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

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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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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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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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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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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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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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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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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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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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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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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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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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 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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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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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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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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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 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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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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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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