the new trusting requirement, but did so with confusing language. So in a sense, Missouri cemeteries went from zero to eighty last year without guidelines.

SCS SB754 attempts to provide some of those guidelines, but it misses a few beats.

The 80% trusting requirement will be one of the highest in the country. Many states’ cemetery laws trust on the wholesale costs of merchandise. This poses an audit nightmare (ask the Kansas Secretary of State). The wholesale threshold is crossed somewhere around 40 to 50% of retail. Consequently, the cemetery laws generally have lower trusting requirements than that imposed on funeral homes. But the second piece of the puzzle for cemetery trusting is the income accrual provisions.

Cemeteries have cash flow requirements that differ from that of a funeral home. States’ cemetery laws reflect this by permitting the disbursement of preneed trust income. Typically, the higher the trusting percentage, the more likely income disbursements will be allowed. But, there are exceptions (Iowa for example).

So, it’s no surprise that 214.387 contemplates income distributions. However, the bill only authorizes income disbursements from escrow accounts. The bill does not include a corresponding authority for preneed trusts.

Another glitch in 214.387 would provide consumers a refund that would include half of the income earned on the account. If escrow accounts are distributing income to cemeteries, then someone would have to ‘come out of pocket’ for refunds to the consumer.

The quick solution to these 214.387 issues would be to allow both types of accounts to distribute half the annual income, leaving the balance of income in the account until the contract is canceled or performed. As such, the Missouri law would provide higher trusting safeguards than most other states.
 

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 NPS salesmen had quite a reputation. Commission driven, some were reported to have earned a healthy six-figure salary. And, some had no prior experience in the funeral industry.

To curb the excesses committed by NPS salesmen, Missouri preneed reform bill requires preneed salesmen to be licensed, with a condition that they “have successfully passed the Missouri law examination as designated by the board”.

Since the effective date of the law (August 28th), preneed agents have been required to take the same law examination required of funeral directors. That examination has proved difficult for many preneed agent applicants, and issues were presented to the Missouri State Board of Embalmers and Funeral Directors at their February 4th meeting. The State Board held an open meeting by conference call on February 11th to facilitate further discussion of preneed agent licensing and the Missouri Law Test.

Two basic positions emerged during the February 11th conference call. The funeral directors’ camp views the preneed contract as the sale of a funeral, which should require the licensed funeral director. The proactive preneed seller views the preneed contract as a funding vehicle to pay for the goods and services described in the contract, which would require the salesman to be knowledgeable about the requirements of Chapter 436.

Historically, most Missouri preneed contracts were of the guaranteed variety. If the preneed contract was performed with little or no variation to the prearranged funeral, then the contract represents the purchase of a funeral. But, some families change the terms of their preneed contracts, and under such circumstances, the contract represents a funding vehicle. As more non-guaranteed contracts and final expense products become more common, fewer preneed contracts will represent the “sale of a funeral”.

For the time being, the State Board will continue to require the same law examination given to applicants for a funeral director’s license. But, is the funeral industry best served by restricting preneed agent licensing to legal testing imposed on funeral directors?
 

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Implementing new regulatory requirements is a difficult and thankless job. Businesses hate change when it comes to government interference, and (most) regulators understand this. Accordingly, regulators typically prefer to implement incremental changes. In contrast to other industries, regulatory changes have been less frequent within the death care industry because legislators and regulators don’t understand the business. This came to an end for Missouri when NPS galvanized a legislature into re-writing the book on preneed, and then saddling the State Board with the task of implementing new mandates for licensure, oversight and enforcement.

There was no question what the State Board’s first priority under SB1 had to be: emergency rules to satisfy the new preneed licensure requirements. Until the law went into effect on August 28, 2009, the State Board lacked the authority to issue preneed licenses. But once the law went into effect, funeral homes were prohibited from selling preneed without a license. Licensing an entire industry at the stroke of midnight was beyond the Board’s limited resources.

As of February 4th, the State Board was five months into the mission, and faced a growing list of SB1 issues. Having addressed the immediate licensure issues (more or less), the Board took a step back to frame a preliminary approach to what may prove to be its top priority: financial examinations.

The State Board approved a plan that would involve an internal unit of 4 to 5 employees that would gather and monitor preneed transactions. The plan would include a period of training to develop the expertise needed to reduce the reliance on independent auditors, and thereby reduce the fees being charged to the industry.  The Board's decision is consistent with Scenario 2 of the Small Business Impact Statement filed with its emergency fees rule.

Determining that “the money is there” has been the priority in Nebraska and Iowa, and now, has also become the priority for Kansas’ cemetery regulator. The challenge for the Missouri and Kansas regulators will be the implementation of an effective, but efficient, system of providing financial oversight to a diverse and fragmented industry.

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The future of Missouri’s examination of preneed books and records will begin to take shape on February 4th. The State Board of Embalmers and Funeral Directors has put this issue at the top of its agenda for Thursday’s meeting.

Regulatory review of Missouri’s preneed industry has been dormant for almost 15 years, and SB1 now imposes a regular examination of preneed sellers’ records. The scope, and the procedures, of the review process may take months to determine, but Missouri funeral directors should anticipate reporting requirements that impact all preneed contracts subject to Chapter 436.
 

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The Missouri Funeral Director and Embalmer Association provided crucial support to the passage of Senate Bill No. 1, but the heart of the association’s membership, the mom and pop operators, may now be second-guessing that decision.

SB1 provides regulators the authority to audit or examine preneed trusts and joint accounts, including those established prior to August 28, 2009. Missouri funeral directors are now hearing that the State Board will enforce provisions of the law against their old preneed business in such a way so to put their funeral establishment licenses at risk.

The State Board’s authority to audit preneed sellers under the old law was vague. During the 1980s and early 1990s, the State Board conducted ‘random’ audits. In reality, the audits were not random, but weighted by the number of contracts sold. Using independent CPA firms, audits were made of the same small group of sellers. The practice was challenged in the mid-1990s, and audits were discontinued.

While the vast majority of Missouri sellers have never been audited, their preneed contracts have been reviewed periodically by State Board inspectors. Funeral directors are now troubled by the prospect of those contracts failing to pass muster when reviewed by an independent CPA firm.

The licensees’ worries are well founded. Few funeral homes engaged legal counsel for the purpose of preparing preneed contracts or trust agreements. Instead, funeral homes shared or borrowed documents, often without regard to such specifics as how the contract was to be funded. Consequently, funeral homes have used trust-funded contracts for joint accounts.

Some funeral directors are bound to take a defiant position with the State Board’s enforcement of SB1 against their preneed paperwork. While it is predictable that the State Board may assert the licensee’s failure to engage legal counsel is no defense, licensees represented by counsel also have reason to be indignant with the Board.
 

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Over the next year, Missouri will examine the various flaws of SB1. One of those flaws concerns the independent investment advisor and the ‘fix’ meant to preclude conflicts of interest.

Preneed trusts have a poor track record in terms of investment performance. Trustees often fail to appreciate the key factors that impact investment strategies for preneed. Those factors can vary substantially from trust to trust, making the fund manager’s job more difficult.

Consequently, it is not uncommon to see large trusts delegate investment authority to an independent fund manager. Missouri’s old preneed law took the practice an ill-advised step too far by relieving the trustee of liability for the advisor’s decisions. NPS exploited that provision by appointing investment advisors who handed the keys to the vault to Lincoln Memorial. Believing themselves to be exculpated from investment liabilities, the NPS fiduciaries became bystanders to the largest preneed fraud in history.

Section 436.445 of SB1 appropriately requires the fiduciary to remain responsible for the investment advisor’s actions. However, the statute goes too far in attempting to preclude any relationship between the advisor and the seller. The provision was lifted from Missouri’s Uniform Trust Code without adequate consideration of the relationships of the seller, fiduciary and fund manager.

In contrast to SB1, the Uniform Trust Code does not prohibit relations between the trustor/seller and the investment advisor (or any service provider to the trust). Missouri’s preneed industry would be better served if such relations were allowed if fully disclosed and subjected to a higher level of scrutiny.
 

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In May 2009, the American Funeral Director editorial advised that fixing preneed has to be a cooperative effort, and that the industry needs to agree upon a plan before attempting to legislate a fix. In that same month, the Missouri legislature passed a ‘fix’ to the NPS abuses that incorporated provisions from a mixed bag of industry recommendations. The Missouri funeral industry is now learning that their recommendations don’t amount to much of a plan.

With rumblings that Chapter 436 would have to be reopened this year to fix SB1’s flaws, the State Board took two important steps towards a plan: suspending any legislative efforts by state regulators for at least a year, and establishing a forum for industry attorneys to provide input regarding SB1. So now, in who’s court is the ball?

Mr. Defort suggests that state associations must take the lead in developing the “plan”. Perhaps, but that would depend upon the strength of the particular association’s membership. The Missouri Funeral Director and Embalmer Association played a crucial role in passing SB1, but the Missouri preneed industry is large and diverse. Consequently, the MFDEA cannot be expected to shoulder the plan-building task alone.

Some might suggest the ‘big’ sellers should step up, but the national companies have preneed programs that already comply with more stringent requirements than those imposed by SB1. The big sellers are waiting for the regulators to clarify SB1’s ambiguities and conflicts.

Rather, the ball would seem to be in the regulator’s court, and more specifically, the court of the Division of Professional Registration.

If the Division needs some starting points for a plan, here are four:

• Develop an annual reporting system that operators can use to demonstrate compliance with the 80% funding requirements of existing trusts (so as to minimize audit expenses and lower the $36 contract fee)
• Develop an alternative to the broken joint account contract
• Establish a voluntary compliance program to fix the technical violations that have accumulated over the past 27 years (when there were no guidelines or oversight)
• Establish a “no action letter” procedure that will allow more sophisticated sellers to determine the boundaries of compliance.

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The anxiety over Missouri’s new preneed law will temporarily peak this Friday with the passing of the due dates for annual reports and license applications. To give the industry a breather, and to assess SB1’s flaws, the Missouri State Board of Embalmers and Funeral Directors reached an informal agreement on October 20th to table any corrective SB1 legislation for one year. While their emergency rules continue on the path to approval, the State Board will begin exploring ways to identify SB1’s problems, and to prioritize issues for permanent regulations.

To view the Board’s emergency rules click here.
 

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Like most states’ preneed laws, Missouri’s Chapter 436 has always contemplated a depository accounts for the small funeral operator who provides preneed as an accommodation. Many funeral homes do not sell enough preneed to warrant the expense and hassle of either a trust or an insurance license. Chapter 436 allows the funeral director to place 100% of the consumer’s funds into a joint depository account at a bank.

Despite certain glaring problems with the joint account contract, the Missouri legislature preserved the structure when it passed SB1, and re-wrote Chapter 436.

The small operator often accepts the consumer’s funds for purposes of a ‘spend down’ that will allow the consumer to exclude the funds from his/her resources for public assistance. Technically, the joint account requirements are not sufficient for excluding the funds, and funeral director is required to set up the account as “for the benefit of”. In doing so, the funeral director has not complied with Chapter 436 (old or new).

Because the transaction is an accommodation, the funeral director has little incentive to incur expense. Consequently, Missouri funeral directors ‘tend’ to borrow from each other with regard to documentation. While Chapter 436 has always required a contract form specific to joint account funding, antidotal evidence suggests many funeral directors borrowed a trust funded contract form for their joint account contracts.

SB1 requires the State Board to examine or audit all preneed sellers, including funeral homes that have joint accounts but decline to become licensed as sellers. This puts Missouri’s regulators in the difficult situation of citing small operators for Chapter 436 violations despite having all of the consumer’s funds in a depository account at the bank. For the integrity of preneed reform, the State Board cannot look the other way with regard to the joint account requirements.

Rather than force the small operator into either of the remaining SB1 options, Missouri should explore a new option for small operator.
 

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The old axiom was that it would take three consecutive legislative sessions to get a preneed bill passed. If Missouri and Illinois are indicators of the current preneed reform movement, the charm may be based not on attempts but actual bills passed by the legislature.

The Illinois Comptroller’s proposal for preneed reform, SB1682, is progressing quickly towards approval of the Governor’s amendatory veto. While the bill fails to address most of the recommendations made by the Governor’s task force, SB1682 will tighten the trusting requirements of preneed funds until comprehensive legislation is passed. Consequently, Illinois’ preneed sellers face the dual task of complying with SB1682 and negotiating the future of the preneed transaction. With the various pending lawsuits, the question is whether the Illinois death care industry has the capacity to work with regulators towards a consensus bill.

Missouri preneed funeral regulators have been slow to communicate the new requirements of that state’s new preneed law, Senate Bill No. 1. That bill was written without much cooperation from either the funeral industry or the cemetery industry, and the result is an ambiguous law that imposes requirements without sufficient consideration of practical compliance by the funeral industry. The law has been the source of tremendous confusion, and many funeral directors would rather ‘opt out’ completely. Against a backdrop of the NPS failure, regulators and funeral homes would be best served to reconcile their differences in an attempt to address SB1’s flaws.

Missouri’s cemetery industry also faces a similar legislative task. With a strategy based on the old axiom, one constituency of the Missouri cemetery industry pursued legislation that included provisions intended to provide preneed sellers an option out of SB1. That legislation included provisions objectionable to cemeteries with preneed programs, and most of the bill was scuttled at the 11th hour. The resulting bill opened the door for Missouri cemeteries to establish Chapter 214 preneed programs, but does not provide any regulatory oversight for consumer protections. The bill also leaves the Missouri cemetery industry with the prospect of being regulated under SB1.

Historically, it was the internal industry disputes that made preneed legislation so difficult to pass. Legislators would send the squabbling parties home until they could resolve their disputes. What has changed in the dynamics of preneed legislation is the role of the regulator. Frauds measured by the millions are forcing regulators to share in the accountability of preneed failures. The regulator’s agenda is now trumping the industry’s internal disputes in Illinois and Missouri.

