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

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.

• Email This
• Print
• Comments
• Trackbacks

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.
 

• Email This
• Print
• Comments
• Trackbacks

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.  

• Email This
• Print
• Comments
• Trackbacks

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.
 

• Email This
• Print
• Comments
• Trackbacks

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."

• Email This
• Print
• Comments
• Trackbacks

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.
 

• Email This
• Print
• Comments
• Trackbacks

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.    

• Email This
• Print
• Comments
• Trackbacks

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.
 

• Email This
• Print
• Comments
• Trackbacks

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.
 

• Email This
• Print
• Comments
• Trackbacks

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).
 

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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?

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks