The dominoes are beginning to fall. The Texas Department of Insurance has disclosed that Lincoln Memorial and its sister Memorial Service Life have been put into receivership. The Department's website provides a copy of the order appointing a Donna J. Garrett as the companies' rehabilitator, and a Q&A for consumers.
Yesterday, the St. Louis Post-Dispatch ran an article that examined the history of NPS, and raised some of the questions that need to be explored in depth in the months to come. The system failed in several states, for both consumers and funeral homes. While most funeral homes will try to make good on the NPS promises to consumers, regulators must share in the responsibilities for what went wrong and what has to be done.
NPS was an innovative company that grew frustrated with the fragmented nature of state preneed laws, and exploited the gaps and ambiguities of state regulation. Some will say that NPS exploited the greed of funeral directors, and this should be sufficient reason for holding funeral homes responsible for performance of the NPS contracts. While this will ring true for some funeral directors, this is too simplistic an explanation of the situation. The reality is that many funeral homes will fail if regulators do not recover sufficient assets from the Cassitys.The Missouri preneed industry faces a long and stormy summer.
The Missouri legislature seems to be listening to regulators' requests for much needed authorities for examinations, audits and rulemaking. A draft bill providing emergency powers to the Division of Professional Registration has emerged as legislation that may be signed into law before the current session ends next week. In contrast to most bills enacted into law, this one is rumored to have an immediate effective date.
If the bill is signed into law, the Missouri State Board of Embalmers and Funeral Directors will begin to study methods for implementing the preneed inspection powers to determine whether the state's preneed problems extend beyond the NPS failure. Though meant to demonstrate the industry's overall compliance with Chapter 436, recent testimony at legislative hearings may have undermined regulators' confidence in the industry's past efforts to comply with current law.
One approach the State Board will consider is a comprehensive desk top examination of each seller's fundamental compliance with Chapter 436. Approximately 12 years ago, the State Board contemplated a broad based review process that would have sought basic information about the three methods of funding: trust, insurance and joint accounts. However, the initiative could not be pursued because the State Board lacked the authority to require compliance by licensees.
I could not attend recent a hearing where industry members testified before legislators to provide assurances that most funeral directors do comply with Chapter 436. If the description provided to me about the testimony of one well intended funeral director was accurate, funeral homes need to take a refresher on the requirements of Chapter 436. I have heard similar misstatements by funeral directors at recent State Board meetings.
I anticipate that The Missouri Funeral Directors and Embalmers Association is already working on Chapter 436 compliance courses to provide its members. Association members would be well advised to take such a course before assuming their funeral home is in compliance.
On Wednesday, April 30th, the Missouri Department of Insurance fired off the first salvo in the legal proceedings to recover funds from Lincoln Memorial Life Insurance Company. In an effort to prepare those affected by the NPS meltdown, the Missouri State Board of Embalmers and Funeral Directors and the Division of Professional Registration have issued press releases that explain critical issues related to this situation. The tenor of these press releases is substantially different from those previously released by other states’ regulators. Consumers and funeral directors need to review these releases carefully.
If it hasn’t been apparent to funeral directors before now, Missouri’s filings against Lincoln Memorial Life reflect that the NPS trusts are full of term insurance policies. Some reports indicate that the policies may be lapsing soon. While Missouri Department of Insurance has filed its actions against Lincoln Memorial Life, the eventual target will be the NPS/Lincoln corporate officers and directors. Because regulators must pursue their claims through the authorities granted by the statutes governing insurance and preneed, funeral homes need to consider banding together in an action that focuses on the authorities granted to the replacement management team installed by the Texas regulators.
The Missouri regulators and their legal staffs have been overwhelmed by the situation. These offices were understaffed to begin with, and the magnitude of the investigation, legal proceedings and inquiries has stretched their resources to the limits. This all may make for good campaign rhetoric in the upcoming fall elections, but the industry needs to take actions to help recover improperly diverted funds.
The rumors of law firms offering to initiate class action lawsuits have already begun to circulate. But, most funeral directors probably appreciate that building a coalition to preserve the NPS assets and working towards an equitable division of the proceeds would better serve their interests. To be fair, consumers need an explanation about the third party preneed transaction and their exposure for the NPS failure.