But, the regulator’s trump card does not necessarily guaranty a law that best serves the consumers’ interests.
 

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Taxpayers, through their local governments, have always borne some of the cost of death care. Taxes go toward the maintenance of abandoned cemeteries and the final disposition of the indigent. But as the New York Times reports, the economy is causing more families to abandon the care of their dead to local governments. While many funeral homes will do what they can to assist the indigent, regulators and legislators are being forced to address this growing problem.

When Missouri’s legislature re-wrote that state’s preneed law this year, one of the earlier bill proposals included a revision to the public assistance law that would have allowed a person to set aside funds in a trust to be used for funeral and burial expenses. The trust would serve as an alternative to a preneed funeral contract. The public assistance law would also have been amended to contemplate the preneed reforms to be made to Chapter 436. However, the Chapter 436 reform passed by the Missouri legislature, and signed by the Missouri Governor, did not include any of the public assistance law amendments.

If interpreted strictly, Missouri’s public assistance law (Chapter 208), does not even exclude an irrevocable preneed funeral contract from the resources of an applicant for public assistance. It is unlikely Missouri residents will be denied the use of “spend downs” to qualify for pubic assistance, but legislators and regulators need to understand that SB1 was not a “one and done” fix for the NPS problems.
 

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The emergency rule that implements Missouri’s $36 per contract fee becomes ‘official’ on October 4th.  Missouri funeral directors question whether the fee is too high, and whether it will contribute to the decline in preneed sales. The analysis required for the emergency rule reports that the fee is expected to generate $612,000 of revenues that will be used by the State Board of Embalmers and Funeral Directors for the enforcement of Senate Bill. No. 1. While funeral directors will challenge the State Board’s need for $612,000, the industry must consider how a few problem sellers contribute to the cost of preneed.

The State Board’s October 20th agenda includes a disciplinary hearing on a preneed seller involving allegations of multiple violations. The administrative order included with the agenda reflects extensive time and effort expended by the Board’s staff, investigators and attorneys. The alleged misconduct covers several years and several preneed purchasers, and the proceeding represents a substantial cost to the State Board.

Missouri has never had an effective preneed exam or audit program.  Consequently, regulators are left to question whether the October 20th hearing is just the tip of the iceberg.

Sellers with a compliant preneed program question why a few bad apples should spoil the barrel for the entire industry. With the $36 fee providing the Board most of its funding for audits and enforcement proceedings, compliant sellers have a reasonable argument that the fee represents an inequitable surcharge to their families. But, Missouri’s sellers face an up hill climb in any fight for a lower fee.

The climb up that hill begins with two proposals: better annual reporting and a shift of audit expenses.

With better annual reporting, Missouri’s regulators could spot trouble accounts without an audit, and when less drastic enforcement actions are an option.

When the State Board’s preneed examination discloses material non-compliance, the costs of an audit and enforcement proceedings should then be borne by the seller.

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The Missouri State Board of Embalmers and Funeral Directors faces two hurdles to implementing SB1: disagreements over the interpretation of key provisions and informing the industry how the Board will enforce the law. These hurdles have put the Board in to a Catch 22 situation.

SB1 was drafted under the cloud of the NPS crisis. Legislators were lobbied from all sides, with positions as diametrically opposed as outlawing preneed to leaving Chapter 436 in tact. With limited assistance from the industry, legislators used the resources at hand and forged compromises. As a consequence, the law has several ambiguities, and crucial provisions can legitimately be interpreted differently. There is ample room for disagreements.

The disagreements over SB1 requirements have caused the State Board to reconsider how to best educate the industry. When contacted with SB1 questions, the Board’s staff (and website) recommends that licensees seek the advice of an attorney. This may be the appropriate ‘legal’ answer, but it is one that will frustrate the licensee. First, the advice requires the licensee to incur an expense at a time when it can be least afforded. Second, there is no assurance an attorney can provide an answer the licensee can rely upon. Some attorneys will turn to the Board’s legal staff, and it is not clear those attorneys are in a position to field questions about SB1.

As licensees, funeral directors do have a responsibility to educate themselves about the law’s requirements. We have heard this at recent Board meetings. But, before the licensee can educate himself on the law’s requirements, the State Board must be able to clearly articulate the law’s requirements. That could require weeks on most issues, if not months on other issues.
 

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One criticism of Missouri’s prior preneed law was that the Attorney General’s office was dependent upon the State Board to refer complaints for legal enforcement. If the State Board didn’t refer a Chapter 436 violation, the AG’s only enforcement alternative was to pursue an action under Missouri’s Merchandising Practices Act (Chapter 407). During the 2008 hearings on Chapter 436 and National Prearranged Services, it was generally recognized that the Attorney General’s office needed independent authorities to pursue Chapter 436 violations. But, the Attorney General also expressed the desire for authority to hold fiduciaries more accountable for their funeral home client’s actions.

The AG’s fiduciary recommendations drew concerns from both funeral homes and the Missouri Division of Finance. The Division of Finance questioned whether the requested powers would make the AG a de facto bank regulator on par with the Division and the bank’s federal regulators. Consequently, the final recommendations for Chapter 436 legislation conditioned the AG’s authority to take action against a fiduciary on having received the consent of the fiduciary’s primary regulator.

However, the Chapter 436 Working Group recommendation regarding this limitation on the Missouri Attorney General did not survive the Senate Bill No. 1 revision process.

Section 436.470.12 of SB1 grants the Attorney General the authority to bring action against a preneed fiduciary whenever an “inspection, investigation, examination or audit” reveals a violation of Chapter 436. A prior subsection provides for information sharing among the relevant Missouri agencies, and arguably, the AG’s authority over preneed fiduciaries could be triggered by the AG’s own investigation or examination.

And, there seems little doubt that the AG may be inclined to apply this new authority with regard to preneed trusts that existed prior to August 28th. Accordingly, Missouri’s preneed fiduciaries should evaluate their accounts with the knowledge that Big Brother may be looking.
 

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Missouri will look to a combination of licensing fees from preneed sellers, providers and agents to fund a portion of the projected costs of preneed oversight under SB1. But, most of SB1’s enforcement price will be funded by the $36 to be charged for each preneed contract sold. The ‘per contract’ fee is not new to the Missouri preneed industry, but the fee does represent a substantial increase from the $2 charged under the prior law.

According to State Board’s statistics, the Missouri preneed industry has sold an average of more than 22,000 preneed contracts each year during the past 6 years. Using that average, the new per contract fee will increase the State Board’s annual budget by more than $750,000. Appropriately, consumers and death care companies are asking how this budget will be used.

Another question is who should bare this expense. When the fee was at $2, many funeral homes absorbed that cost. But in today’s economy, the fee represents an expense that many funeral directors can no longer absorb. One of the proposed emergency rules reflects the division that exists between the Attorney General and some the State Board members with regard to how this new fee should be assessed.

