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

With two reform bills (HB 2469 and HB 2594) already introduced into the legislature, and two substitute proposals in the works, Missouri legislators and regulators are committed to fixing a law that allowed NPS to exploit consumers and funeral homes. However, consumers and the death care industry are both having difficulty analyzing the specifics of the various proposals. The haste with which legislation is being pressed suggests that regulators know more about the gravity of the NPS situation than what has been disclosed to the public.

Chapter 436 has some obvious problems:

• The combination of a low trusting percentage (the last 80% of payments) and the right to withdraw income currently

• Restrictions on the state board to order inspections or audits

• Minimal reporting requirements

• Ambiguity regarding deposit requirements

• Ambiguity regarding insurance funded preneed

• A lack of rulemaking authority

• An underlying assumption that all preneed contracts will be price guaranteed, and most would be trust funded

• Inadequate provisions for consumer protections when sellers or providers go out of business or are sold

• A general lack of independent oversight

What may not be apparent to legislators, and to consumers, are the many competing economic interests that exist under the “death care” umbrella. There is little doubt that legislators are getting a crash course on those interests. The various proposals already reflect certain interests of regulators, funeral homes and preneed sellers. But if legislators are only now learning the issues, how will they know which proposals are in the best interests of the consumer?

If it were not for the NPS meltdown, Chapter 436 would not be a topic of discussion in Jefferson City. Last year, Representative Meadows proposed a reform bill that was blocked before it could even be discussed. The year before, the State Board of Embalmers and Funeral Directors put preneed reform on its agenda, but the chairman, Ken McGhee, received very little support, or interest.  The sudden interest to fix Chapter 436 is being driven by the NPS failure.

Preneed is a complex issue, and Chapter 436 has more faults than most states’ preneed laws. But, the NPS situation cannot be fixed if we do not know the extent of the damage. It is too late to close this barn door. Rather, the legislature must bring structure to a situation that has many competing interests. The NPS meltdown is unprecedented, and a public forum is needed so that all can understand what went wrong, and where should we go from here. 

With regard to drafting preneed reform, the Missouri death care industry has historically relied upon representatives from the State Board, the funeral directors association, the cemetery association, preneed sellers and the consolidators to forge a consensus bill to submit to the legislature. This group has been referred to as the Allied Council. It has been 13 years since the Allied Council forwarded a Chapter 436 proposal to legislators. Ironically, that Allied Council effort was subverted by NPS. 

Chapter 436 will be revised. However it should be done with the input of an Allied Council that includes consumers, insurance companies and the attorney general’s office. 

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The preneed bill that angered the Funeral Consumers Alliance in February continues to advance within the Tennessee legislature. SB 2705/HB 2763 has been placed on the calendar for the Commerce Committee for April 1^st. If passed, the legislation may well make Tennessee the first state to lower its preneed trusting requirement. Despite the need for better consumer protections, I anticipate other states may eventually follow suit. 

Preneed is evolving from a transaction of accommodation to becoming an essential element of each funeral home’s business. Funeral directors in 100% trusting states such as Tennessee are feeling the need to control their own preneed programs, and have come to appreciate the costs of establishing, and maintaining, a trust funded preneed program. 100% trusting laws have historically dictated that insurance be used as the principal method for funding, with trust funding as a backup for purchasers who were too old or could not qualify. With insurance companies coming and going within the preneed market, funeral homes want the alternative to offer consumers a trust-based product.

Why will legislators be willing to decrease 100% trusting laws: the guaranteed preneed contract has been, and continues to be, viewed as a sale of goods and services. Legislators are likely being told that if consumers want a product that provides a full refund right, and portability, then they can choose a non-guaranteed preneed contract. Tennessee’s law provides that option. But is the non-guaranteed preneed contract really a viable alternative?

The vast majority of laws and regulations aimed at regulating the preneed transaction are in response to the guaranteed preneed contract. This is true regardless of whether the issue is securities regulation, income taxes or trusting requirements. Preneed has been defined as a purchase transaction, not a dedicated savings account transaction. As a consequence, criticism that attempts to re-characterize the preneed transaction as a savings plan can often be deflected by the death care industry. 