The majority of preneed contracts are between the funeral home/cemetery and the purchaser, wherein the funeral home/cemetery is the primary obligor. The essence of the contract is two promises: the purchaser to pay a specific amount of money and the funeral home/cemetery to provide certain described services and goods when the purchaser (beneficiary) dies.
NPS is (was) a third party preneed seller. Funeral homes and cemeteries use third party sellers for a handful of valid purposes. Often, smaller death care companies may not have the volume of preneed sales to justify the expense of contracts, administration and compliance and so they contract with third party preneed sellers. Some states require the death care company to be the obligor of the preneed contract, but many do not. In states where law requires the death care company to be the obligor, the third party seller acts in an agency capacity to the funeral home and cemetery. It that situation, the death care company has an obligation to honor the contract regardless of most circumstances (like the failure of the trust).
However, states such as Missouri and Texas, allow the third party seller to be the obligor of the preneed contract. In these types of preneed transactions, there are four sets of promises: the purchaser to pay money to the third party seller, the third party seller to cause the funeral home to provide a funeral by paying it money, the funeral home to provide the funeral, and the third party seller to pay money to the funeral home. However, the terms of the payment between the third party seller and the funeral home are not generally disclosed in the preneed contract, but rather in a separate agreement between the third party seller and the funeral home/cemetery (called an associate agreement or provider agreement).
NPS used a multitude of different preneed contract forms and associate agreements (most of which were infamous for their ambiguity or brevity). NPS relied upon these ambiguities to transfer preneed contracts from one funeral home to another funeral home if the circumstances benefited NPS. Consequently, the agreements were intended to be difficult to enforce, which cuts two ways.
Regulators did not seem to appreciate this fact when early press releases were issued to calm consumers. Those press releases suggested that funeral homes would have to honor their NPS contract “pursuant to their terms”. While funeral directors cannot afford to walk away from their families, regulators need to follow the lead taken by Missouri’s State Board of Embalmers and Funeral Directors by being more forthright with consumers. If the NPS/Lincoln proceedings take years to resolve (instead of months), the parties will need an understanding of their respective rights and obligations in reaching fair and equitable settlements.
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:
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.
Certainty? In this world nothing is certain but death and taxes.
Benjamin Franklin
The “collapse” of National Prearrangement Services comes as a shock to both the company’s clients and competitors. For the seventeen states in which NPS transacted business, regulators are scrambling to get their arms around the magnitude of the problem. NPS’ adversarial reputation will cause many regulators to move cautiously. However the capitulation by NPS to the termination of its marketing operations should cause regulators to consider whether the individuals that control NPS and its related sibling corporations have employed a rearguard strategy.
Missouri and Texas will figure prominently in regulators’ efforts to protect consumers. NPS maintains its corporate headquarters in St. Louis, Missouri. The insurance company to which NPS funnels its preneed sales, Lincoln Memorial Life, is a Texas company located in Austin. Accordingly, records of NPS’ preneed sales should be in St. Louis and the funds received by NPS should (hopefully) have made their way to Austin, and subject to the jurisdiction of the Texas Department of Insurance (TDI).
However, the news from TDI has been a bit confusing. On April 9th, TDI issued a press release that disclosed that an Agreed Order had been entered into with NPS. The press release states:
The TDI-issued Hazardous Financial Condition Order requires the companies to establish a plan to pay policyholder claims and to address existing contracts.
"While every effort was made to secure the companies and return them to normal operations, the decision was made to take this regulatory action," said Texas Insurance Commissioner Mike Geeslin. "As we move forward, our goal is to use every law on the books to protect consumers, coordinate with other regulators and states and - most importantly - keep all parties informed as issues develop."
"It is imperative that we work closely with NPS and the funeral providers to ensure all Texas consumers receive their prepaid funeral goods and services as originally promised," said Texas Banking Commissioner Randall James.