With the purchase price of a preneed contract based on the funeral home’s current prices, a preneed seller must already absorb the costs of developing and maintaining a compliant program. Funeral homes and cemeteries must also bare a portion of SB1’s costs through new licensing fees. By passing the per contract fee on to consumers, the death care industry can begin to make regulators accountable to the public for the oversight they plan to provide for the preneed consumer.
 

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The first week under the new preneed law was a confusing one for the Missouri funeral industry. SB1 has many drafting conflicts and ambiguities, and that has give rise to different interpretations from the Attorney General’s Office, the State Board of Embalmers and Funeral Directors, and the death care industry.

The State Board and the Attorney General’s Office have been criticized for the NPS debacle. While some of that criticism may be justified, NPS exploited the weaknesses of Chapter 436 (and the Board’s enforcement budget), and kept the regulators at bay for years. With SB1, the regulators have been given the keys to a new vehicle for preneed oversight and enforcement, but they are not in total agreement about the map to follow.

The State Board’s immediate agenda are the emergency rules that will keep the preneed industry functioning for the next 3 to 9 months. Consequently, debate over interpretations must be brief and concessions must be made. In some respects, the resulting emergency rules will be overly burdensome. But, these emergency rules will be the law until regulations are promulgated pursuant to the normal rulemaking process. Funeral homes that disregard the emergency rules, do so at substantial risks. It is crucial that funeral directors also understand that the emergency rules will impact the preneed contracts sold prior to August 28th.
 

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As its first step in educating the preneed industry about SB1’s requirements, the Missouri State Board of Embalmers and Funeral Directors posted the Top 12 Changes to Missouri’s Pre-Need Law to its website. However, I had trouble getting past No. 2. The explanation about fiduciary reimbursements of sales expense on Pre-SB1 sales sent me back to SB1’s ‘Grandfather clause’:

436.412. Each preneed contract made before August 28, 2009, and all payments and disbursements under such contract shall continue to be governed by this chapter as the chapter existed at the time the contract was made.

As authorized by RSMo. Section 436.027, it has been fairly standard practice for Missouri preneed contracts to recite that Sellers may retain the first 20% of the purchaser’s payments. However, the State Board is advising all Purchaser payments, including PreSB1 business, must be deposited to trust before the 20% sales expense is retained.

While the State Board’s intent may have been to address the old statute’s failure to address when purchaser payments must be deposited to trust, the Board has overstepped its authority if its intent is to require sellers to deposit payments on PreSB1 contracts to trust without retaining sales expense.

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Reform in Illinois inched closer to reality with Governor Quinn's "amendatory veto" of SB1682.  If accepted by the Illinois legislature, the reform bill will become law on January 31, 2010.

However, the Governor is seeking a 30 day window between the deadline for the report due from the Funeral Burial Task Force and SB1682's effective date.  It is doubtful much could be done to change SB1682 during that 30 day period.  Accordingly, the Governor's action adds confusion for the Illinois death care industry.  

If the amendatory veto is approved, Illinois funeral homes and cemeteries should plan for the January 31, 2010 effective date.    

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The Missouri State Board of Embalmers and Funeral Directors meets August 25th to vote on emergency rules that are intended to keep the preneed industry functioning when SB1 goes into effect on August 28th. While numerous issues have been identified to the State Board as deserving of emergency status, four stand out above the rest: licenses, the new trusting of all payments, preneed contract requirements and the cemetery exemptions.

To sell preneed after Thursday, funeral homes must have a license. It doesn’t matter whether the funeral home is offering joint account contracts, trust-funded contracts or insurance-funded contracts, a seller license is required. The same is true if the funeral home intends to honor a preneed contract sold after Thursday. A preneed provider license is required. A preneed agent registration will also be needed for each individual that sells a preneed contract.

But, the State Board does not have the authority to issue a license until Friday. So, the State Board will vote on a special form called the Notice of Intent to Apply for Licensure/Registration that will be used for both licenses and the preneed agent registration.

Once the form is approved, the State Board will place it on their website for downloading. Applicants should consider executing the form in duplicate.

Completed copies of the form could be emailed (in a PDF format) or faxed to the State Board (save the transmission as evidence of the filing). An original copy will have to be mailed to the State Board. The other original copy should then be posted where the funeral home would normally display its establishment license.

It will be near to impossible for preneed sellers to establish new trusts in time for business written after Thursday. Accordingly, the State Board will consider whether to allow newly ‘licensed’ sellers to establish an account with a bank for use as a clearing account for purchaser payments on contracts sold after August 27th.

The new law also will require changes in the preneed contracts sold after Thursday. Most of the Missouri preneed industry utilizes printed contract forms that can take weeks to prepare. Consequently, the State Board is considering a rule to permit continued use of those old contract forms.

Finally, Missouri’s cemeteries are waiting to hear the State Board’s interpretation of the cemetery exemptions from licensing and Chapter 436 compliance. Cemeteries will have their own licensing and trusting requirements under Missouri’s Chapter 214.
 

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Come August 28th, every Missouri funeral home that plans to sell or honor a preneed contract must file a Notice of Intent To Apply. The State Board of Embalmers and Funeral Directors has devised this form to ease the rush that will occur when hundreds of licenses must be obtained. However, many Missouri funeral homes are under the mistaken belief they already possess licenses as preneed sellers and providers.

There is a document hanging on many funeral homes’ wall that indicates the entity is authorized as a “Preneed Seller” or “Preneed Provider”. The document also references an “Original Certificate/License No.” However, those documents are verification of the entity’s compliance with ‘old’ Chapter 436’s registration requirements. The “new” Chapter 436 imposes a license requirement. Come August 28th, those registration certificates are only worth the paper they are printed on.

In contrast to the Mexican bandit in The Treasure of The Sierra Madre, Missouri funeral homes do need a filed Notice of Intent to sell/honor preneed after August 28th. The State Board has published its draft of an emergency rule addressing the Notice of Intent.
 

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Missouri’s Chapter 436 reform law goes into effect on August 28th, and the Missouri State Board of Embalmers and Funeral Directors will have the responsibility of implementing the new changes. However, the State Board is caught in a Catch 22 situation.

Many of the changes will have to be implemented through regulations, but the Board doesn’t have Chapter 436 rulemaking authority until August 28th. For example, preneed sellers and providers will have to be licensed on August 28th . Since this is a new requirement, every preneed seller in the state will have to file an application and fee to be licensed. There are hundreds of funeral homes that will seek a seller’s license, and not a one can sell a preneed contract until the license is in hand. But, the Board can’t begin passing regulations about the licenses until August 28th. To avoid a shutdown of the preneed industry, the State Board will have to improvise through the use of emergency regulations and temporary licenses.

Accordingly, the State Board will be meeting every week during the month of August to establish its priorities for Chapter 436 regulations. The Board’s agenda for those meetings are set out on its website.