The Tennessee Prepaid Funeral Benefits Act has several excellent features, and could serve as a reference for other states. But, as with most preneed laws, it has some provisions which leaves one to scratch his or her head (like Section 62-5-408(d)). Yet, SB2705/HB2763 provides a reasonable remedy to the hole left in the 2007 effort to repair the Smart damage: funding the protection fund from the funds retained by sellers on guaranteed preneed contract sales.  

Fiduciaries also need to consider that the Act authorizes civil penalties of up to $1,000 for each violation of the Act committed by the preneed trustee. 

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It must be spring: preneed reform bills are sprouting like crocus. 

The direction taken by the Maryland and Tennessee legislatures in proposing protection funds drew recent criticism from the Funeral Consumers Alliance. While consumer advocates have some valid points regarding these legislative efforts, the obstacles facing states are far more complex than what most outsiders understand. For purposes of this blog entry, lets focus on Maryland and put Tennessee off to another day.

First, a distinction needs to be made between a state’s industry board and a state trade association. Some times the two cooperate to get legislation introduced and passed, and then sometimes the two are on very different pages. Most state industry boards are understaffed and under funded. A casual survey of the website for the Maryland State Board of Morticians & Funeral Directors reflects the Board has one inspector, excuse me, had one inspector, for all of the state’s funeral homes.   While the Board’s principal purpose is the “protection of the public's health and welfare through proper credentialing, examination, licensure, and discipline of morticians, funeral directors, surviving spouses, apprentices and funeral establishments in Maryland”, its newsletter suggests preneed has become its pressing problem.

Preneed accounts for most of the Board’s complaints, and the number of funeral homes that are late in filing their reports to the Board are substantial. Yet any thoughts the Board may have regarding enforcement actions must be tempered with the realities of its budget. As a self-supported entity, the Board’s resources are those fees it charges the state’s funeral homes and morticians, and there lies the first rub with the state’s trade association. What businessman doesn’t complain about the fees charged for licenses? Those complaints are invariably directed to the trade association, which in turn applies pressure on the board. 

But the fact something is broken with regard to preneed is not lost on either the Board or Maryland’s funeral director association. The association position for scrapping the CPA certification in favor of a protection fund probably signals the industry’s acknowledgment that this oversight approach is ineffective and a waste of resources. I have experienced the same frustration working with CPAs and auditors who held themselves as having experience with the death care industry. If each funeral home has to find a CPA to certify compliance with a state law like Maryland’s, HB 1090 may well represent a better application of the funeral home’s funds. However, the real problem with Maryland preneed is its preneed law and the lack of effective oversight. 

The dynamics of preneed reform are complicated, but there certain generalities that apply from state to state. No matter how bad your state law is, no one wants to open the law for the donnybrook that is sure to follow if all bars are removed. It doesn’t matter if the trusting is 100% or 80%. If you work in a 100% state, there will be a strident element that argues a lower percentage will open the floodgate to the unsavory characters of preneed (and the criticism of FCA). If you work in state such as Missouri, there is the position that opening the preneed law will invite restrictions that cut into the revenue streams that funeral homes have become dependent upon. However, these arguments are beginning to pale in the face of growing frauds and abuse. Most funeral directors understand that oversight is needed, but the challenge is how to achieve it efficiently on the limited resources available. Shifting the responsibility, as Indiana’s legislature is considering, to the fiduciary will not work. 