For years, these companies have been dependent upon new sales (and trust transfers) for revenues to meet promises made to funeral homes. Consequently, TDI’s assurances about returning these companies to ‘normal operations’ rang hollow when news of NPS’ termination of its sales personnel was leaked. A day later, the Kansas City Star reported that a Kansas lawyer had taken “control of the company Tuesday as action manager of behalf of Texas,…” So, what is going on?
The lawyer referenced by the Kansas City Star article has experience with insolvent insurance companies, and so one explanation could be that Texas is preparing to take control of Lincoln Memorial Life.
With NPS being deprived future sales, the Lincoln Memorial assets may be the only source of payment for hundreds of thousands of consumers. Texas reported 39,000 policyholders, and Missouri reported 46,000, and while these two states may account for a substantial portion of NPS’ business, there are 15 other states with NPS sales.
With information in such short supply, one must be careful not to read too much into these press releases. But each seems to place emphasis on “Policies” and “Policyholders”. There seems to be an assumption (or at least a hope) that each NPS sale ended in a Lincoln Memorial policy. Yet, many of us know that NPS aggressively pursued trust rollovers that included questionable records for the preneed contracts involved. With regard to those transactions, it is unlikely that purchasers were ever contacted. The question then becomes what NPS/Lincoln did with the funds from their trust rollovers?
To know just how deep the NPS waters are, Missouri is key to obtaining NPS and its corporate records. On April 9th, the Division of Professional Registration issued a press release that advised:
Funeral directors are cautioned to ensure they maintain adequate records and evaluate any preneed arrangement sold on behalf of their funeral establishment.
On April 11th, The Kansas City Star reported the following comments:
“We want people to know we are working to safeguard their interest,” ……….. “We’ve stopped the flow of business to look at what’s going on. Our concern is that they get what they paid for.”
While terminating NPS’ authority to enter new transactions had to be its first priority, Missouri must now determine how it can best protect all consumers, not just those from Missouri. If there is any doubt about the trust rollover transactions, Missouri needs to take prompt action to secure NPS’ corporate records.
Which brings this post back to its introductory muse: has NPS been sacrificed as some sort of rearguard maneuver?
We can hope that NPS will take all actions necessary to provide assurances to its policyholders, including cooperation with Missouri’s regulators. But if push comes to shove over records that document the company’s money trails, NPS may resort to its true colors when responding to Missouri’s requests. Funeral directors must prepare for that potential conflict.
All funeral homes that have NPS contracts should begin an inventory of their paperwork. For funeral directors that participated in an NPS trust rollover, the inventory should include documentation regarding the application of the trust funds. If their records do not include such documentation, funeral directors need to consider making an immediate written request to NPS. An even tougher (but necessary) decision may be whether to copy that request to your state preneed regulator.
A bank client recently asked that I provide some standard of accountability for administration provided to a master preneed trust. As I struggle to provide the client a concise answer, I can’t help but to think that the issue will also become a crucial concern to consumers and funeral directors alike. As news reports reach consumers about the regulatory actions taken against the preneed programs maintained by NPS and by the Illinois Funeral Directors Association, families will begin to contact their funeral directors for reassurances about their preneed payments. Unfortunately, many state associations have not made accountability a priority, and their members may be ill prepared to respond to consumers’ concerns.
For the independent funeral home, the state association can be a valuable resource to understanding the requirements imposed upon the profession by federal and state laws. As the preneed transaction grew in acceptance, most state associations formed master trusts to serve their member funeral homes. These master trusts came to reflect not only the respective state’s preneed law, but also the attitudes and values of the association leadership.
Consumers need to appreciate that master preneed trusts are an important source of income to the sponsoring association. Because there are costs to providing contracts, administration, compliance, and asset management, the master trust provides the smaller funeral home the economies of scale necessary to reducing costs that would otherwise be prohibitive. However, the Illinois situation suggests that former association leadership may have exploited both members and consumers. While the association’s website is finally acknowledging the issue, the response lacks in terms of accountability.
Getting back to my client’s question, how should accountability be measured for preneed administration from state to state? The diversity in the approaches taken by the state legislatures in regulating the preneed transaction is the single greatest hurdle to a comprehensive, national evaluation of preneed accountability. But perhaps transparency in terms of disclosures to both members and consumers would be one measure of accountability. On this standard, I would give kudos to the New Jersey Funeral Directors Association. It may be a sad reflection on the industry, but many funeral directors do not know what they are being charged for preneed services. The NJFDA provides this information for all to see.