The State Board is seeking input from funeral directors in the form of written questions or comments regarding the agenda issues. By seeking comments in advance of publishing proposed rules, the State Board is hoping to expedite the regulation approval process.

Historically, some Chapter 333 rules have taken up a year or more to pass. The rulemaking process requires a Board meeting to discuss the issue and direct the legal staff to draft a proposal. Then a few months later at the next meeting, the Board will consider the proposal, and if acceptable, submit the proposal to the Secretary of State’s office for the publication process. With the publication, there is a comment period. Then, the comments are discussed at the next scheduled Board meeting. Depending upon the comments, the proposal may be revised, and if so, there will be another publication and comment period. All in all, the rulemaking process can be lengthy.

In the meantime, the Missouri preneed industry is waiting on the Board for directions on such issues as contract disclosures and trust administration requirements.

Missouri is in for a long, painstaking period of change.
 

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Rather than defend the legality of its master trust, the IFDA sought to enforce the gentlemen’s agreement that the association perceived it had with the Comptroller. The 2006 exchange of correspondence reported by the State Journal-Register underscores the risks that death care operators take when they structure arrangements that exceed the parameters of applicable law.

When the applicable law is ambiguous, operators may be forced to go outside the four corners of the law. In those situations, the operator should do exactly as the IFDA did: personally work with the regulator. But it becomes incumbent upon the operator to ‘work with’ the regulator when circumstances force changes to the arrangement.

Reading between the lines, the SJR article suggests that as more IFDA funds were put into insurance, the more the IFDA relied upon its ‘declared’ 2% increase as justification for the fees charged the trust. As that domino fell, next went the IFDA’s authority to act as the trust’s fiduciary.

Rather than continue to ‘work with’ the Comptroller’s office, the IFDA sought to enforce their gentlemen’s agreement. Unfortunately for consumers and funeral directors, that agreement was flawed from the start.
 

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Last week’s exchange between the State Journal-Register and the Illinois Comptroller’s office underscores just how poorly some regulators (and funeral directors) understand the preneed transaction.

The newspaper’s June 24th editorial included the following statement:

The directors allege they didn’t find out about the audit until fall 2007 when the comptroller revoked the IFDA’s license to be the fund’s trustee.

The Comptroller’s office responded two days later with a letter stating they are only responsible for auditing funeral homes and cemeteries that are preneed sellers, and that the IFDA was not a seller. While this position is consistent with that taken by the Comptroller in its September 17, 2007 letter of revocation, it is wrong nonetheless.

State associations serve as a jack-of-all-trades with regard to their master trusts, including administrative agents. But for smaller operators, the association (or its affiliate) typically serves as the preneed seller, discharging compliance and licensing obligations that are too burdensome for the ‘little guy’. With regard to larger members that have a seller's license, contracts between the association and the member determine who is the seller.

One problem with the IFDA situation was that the preneed contracts were so poorly written it may be impossible to tell who the seller is. But, it was the Comptroller that licensed the IFDA as a preneed seller, and it was incumbent upon the Comptroller to have addressed the contract and fiduciary problems before the license was issued.  It is wrong for the Comptroller to now attempt to duck those responsibilities, or to cram a settlement down the throats of funeral directors on any argument that they were the sellers of the IFDA preneed contracts.
 

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The Illinois Division of Insurance made the right call: the IFDA master trust does not have an insurable interest in the lives of the members who participate in the trust.

A preneed trust is intended to fund the liability that arises when the preneed beneficiary dies and a funeral must be provided. Accordingly, it is appropriate for a preneed trust to hold insurance covering the life of the contract beneficiary. At the time of death, the trust will receive insurance proceeds, and if the trust is established correctly, the proceeds are excluded from being taxed pursuant to Internal Revenue Code Section 101(a). The amount distributed by the trust to the funeral home is treated as ordinary income.

While the funeral director may have a financial interest in the performance of the preneed contract, the director’s death does not create a liability for the preneed trust. In the absence of a risk of loss, the policy held by the preneed trust is taxed as though it were an investment contract. Once the fiduciary factors in the tax consequences and the mortality charge, the decision to dump the key man policies makes sense.

Now the accusations turn to why this wasn’t done sooner. Or, why were these policies purchased in the first place. The broker’s excuse dodges the responsibilities he had to perform research, make inquiries and report accurately to the insurance companies.

Where was the IFDA counsel when these insurance purchases were being made?

Perhaps the regulators have exposure as well, but that may depend on what was disclosed by the IFDA (and when).
 

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Finding a fiduciary institution that is both knowledgeable and receptive has proven a challenge to funeral directors. Until a few years ago, the larger operators could rely upon the size of their trust to at least generate interest from prospective institutions. However, litigation exposures are now causing institutions to hesitate with even the largest of trusts, and the Illinois Comptroller’s proposed legislation would raise the fiduciary bar even higher for Illinois funeral homes.

If given the choice, state preneed regulators prefer that sellers use a ‘domiciled’ fiduciary institution. It is easier to hold domiciled institutions accountable under the preneed law. However, the preneed regulator’s jurisdiction begins to ‘cloud’ with regard to a foreign state-chartered institution, or a federally chartered institution that is not “located” within the state.

The Illinois Funeral or Burial Funds Act, like other states’ preneed laws, has an ambiguity that opens a ‘back’ door for foreign fiduciaries. While paragraph (b) of Section 225 ILCS 45/2 contains language stating the preneed fiduciary is to be domiciled in Illinois, paragraph (f) authorizes the use of foreign fiduciaries without the institution subjecting itself to the jurisdiction of state regulators. The Comptroller is now looking to close that ‘back’ door by deleting paragraph (f). The consequence to the Comptroller’s proposal would be to require the foreign fiduciary to comply with the Illinois Corporate Fiduciary Act.

Each state has a law governing the fiduciary activities of foreign institutions, and some are more liberal than others. State chartered institutions have no choice but to comply with these laws if it is deemed that the fiduciary services are being rendered within the state. In contrast, OCC and OTS chartered institutions will generally assert federal preemption arguments. With regard to both state chartered and federally chartered institutions, the language of the preneed law and the preneed contract are relevant to the issue.

The Texas Department of Banking addressed these issues in a 2001 opinion, with a compromise of sorts. In reaching that opinion, the Texas attorneys were mindful of the 1998 OTS opinion obtained by Forethought Financial Services. While on its face, the OTS opinion reads as a “Pass Go” and Collect $200 card, certain representative facts undermine the opinion’s value. State preneed regulators will invariably dispute the facts asserted by the “Association” at the bottom of page 7 of the opinion.

Following the Texas lead, state preneed regulators need to be flexible with foreign fiduciaries willing to comply with their state’s preneed law without ‘locating’ within the state.

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It may be a mere coincidence, but the $9.7 million demand made by Comptroller Dan Hynes upon the IFDA is approximately 25% of the $39 million dollar “deficit” that the master trust had accrued by 2006. In applying the letter of the law, the Comptroller has rejected the IFDA approach of crediting individual preneed accounts with a fixed rate of growth. Instead, the Comptroller has taken the position that the 25% administration fee must be based on actual trust income, and the IFDA has failed to adequately demonstrate what the trust has earned.

As more information is released about the master trust, the more it appears that the IFDA structured the master trust to simulate a defined benefit pension plan. By establishing a fixed rate of return acceptable to funeral providers, the IFDA could apply actuarial studies to project the trust’s liability at future dates (and invest accordingly).

A generation ago, the defined benefit plan was the principal method for funding retirement benefits. Today, however, the 401K plan has replaced the defined benefit plan as the retirement vehicle of choice. Defined benefit plans have proven too costly.

If some twenty years ago the IFDA in fact chose to emulate the defined benefit model, that decision was flawed from the start. Defined benefit plans are subject to extensive rules and procedures established by ERISA. Investments, allocations, related party transactions, expenses and taxes are all subject to strict rules and tests. There are no comparable laws and regulations for preneed trusts. Without similar guidelines and supervision, the IFDA appears to have broken most of the ERISA rules.

When funeral directors fault the Comptroller for not having acted sooner to avoid the trust’s decline in value, they are failing to understand that a substantial portion of the amount written down prior to 2008 represents an accounting change from the defined benefit ‘value’ to the trust’s current approximate market value. There was nothing the Comptroller could have done to prevent that ‘deficit’ from being written down.

With regard to the trust’s value decline since 2007, the key man insurance held by the trust poses a thorny problem. The insurance policies have a mortality charge that must be satisfied from a reserve that is probably invested in a volatile mix of fixed income and equity assets. Surrendering the policies requires the trust to address certain tax penalties and policy fees, unless of course, the policies are rescinded or fail to constitute insurance.

Where does this leave the IFDA and the Comptroller’s $9.7 million claim?

Unless the IFDA has assets (including its museum of funeral customs) sufficient to pay the claim, it will have to earn its way out of this hole. As with most state associations, the master trust represents its main source of revenue. Administrative fees charged to members range from 75 basis points for large trusts to 125 basis points for smaller trusts. Besides individual account administration, these fees must also cover fees for the fiduciary, asset management and tax administration.

In a prior press release, the Illinois Secretary of State put the IFDA trust value at $200 million. For a trust this large, account administration could conceivably receive a fee of 35 to 50 basis points. Assuming the IFDA’s costs to provide such services were $250,000, the association could net $750,000 per year. If the IFDA could apply half of that fee to the Comptroller’s claim, the association is still looking at a very long row to hoe.

But the Comptroller has reasons to consider this alternative. If the claim should prove the final straw that breaks the association, the IFDA master trust may have to be broken apart and transferred to new trusts established by the individual members. This is what happened a few years ago with the Minnesota master trust. The difference with the IFDA situation is that hundreds of members are involved instead of dozens. It would be the Comptroller that must supervise hundreds of trusts instead of a single trust.

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The battle to reform Illinois’ preneed funeral law was renewed by the Comptroller’s office with the release of his Amendment to Senate Bill 1862. Reform in Illinois will take months, and the final product may differ substantially from the Comptroller’s proposal. However, SB 1862 flags Mr. Hynes’ priorities, and one of those priorities could force a shotgun marriage between the IFDA and some of the small funeral homes critical of the Association.

The Illinois preneed law authorizes a preneed seller to act as its own trustee when the seller’s preneed funds are less than $500,000. This provision is a reflection of the difficulty and expense encountered by small operators attempting to find affordable trust services. However, the IFDA exploited this provision with regard to its master trust, and consequently, the Comptroller wants to eliminate the self-trusted arrangement.

The advantage of an association master trust is that it provides the requisite economies of scale to provide affordable trust administration to the smallest funeral home operator. But, many Illinois operators shunned the IFDA master trust because of a lack of transparency. The amount of preneed funds held in self-trusted arrangements could be substantial. If the Comptroller seeks to apply the elimination of the self-trusted exception retroactively to existing trusts, the cost of corporate fiduciary services and the scarcity of such fiduciaries may lead these operators back to the IFDA, perhaps with the numbers to force changes at the Association.

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The New York preneed law may be the best consumer oriented preneed law in the country (see Page 47 of the AARP Survey). It requires 100% trusting, the accrual of income and limits the permissible investments. The New York State Funeral Directors Association has good reason to be proud of their preneed program. Yes, their preneed trust is safe and steady. But, it is a one-of-a-kind model that owes a certain amount of its success to New York’s restrictions on insurance funding.

The bar set by the NYSFDA for other state associations is impossible to obtain in today’s legal environment. The last sentence from a recent article about the IFDA’s woes is most telling:

“The only lobbying we’ve had against our laws is from the insurance industry, which would like to bring their products into New York.”

Other than New York, what states prohibit insurance funded preneed contracts? States that consider the New York standards without insurance funding restrictions need to examine the consequences to the consumer and to the funeral home operator. If trusting requirements are set too high, operators will resort to insurance funding for their preneed contracts. Funeral directors will have insurance licensing requirements to fulfill, and consumers will have fewer preneed options.

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Like the Swine Flu, a preneed virus has been spreading across the Midwest.   Looking for a cure, state legislators and regulators have been forming research teams.  It all started last summer, with Missouri’s Chapter 436 (funeral) working group and Chapter 214 (cemetery) working group.  Now, Illinois is establishing a preneed task force, and Kansas is forming a cemetery committee.  But, in contrast to the Missouri Chapter 436 working group, the forthcoming preneed research teams are limiting the industry’s involvement in the proceedings.  It’s not that the patient has a terminal condition that is contagious, but rather a reflection that organizing industry participation can be akin to herding cats.

Take the May edition of the American Funeral Director as an example. There are no less than six articles addressing preneed. As Mr. Creedy points out, everyone in the industry has an opinion and some can’t help but apply a general prescription for the preneed transaction. But, preneed is governed by more than 50 different state laws, making the transaction impervious to such generalizations. Boiling the issues down for the sake of an editor’s guidelines only contributes to the confusion of our industry members. While these types of articles often quote experts with opposing (and often, valid) opinions, death care operators tend to remember only the opinions that support their preneed program (or, supports their opposition to another form of preneed).

The preneed problem involves complex issues that require an in-depth analysis by our respective state legislators and regulators. For the sake of our consumers, we need to provide legislators and regulators objective and unbiased information about all aspects of preneed.

This patient is very ill, but not terminal. There are no easy cures or solutions.

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Missouri’s preneed reform legislation will be amended on the House floor in the next day or so, and some of the Representatives have heard that old phrase about legislating morality. There is some truth to that phrase, and to some of the other objections raised against the reform legislation.

Preneed oversight will impose a substantial financial burden on a strapped state government and regulators lack the requisite experience to define the future course of preneed. However, these objections seem to wither when read in conjunction with the ‘excuses’ of the IFDA member funeral homes.

In a nutshell, Illinois funeral directors did not perform due diligence with regard to the management of their master trust. Instead, funeral directors placed their trust in their elected leadership, who then placed their trust in an investment advisor.