With regard to Maryland’s preneed law, I would offer the following recommendations:

1. Require an independent, corporate trustee that can invest pursuant to the Prudent Investor Rule. Scrap the concept of letting a funeral home serve as a trustee (or escrow agent).   (And what is a trust that is insured by the FDIC?)
2. Require a combination of flat fees and per preneed contract fees that are divided between a protection fund and the Board’s costs to monitor annual reports and to take enforcement actions. The per contract fees should be assessed equally from the funeral home and the consumer (perhaps $10 each). 
3. Each preneed seller should be required to file an annual report that sets out new contract information, deposits to trust, distributions from trust, the trust’s market value and the trust liability. 
4. Each preneed seller should be subject to a tri-annual inspection that may last between 1 to 3 days. The inspection reviews the funeral home’s records, accounting controls, a sampling of transactions (deposits, distributions) and the annual reports filed with the Board. The inspection should be conducted by a CPA firm pursuant to agreed upon procedures developed by the Board, with the cost of the inspection being assessed against the funeral home. The better the funeral home’s records and procedures, the more likely the inspection can be completed in a day (and the lower the fee). With a fixed number of inspections per year, the Board should be able to negotiate a fee that is substantially less than the CPA certification required by the current law.
5. Inspections that reflect violations or deficiencies can be the basis for full audits (which are assessed against the funeral home).
6. Final inspection reports should be a matter of public record so that consumers can investigate funeral homes before making a preneed contract purchase.
7. Preneed sellers should have to obtain trustee certifications of new contract deposits, and then provide documentation to the new contract holders of the deposit of their funds to trust.
8. Preneed trustees should provide annual summary statements (transactions and asset listings) directly to the Board. 
9. Trust transfers should be documented to the Board.

Protection funds have merit, and should not be discounted as a ploy. However, preneed oversight is becoming a national issue. Documentation and disclosure will be fundamental to providing an adequate audit trail for regulators. Maryland funeral directors may have legitimate complaints for dropping their current oversight, but they should not opt for a protection fund in lieu of oversight. 

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Death Care trade publications such as the Funeral Service Insider and the FuneralWire advocate that funeral homes revisit the non-guaranteed preneed contract.  I agree that funeral homes should reconsider the non-guaranteed preneed contract, but for reasons different from those expressed by other authors.

The non-guaranteed preneed contract affords flexibility and portability to the individual who wants to do more than preplan, but is not prepared to make all of the decisions that go into planning the final disposition.  The guaranteed preneed contract often ties the hands of the consumer's survivors and the funeral home.   While many families take satisfaction knowing the prearranged funeral, some survivors feel they have been deprived the final opportunity of taking care of a loved one.    

Rather than espouse one form of preneed over another, funeral homes need to provide a viable non-guaranteed arrangement that can be selected in lieu of a guaranteed contract. There is a place for both types of contracts.  However, there are a number of hurdles to the non-guaranteed preneed transaction.  In this post, I will identify those issues briefly, and provide expanded discussions in subsequent posts.

• Most state preneed laws have been written with the guaranteed contract in mind.
• Marketing - proactive vs passive
• Efficient trust management
• Finding a sponsor

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The Clayton Smart debacle has been, and will continue to be, the subject of articles calling for preneed reform. A recent AARP article titled R.I.P. Off  will be one of the more controversial (leading to frequent citations by consumer advocates).   While the article is biased and should be rebuked by the death care industry for its various flaws, the industry should examine the Smart affair and the public's reaction to Mr. Yeoman's issues (including the comments posted to the AARP website). 

Mr. Smart exploited the Tennessee laws to divert millions of dollars of trust assets.  While Forest Hill's new owners should be applauded for taking steps to minimize the loss to consumers, the industry should not ignore the magnitude of the fraud committed.  Over the next few months, I plan to revisit the Smart affair and the issues it spawns.  But for this post, consider the missing fiduciary.

In its April 2007 edition, the American Funeral Director reported in detail about Mr. Smart, including his appointment of a small Indiana institution as Forest Hill’s preneed trustee and the revision of the governing trust instrument.   While another of Forest Hill’s trustees discharged its duties to consumers by refusing Mr. Smart’s distribution instructions, the Indiana institution followed Smart's instructions to terminate life insurance policies that would result in millions of dollars of loss to the trust.  Too frequently, funeral directors exhibit the similar business ethics by shopping for a trustee that will do what it is told.   

Many of our country’s larger banks now refuse to accept death care trusts either because the laws are ambiguous or because of the industry’s reputation.   Death care companies need to develop procedures and controls to ensure compliance, accountability and transparency.  Restoring the confidence of  financial institutions and consumers will take time.   

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