If consumers do call for reassurances, funeral directors should have some basic information available to provide:
When funeral directors begin to call for reassurances, association leadership should be prepared to provide the following information:
NPS, beleaguered by state regulatory proceedings in Kentucky, Illinois, Ohio, Texas and Iowa, has called it quits.
NO MAS!
ENOUGH!
Much to the surprise of industry leaders, NPS has suggested it will do what's in the best interests of the consumers. Could this mean a refund to everyone?
April Fools Day!
If anything, NPS is a fighter, and will battle each of these states. Does NPS have problems? Sure. The insurance in the trust scheme has had competitors mad for years, and for good reason. Does NPS' problems make it vulnerable to the funeral homes it contracts with? Better go read those associate agreements. The Funeral Service Insider suggests funeral homes could be taking the hit if NPS fails. That may not be the case. Nor is FSI's source on point when suggesting that the purchaser money that NPS collects is also the funeral home's money. Funeral directors need to start reading those NPS contracts to determine if they are an 'obligor'. Frequently, NPS associates are agreeing to provide the described funeral when they are paid pursuant to the terms of the agreements (note: plural..... agreements, you need to read more than the preneed contract).
The consumer is the one most exposed by a possible NPS failure. And if that were to happen, it would also be catastrophic to the industry's integrity, and the arguments against federal regulation.
But, it is a little early to be giving NPS any final rites. Industry leaders need to take a calm approach to the situation, and avoid contributing to the rumor mill. Consumers need to contact their state regulators to obtain more information about the safety of their funds. Funeral directors need to get out those associate agreements, and begin to read.
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 1st. 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.
It's always an ugly scene when a party to a fiduciary relationship gets caught with his/her hand in the cookie jar. Unfortunately, this has been happening with alarming frequency in the death care community, and Indiana has had enough. In a relationship that requires mutual cooperation, the death care industry has taken the position that "someone should have stopped us by saying no", and the Indiana legislators have agreed. With the legislation signed into law last week, Indiana has initiated a major shift in the responsibilities of the death care fiduciary. Like the tree falling in the forest, was there anyone from the banking/fiduciary community around to here it?
The Indiana legislature moved quickly in response to the trust frauds committed at Grandview Memorial Gardens and at the cemeteries owned by Robert and Debra Nelms, and Governor Daniels followed suit by signing HB 1026. The new law will go into effect July 1, authorizing the Indiana State Board of Funeral and Cemetery Service to promulgate regulations that will determine the distribution documentation that must be reviewed and approved by death care fiduciaries. Failure to comply with these new requirements will expose the fiduciary to criminal charges and liability to cemetery customers.
To understand the gravity of the issue, fiduciaries need not go any further than their clients for input. The general counsel for the Indiana Cemetery Association put it this way:
The people who own the trusts could do almost what they wanted. We've given the trust companies the incentive not to pull the wool over their eyes.
Cemetery association members were aghast to learn of the case because they did not understand the extent that the current law left cemetery trusts vulnerable. People really weren't aware.
It would be safe to say that most death care fiduciaries are still unaware how vulnerable these trusts are.
What should death care fiduciaries do? The knee-jerk reaction would be to terminate such accounts and run as far away as possible. However, the fraudulent character of the charges leveled in recent class-action suits bring into question whether the statute of limitations has even begun to run. The class-action lawsuit brought on behalf of Grandview Memorial Gardens lot owners will likely turn on whether preneed contracts were performed pursuant to their terms, and that will require the distasteful act of opening gravespaces. The trust frauds committed by the Nelms have already snared one fiduciary and a major brokerage firm when a $20 million class-action lawsuit was filed in late January on behalf of cemetery lot owners.
Fiduciaries with a federal charter may be tempted to play the federal preemption card that has been used to keep state regulators at bay with regard to the sub prime mortgage crisis, but history is not on the national fiduciary's side with regard to death care regulation. State death care regulators in Florida and Texas have taken OTS preemption opinions, rolled them up and slapped thrift chartered fiduciaries into submission. Frankly, the legal arguments advanced by the state regulators were on point.