For those of us who work in this industry there is one given fact: funeral directors are caregivers by nature, and would rather spend their time with a family than the preneed trust’s accountant, attorney and investment manager. Well respected industry leaders are calling the current preneed situation “nuts”, and recommend that funeral directors focus on what they do best: serve the family. This advice resonates with most funeral directors, but they also know that families have come to expect the preneed option. But if preneed is to be offered, funeral directors must begin doing their homework.

Two years ago, Sue Simon wrote about Missouri’s triple-dipping trusts. One might have thought NPS’ demise brought this issue to an end, but that is not the case. A program utilizing a variable annuity product is being marketed to Missouri funeral directors. The promises made with regard to this product seem familiar to those made to the IFDA.

Depending on the final version of Missouri’s preneed reform legislation, funeral directors and fiduciaries may be forced to explain the condition of their preneed trusts. It would be best to put the Illinois Secretary of State’s questions to the investment advisor before the investment is made, rather than after.

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As new allegations surface about the Merrill Lynch broker associated with the IFDA master trust, some may appropriately ask why a preneed trust would ever invest in an insurance product. There was a time when the twain shall never meet. That all changed in January 1988, and specifically when the IRS and Treasury decided to apply Rev. Rul. 87-127 retroactively to states ‘that should have known’ the funeral home/grantor method of income reporting was inappropriate.

Prior to the ruling, preneed trustees were taking different approaches to reporting the income earned by the trust. With regard to states such as California and Illinois, the trust was required to accrue income and the Service believed trusts from those states lacked authority for electing the grantor method with the preneed seller as grantor.

Consequently, the Service leveled the boom by serving notice that the ruling would be applied retroactively in certain states. This posed a genuine problem for existing trusts because most lacked the requisite consumer information to report income in compliance with the ruling. Thus started a mad scramble to find an alternative to income reporting, and thus began the exodus to insurance.

Today, preneed trustees can avoid the burden of Rev. Rul. 87-127 by electing taxation pursuant to IRC Section 685. While a few legitimate reasons for preneed trusts to hold an insurance product remain, the insurance transaction merits close scrutiny, particularly when a conversion of existing assets to insurance is involved (NPS and its Missouri trusts).

The preneed trustee should ask certain fundamental questions of those who seek to have the trust invest in insurance:

· How will this product be taxed upon maturity?
· Does this product provide the requisite liquidity to fund cancellations?
· Is a commission paid, and to whom?
· How strong is the policy’s issuer?
 

To the extent a life insurance policy is utilized, the decision invariably becomes an irrevocable election. The policy’s cash value generally precludes getting back out.

Generally, annuities provide a more flexible alternative to life insurance, but pitfalls still exist. In recent years, funeral directors have received solicitations to have their preneed trusts invest in a group, variable annuity product. Trustees still need to ask these fundamental questions, particularly when an investment broker is advising the funeral director.

With regard to the taxation of the insurance product, few seem to realize that the trust is dependent upon Rev. Rul. 87-127 for the desired tax consequence.

For those interested in the history of Rev. Rul. 87-127, and its alternative reporting method (Section 685), Professor Joel Newman provided a fair and accurate account in 80 Tax Notes 711.

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With a recent editorial opinion, the State Journal-Register seeks to keep U.S. Senator Roland Burris accountable for his role in the IFDA master trust problems by asking the following questions:

· As comptroller, why did he think it was a good idea to allow the IFDA control of the fund?
· How did he monitor the group?
· Did he ask questions about its administration?
· Did he know that it would be backed by life insurance policies on IFDA leaders and members?
· When he became a lobbyist for the IFDA in 2007, what solutions did he envision?

But in the effort to build a fire under the Senator’s feet, the paper may have innocently misstated the facts.

What little that has been released about the master trust’s current state does not suggest that its value has dwindled down to $59 million dollars. While the fund has undoubtedly lost value, some of the ‘write down’ numbers attributed to the master trust represent an accounting change in what is to be paid funeral homes.

However, this should not detract from the paper’s effort to hold Mr. Burris accountable for his role in the IFDA’s problems.

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U.S. Senator Roland Burris has been sidestepping questions about his role(s) in the IFDA master trust troubles.  While the Senator was a side issue to a March 30th article published by the Springfield Journal Register, the statement provided by his public-relations specialist may signal just how little Mr. Burris understood about his responsibilities to the Illinois public.

In an effort to shift blame to current Comptroller Dan Hynes, Delmarie Cobb wrote to the paper:

I don’t know what he has to say is relevant given that he left the comptroller’s office in 1991. When he left, the pre-need fund was in the black.

Au contraire, Ms. Cobb.

The $49+ million dollar question is why Comptroller Burris issued a seller’s license to the IFDA when it did not have a corporate fiduciary?

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The IFDA seems to be everyone’s favorite whipping boy. Even prominent industry leaders are stepping back from the Association in its time of need. The epicenter for the latest news on the IFDA’s troubles has been the Springfield Journal-Register and Bruce Rushton. Mr. Rushton has done a thorough and excellent job of reporting on the IFDA master trust. In support of that reporting, the Journal-Register published an editorial calling for action to protect Illinois consumers. In response, Springfield funeral director Chris Butler wrote to the Journal-Register to present a different perspective of the reporting and editorial. I, for one, agree with Mr. Butler that the Journal-Register is contributing to the confusion and anxieties of consumers who hold a preneed contract.

References to the IFDA master trust as a Ponzi scheme have been abused. It’s a fact that the IFDA made promises to its membership that it has not been able to keep. In a very literal sense, this may seem to fit the Ponzi scheme definition, but the IFDA master trust does not begin to equate to the Bernie Madoff fraud, or even the NPS business model. Certain factors have contributed to a liquidity problem for the master trust. The single greatest factor, the collapse of the financial markets, is completely beyond the IFDA’s control. Rather than sell off assets at a loss, fiduciaries in this situation would prefer to use incoming funds to meet liquidity needs. This is not the classic Ponzi scheme.

As Mr. Butler suggests, it is the Illinois funeral director who will bear most of the financial consequences of the master trust deficits. While there is a legitimate exposure to the consumers holding non-guaranteed contracts, the IFDA must be afforded the opportunity to do right by these consumers. Contrary to what the Journal-Register suggests, state law does not appear to ensure these consumers ‘can’t lose money on their investment’. In reality, the non-guaranteed contract purchaser has investment risk because of the decision to forego the guaranteed contract.  Granted, the consumer may not have been able to afford the guaranteed contract (and its required installment payments).  But, the non-guaranteed contract represents a fund set aside for use at a future date (without promises from the funeral home about what those funds will purchase). 

When a funeral home steps forward to honor a non-guaranteed contract regardless of the deficit, the consumer should recognize that the funeral director is covering the deficit out of a commitment to the family, and not because of a state law.   Consumers of guaranteed contracts should also appreciate that funeral homes are honoring those contracts despite legitimate controversies over their obligation to do so. 

The IFDA and its advisors made serious mistakes, but so did the regulators. Oversight fell through the cracks several years ago. Restructuring the master trust and its oversight could take years. The reform process will only take longer if misplaced criticism must be addressed at every step.

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In naming the IFDA officers and board of directors as individual defendants in their lawsuit, the Calvert group sought to make these individuals accountable for management of the association’s master trust.  Members of a board of directors have a duty to act in the best interests of the organization.  Defenses against personal liability are afforded the board member so long as he/she has acted reasonably, diligently and in good faith, even when the organization suffers a catastrophic loss as a result of the board’s decisions.  However, what defenses were afforded the IFDA board members are now compromised by the lawsuit filed by the Association’s liability carrier, and the outcome could have a chilling effect on new board members’ efforts to do the right thing.

Funeral Service Insider and Chicago Tribune have reported a limited number of facts, but the liability carrier seems to be challenging coverage of the IFDA for the Association’s failure to provide timely notice of “the claim”. Federal Insurance Company cites the June 21, 2006 letter from the Illinois Comptroller’s office as the event that gave rise to the claim.

The IFDA has valid issues to raise in opposition to the carrier’s assertions, but litigation moves slowly.  In the meantime, prospective candidates to the IFDA board of directors must weigh their personal exposure to this situation.  Doing the right thing may not be enough for some who have been injured by the master trust's decline in value.

Other state associations should take from this latest IFDA development the need to review their liability insurance policies and to timely report all potential claims.

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Illinois and Missouri have more in common than they may realize. Consumers and funeral directors are blaming state regulators for their current preneed problems. Looking to avoid that hot seat, regulators have been stating their excuses/defenses. If legislators are to correct the flaws in their state’s preneed oversight, they need to put partisan politics aside and objectively assess those excuses.

In response to criticism about the IFDA master trust, the Illinois Comptroller’s office states: we don’t regulate trusts. With regard to preneed audits, the Comptroller follows the money from the consumer to the funeral home and into the IFDA trust. Once there, the Comptroller did not provide an extensive review of the trust’s activities. (Summary, it’s not my job to provide oversight once the funds make it to trust.)

The chink in the Comptroller’s IFDA armor is that the consumer funds never made it into a corporate trustee’s hands. The Comptroller’s excuse (we thought they had a corporate fiduciary) has funeral directors boiling. Rightfully so. While news reports and funeral homes have garbled the legal issues, the Comptroller’s function was to license preneed sellers, and for the IFDA, that meant the responsibility to ensure the organization had an appropriate fiduciary.

Missouri’s Division of Professional Registration and State Board of Embalmers and Funeral Directors have received the same type of criticism with regard to the NPS collapse. Those regulators have appropriately countered with explanations about how Chapter 436 tied their hands. Legislators and state agencies sponsored meetings last summer to obtain recommendations for improving Missouri’s preneed oversight. Those recommendations included the decision to continue the State Board’s jurisdiction over the preneed and to provide that entity greater licensing and oversight authorities.

Preneed regulation should begin with the licensing/registration of who may sell preneed. (I beg to differ with Ill. State Rep. Dan Brady, and those who assert preneed should only be sold by licensed funeral directors.) But that issue aside, who should provide oversight once the consumer’s funds are deposited to trust? I tend to agree with the Comptroller’s office that a state’s financial regulator is better suited for this job. However, there are ‘gaps’ to that recommendation. (State banking regulators do not have express jurisdiction over fiduciary institutions that derive their powers from a charter granted by the Office of Thrift Supervision or the Office of Comptroller of the Currency.)

While preneed licensing and payment administration oversight should be placed with a state’s agency charged with establishing minimum competency standards, oversight of the preneed trust should be with the state’s banking regulator. Federal preemption issues could be eliminated by statutory provisions that require the seller’s trustee to consent to limited jurisdiction as a condition to accepting the account. Preneed is too complex, too big, for a single state agency.

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John Duggan has a point, and that’s what concerns regulators in Illinois, Missouri and Texas. Who will be blamed when the consumer does not get the benefit of their preneed contract?

While the overwhelming majority of NPS’ preneed contracts will be honored by the funeral home named in the contract as the “provider”, it is not because of regulators’ threats. Most funeral directors cannot afford to abandon their preneed families. The same can be said for the IFDA members and their preneed contracts. But there will be some funeral directors who eventually decide that they cannot afford to honor those contracts. To protect the consumer, the regulator will be called on to enforce a contract that should exist between the funeral home provider and the third party preneed seller.

Many funeral homes rely upon third party sales organizations to provide preneed documents, administration, sales forces and economies of scale. While funeral directors typically relate the term “third party preneed seller” to entities such as National Prearranged Services, the term also includes those entities formed by state associations to service member funeral homes that do not want, or cannot afford, to maintain their own preneed operation. While this relationship involves the delegation of crucial responsibilities, regulators have discovered that the seller and provider have done little to document their respective rights and obligations in a formal agreement.

When the Texas Insurance Department took control of NPS and its sister insurance companies in early 2008, the initial press releases advised funeral directors that they were obligated to honor those contracts regardless of the circumstances. Texas authorities subsequently narrowed such statements to their Texas funeral directors because Missouri’s Chapter 436 does not have such a requirement.

NPS was notorious for selling preneed contracts in the absence of an agreement with provider funeral homes. Some funeral directors discovered these sales after the fact. To the extent NPS had authority to represent a provider funeral home, the agreement was often cursory in nature. Consequently, Missouri funeral homes have some justification for challenging the obligation to honor NPS contracts. In response, Missouri’s reform bill includes the following provision:

436.415. 1. Except as otherwise provided in sections 436.400 to 436.520, the provider designated in a preneed contract shall be obligated to provide final disposition, funeral or burial services and facilities, and funeral merchandise as described in the preneed contract.

2. The seller designated in a preneed contract shall be obligated to administer all payments made by, or on behalf of, a purchaser of a preneed contract and ensure the preneed contract is managed and fulfilled, and payments remitted, in compliance with sections 436.400 to 436.520 and as provided by the contract. 

 But what if the seller does not fulfill its obligations to the funeral home provider and the consumer? Is it fair to impose strict liability upon the funeral home provider?

Regulators, such as the Illinois Comptroller’s Office, seem be indicating that preneed regulation is a bigger, more complicated, task than what they are prepared for. In that vein, Missouri is warning funeral homes that they must assume the risks associated with third party sellers. Texas seems to think that consumers would be best served by the prohibition of trust-funded third party preneed contracts (154.1013). I disagree.

Insurance funded preneed is not an option for many elderly consumers. If faced with trust funding or POD/joint accounts, smaller funeral homes will be squeezed out of the trust arrangement by the expense of establishing and maintaining their own trust. Funeral homes will also have to comply with the seller licensing requirements.

Despite the allegations made against the IFDA, the state association trust may represent the only competitive preneed product available to the smaller funeral operator.

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