Indiana chartered fiduciaries need to become engaged in the procedures that will be unfolding before the Indiana State Board of Funeral and Cemetery Service later this Summer. The death care industry will be there in force providing their comments about the forms and procedures to be covered by the regulations authorized by the new law. Fiduciaries will have no one but themselves to blame if they miss this dance.
Federally chartered fiduciaries will need to determine how significant a block of business Indiana represents to their death care business. These fiduciaries will also need to monitor other states to see whether the Indiana law represents a trend that other state legislatures will follow.
Death care companies and consumers will need to anticipate an increase in the cost of fiduciary services. The old adage "you get what you pay for" has a double-edged application to the death care fiduciary environment. The security sought by consumers and cemeteries/funeral homes will come at a cost. To minimize the cost of the new obligation to provide distribution oversight, death care companies and fiduciaries will need to explore standardized examination procedures or the reliance on established audit procedures. Death care companies will also have to be more receptive to trust instrument provisions intended to provide fiduciaries the power to say no, and protections when they do.
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:
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.
The families of those buried at Grandview Memorial Gardens are angry. First they are advised that the trusts meant to fund future burials and the care for those graves are not properly funded. Next, they learn that some of the cemetery’s gardens have a problem with grave spaces flooding with water. When Indiana regulators and prosecutors reported there was nothing they could do to correct the situation, plaintiff attorneys filed a class action suit naming several entities as defendants, including three banks and the consolidator that sold the cemetery in 2001. The Indiana legislature has also reacted to the situation with a bill intended to eliminate the ability of the death care industry to use a custodial arrangement for these funds, and to place a greater burden on fiduciaries to police fund distributions.
Are Grandview’s problems the fault of the three banks named as defendants in the lawsuit? Of course not. Should the preneed fiduciary be required to police distributions to the extent required to determine if the vault delivered is a 'sealer' or not? Of course not. The Grandview situation may be more indicative of the problems facing the death care industry than the irregularities facing the Illinois Funeral Directors master trust. There are several factors that have contributed to the Grandview situation. Consequently, there are no simple answers, and shifting the blame/responsibility to the financial institutions that serve the death care industry is short sighted and counterproductive.
Indiana’s death care laws are a hodge-podge of sections spread among different chapters, with different effective dates. If funeral directors and cemeterians cannot accurately cite the legal requirements for their trust funds, should legislators pass the responsibilities over to the financial institutions?
It doesn’t take much speculation to guess why Indiana’s regulators have not taken any actions. More than likely, the Grandview accounts complied with the Indiana laws (albeit they were likely set up as custodial accounts). This won’t stop the class action attorneys from pursuing the deeper pockets of the banks and Carriage.
If the death care industry should decide to take steps to improve the image of preneed and perpetual care, death care fiduciaries have to be afforded the resources and procedures required to provide meaningful oversight to account distributions. Fiduciaries are completely dependent upon the death care company for the documentation required for substantiating distributions. Many fiduciaries rely upon certifications from the death care company that a contract has been performed pursuant to its terms. But such procedures cannot ensure that a family receives a ‘sealer’ vault, if that is what the preneed contract called for. HB 1026 will not solve Indiana’s preneed woes. The problem is deeper than the water that filled Grandview’s vaults.
The approach taken by Grandview’s class action attorneys reminds me of the search for the infamous Keyser Söze. As if they were reading from the script for The Usual Suspects, the attorneys advise they think they have it figured out but that legal process will have to grind out justice slowly. For the sake of the Grandview families, we hope there will be a different ending than what happened in the movie. In real life, there is no Keyser Söze to whom all blame can be attributed. Instead there are only some bit players who followed the twisting trail of Indiana law, and the only characters likely to profit from this drama are the attorneys.
To help the Grandview families, the first course of action needs to be the repair of the cemetery’s drainage system. If the cemetery’s perpetual care fund was depleted through improper distributions, determine who did so. There has been little press coverage about the prior owner’s response to the perpetual care issues. Did Madison Funeral Services understand the requirements of cemetery maintenance when it purchased Grandview from Carriage in 2001? Did the more stringent perpetual care law govern Grandview’s fund? How much of a perpetual care fund did Madison receive from Carriage?
With regard to whether the Grandview families were defrauded with inferior vaults, what did the preneed contracts provide? If one reads between the lines, the Jefferson County Prosecutors are indicating there is no basis for a fraud prosecution. The statute of limitations excuse sound like, ah, an excuse. Doesn’t the statute of limitations start from the point of the discovery of the fraud? If consumers were promised a ‘sealer’ vault, and an investigation does not prove the fraud for 8 years, has the statute of limitations just been triggered? The danger for the Grandview families is that the contracts don’t call for a ‘sealer’ vault. Someone may have planted the ‘sealer’ seed in their minds, and we should hope it wasn’t someone looking to profit from the families’ emotional distress.The Iowa had not one, but two personal preference bills pending before its Legislature for the 2007/08 term: SF 473 and HF 2088. The Senate version, SF 473, was backed by Iowa’s attorneys, and the House version, HF 2088, was backed by the Iowa Funeral Directors Association.
What caught my attention about these bills was the IFDA statement published by the Des Moines Register on February 22nd. The death care industry would have been better served if the IFDA had given more thought to their position against SF 473. The IFDA statement started with the following:
I must clarify your Feb. 14 article, "Bill Gives Deceased Control of Remains." Iowa funeral directors have always believed funerals are about loved ones gathering to commemorate the deceased person's memory. Funeral ceremonies are not about the dead forcing their intentions on loved ones.
There’s no argument that funerals have been for the living. It is a ritual that is meant to help survivors to take the next step on life without the individual who just died. But how can the IFDA reconcile the highlighted statement with the preneed transaction that most funeral homes endorse. Yet, I believe the IFDA correctly identified the issue that should be addressed before a preneed contract is ever signed:
If someone has specific requests for his or her funeral, those must be communicated to their loved ones. Funeral directors bring families together to decide how to remember the dead. SF 473, backed by the Iowa State Bar Association, allows a "final disposition directive," which forces everyone to listen to a document, and not to the emotional needs of survivors.
The [attorneys bar] association's proposal could conflict with other legal instruments. What if the decedent's will, pre-need funeral contract and final disposition all request burial, but in different cemeteries? What if the final disposition designates some distant cousin to be in charge?
The IFDA is asking the right questions, but failing to look in the mirror to understand how the death care industry is contributing to the problem.
First of all, each individual should have the right to control the disposition of his or her body. Period. But in contrast to our ‘inalienable’ rights, we are powerless to defend the right to control our own disposition. After we cash in our chips (pardon the pun), we are completely dependent on someone else respecting our ‘instructions’. Most individuals seem to have a strong personal preference for what should be done with their body. In a sense, there seems to be a certain selfish aspect to one’s last act or wish being one of “this is what I want”. Unfortunately, many preneed programs seem to cater to this self-indulgence.
What may be galling some funeral directors is that the written document, whether it is disposition directive or a preneed contract for cremation, may not be in the best interests of the surviving family members.
First preneed, and now enforceable disposition directives, are underscoring that the role of the funeral ritual needs to be for both the deceased and the living. But to accomplish such a goal, the individual must overcome the reluctance (or denial) that precludes the discussion of mortality with family or friends.
Preneed introduced our older generation to the issue of their own mortality, but hasn’t provided them the resources to share fears and values with the next generation. And now the death care industry is being forced to redefine the preneed transaction from being about “me”, to being about “us”. To incorporate family members into the process, key decisions about the funeral must be deferred. Individuals will continue to want to address the financial burdens of the funeral, but the industry needs to become receptive to allowing the family the freedom to reach a common decision about what ritual is best for everyone.
Bill Tammeus, a Kansas City Star columnist on issues of spirituality, addressed these issues from a theologian’s perspective in a September 2, 2006, column titled “The Cremains of the Day”.
So which Iowa bill should be favored? In this situation, the attorney’s version provides a lower hurdle for the individual wishing to establish an enforceable disposition directive, and therefore I would endorse it over the IFDA bill. SF 473 should better protect the interests of the elderly and the gay community.
One of the many issues facing regulators in the Clayton Smart debacle was the surrender of thousands of Forethought life insurance policies by a Forest Hill preneed trustee. New light will probably be shed on this issue with revelations that Robert Nelms and Clayton Smart may each have been using the same financial management company: Security Financial Management Company. One needs to consider whether an investment advisor looked at the insurance being held by the preneed trust and boasted ‘we can do better’.
Preneed funeral contracts are generally funded by either insurance or trusts. Each has its advantages and disadvantages. However, the respective advantages are generally lost when the preneed trust holds insurance products as investments. (I will exclude cemetery preneed trusts from this discussion because cemetery merchandise is often delivered prior to the purchaser's death, thus making life insurance impractical.)
Insurance gets the nod as the preferable funding vehicle for portability, tax consequence (to the purchaser) and consumer savings (if you're under the age of 60-something and in relatively good health). Trust funding gets the nod for universal availability, long-term performance (if the trust has sufficient assets to permit diversified investments) and refund rights (okay, okay, put the state law variations aside for a minute). However, each type of funding has its unique 'costs', and combining them may cost the funeral home and consumer in the long run.
Trustees were first induced to accept insurance products in the late 1980s when annuities were purchased for trusts that could not comply with the retroactive application of Revenue Ruling 87-127. Many of these trusts lacked the information required to report income to the purchasers. As a grantor trust, preneed trusts could hold an annuity and have the contract's increase be deferred for tax purposes until the contract's maturity.
Once the camel's nose was in the tent, insurance companies began to market life insurance and annuities to death care companies as solutions to lagging trust performance. Corporate trustees often consign smaller preneed trusts to fixed income investments in a conservative approach to avoid market fluctuations. In this era of relatively low interest rates, insurance products can offer a better return than conservative bonds and government securities. And, there is the temptation of a commission on the conversion of the trust's assets to insurance.
However, insurance products represent problems to the corporate trustee. As demonstrated by Clayton Smart's short-sighted actions, cashing in life insurance before the purchaser's death will have a significant adverse impact on the trust's value. Cash surrender values on 70-something year old insureds are typically low. And if the trustee does hold the policy to maturity, how are the insurance proceeds to be taxed? Annuities simply defer the income aspect of the contract until maturity. Life insurance proceeds are not taxable to an individual beneficiary, but are those proceeds taxable to the trust? More than likely, the answer is yes. The proceeds must generally flow through the trust, thus adding time and cost to the administration.
Funeral directors need to consider that rolling a preneed trust into insurance is probably a one-way transaction. Once it has been done, it will be a matter of a few years before an investment advisor recommends that its time to cash those policies in. Two wrongs do not make a right. In many states, it would be difficult to justify a rollover in the first place. Funeral directors will only compound any error made if they change their minds and cash the policies in.
The Funeral Monitor and the Funeral Service Insider write to different segments of the death care industry, and rarely report on the same topics. So when each makes National Prearrangement Services their lead story in late January, readers should take notice.
NPS is a company that has always pushed the envelope. With preneed laws as ambiguous as they are, there is plenty of room for wiggle when it comes to compliance. In the past, competitors would point a finger in NPS' direction and complain about a level playing field. Funeral directors generally stayed out of that fray because they were being paid by NPS. With the issues being reported by trade journals about NPS, funeral directors need to reevaluate their agreements with the third party seller.
To NPS' credit, they can bring economies of scale to bear on a casket company that small funeral homes can not. But what about the funeral home's existing agreements with casket vendors? What happens if NPS' relationship with the Chinese sours in five years? Does the NPS proposal put funeral homes at risk in satisfying the terms of the preneed contracts? In one perspective, NPS has put the funeral director and the preneed purchaser in the same boat, that being dependent on NPS and its casket vendor being able to perform at some point in the future.
Funeral directors should heed the advice that Josh Slocum gave consumers after the AARP published its notorious RIP Off article: take your contract to an attorney for advice about your rights.
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.
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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