With the upcoming new year, Illinois smaller funeral homes will begin searching for a corporate trustee for their preneed funds. With the Legislature's approval of the Governor's Amendatory Veto of SB1682, funeral directors lose the authority to serve as fiduciary of their own preneed funds.
In naming the IFDA officers and board of directors as individual defendants in their lawsuit, the Calvert group sought to make these individuals accountable for management of the association’s master trust. Members of a board of directors have a duty to act in the best interests of the organization. Defenses against personal liability are afforded the board member so long as he/she has acted reasonably, diligently and in good faith, even when the organization suffers a catastrophic loss as a result of the board’s decisions. However, what defenses were afforded the IFDA board members are now compromised by the lawsuit filed by the Association’s liability carrier, and the outcome could have a chilling effect on new board members’ efforts to do the right thing.
Funeral Service Insider and Chicago Tribune have reported a limited number of facts, but the liability carrier seems to be challenging coverage of the IFDA for the Association’s failure to provide timely notice of “the claim”. Federal Insurance Company cites the June 21, 2006 letter from the Illinois Comptroller’s office as the event that gave rise to the claim.
The IFDA has valid issues to raise in opposition to the carrier’s assertions, but litigation moves slowly. In the meantime, prospective candidates to the IFDA board of directors must weigh their personal exposure to this situation. Doing the right thing may not be enough for some who have been injured by the master trust's decline in value.
Other state associations should take from this latest IFDA development the need to review their liability insurance policies and to timely report all potential claims.
Has the economy caused consumers to put preneed on a back burner? Perhaps, but funeral directors can anticipate an increase in spend down inquiries. It is hard to turn prospective business away, but funeral directors need to consider how these transactions do not lend themselves to insurance funding or the conventional guaranteed preneed contract.
In many situations, these families cannot afford a full traditional funeral. Over time, they may be able to contribute funds to pay for most of a funeral (depending upon the expense of the casket), but they cannot commit to regular monthly payments. Often, payments may be several months apart. A funeral home cannot freeze its prices if the family cannot commit to paying the required price within a specified time.
But, what are the funeral director’s responsibilities with regard to the non-guaranteed payments? Does the funeral director become a guarantor of the payments received on the non-guaranteed contract? This is one of the ‘lesser’ issues in the IFDA master trust controversy.
Last October, the IFDA included the following explanation on their website:
Non-guaranteed contracts are subject to the ups and downs of the market – like many other investments. Their principal is protected by the funeral director who sold them the “non-guaranteed” preneed policy.
Today, the IFDA website is a bit less forthright about the non-guaranteed contract:
The very nature of a "non-guaranteed" preneed contract is earnings are not guaranteed, but the amount of principal paid by the consumer is protected. The value of non-guaranteed contracts is determined at the time of need and any paid principal is a deposit toward the final cost. If there are any earnings in the Trust investments, those earnings are credited toward the final purchase price. But if there are no earnings, the amount of principal paid is still protected by law and applied on behalf of the consumer to the final purchase price.
Unless the non-guaranteed payments are invested separately in government-backed securities, the consumer will ride with the funeral home in the ups and downs of the market. To suggest the consumer will at least get his deposits means that the deficit has to be funded out of the trusts assets, at the expense of the guaranteed contracts.
Last summer, the Missouri Funeral Directors and Embalmers Association made a POD/bank account proposal during the state’s reform hearings. While the proposal has merit, state attorneys were quick to point out that POD bank accounts cannot be excluded from a consumer’s assets for qualification testing. In other words, you need an irrevocable trust for spend down purposes.
Greed
Funeral directors who rejected NPS’ promises may feel justified in criticizing those who are asking for help. Generally, their criticism is that NPS exploited funeral directors’ greed. With regard to some trust rollovers, that may be true. But, what NPS best exploited was funeral directors’ desire to devote their time to the service of families rather than preneed.
NPS grasped that many funeral directors felt the need for a proactive preneed presence, but did not have the time, resources or inclination to establish their own program. NPS offered to take care of all the details, with at-need prices to boot. Hindsight is 20/20, but funeral directors should have asked questions and requested documents. But what questions?
Perhaps as an acknowledgement that competition is forcing members to use proactive preneed programs, the NFDA has issued guidelines for evaluating preneed insurers and preneed trusts. During the months that followed the Clayton Smart and Robert Nelms arrests, the NFDA drew criticism for its failure to provide leadership in addressing the growing preneed scandal. Some of the more stinging criticism came from the association’s smaller cousins.
These critics rarely address the elephant in the room: our fragmented, state-based approach to preneed regulation. The New York Funeral Directors Association has an excellent consumer protection statute to work with, but you can’t judge other trade associations without looking at their laws. And, the NFDA has to consider all fifty states when it issues policy guidelines.
If the NFDA’s Guidelines For Evaluating Preneed Trusts seems general and vague, it is because those 50 states’ laws differ substantially, many of which are poorly written. Preneed laws are often compromised efforts that include purposeful ambiguities. Those ambiguities can come back to haunt us years later when a new appointee fills the regulator’s chair.
The NFDA’s task is made even more difficult when suggesting questions that will be asked of member’s state association master trust. But the times demand action.
Taking the NFDA Preneed Trust Evaluation a step further, funeral directors should also request certain documents regarding prospective program sponsors.
From state regulators, determine whether audits are performed of the program. If so, request the most recent audit report. Also inquire whether there have been any disciplinary proceedings during the past three years. Open investigations may be subject to confidentiality requirements, but closed proceedings may be subject to open records requests.
From preneed program sponsors, request the three cornerstone documents: the master trust agreement, the participation/provider agreement and the preneed contract. Determine from the program sponsor whether applicable state law authorizes collective trust investments, and if so, request the sponsor’s guidelines for unit pricing and income/expense allocations. Also request a breakdown of the trustee/administration expenses by: custodial services, fund management, sub-account administration, audit and tax return preparation and reporting. If the master trust utilizes insurance products, request a written explanation of the product’s taxation.
As IFDA members are learning, preneed due diligence is an ongoing obligation. Funeral directors must find the time to periodically review their preneed program by asking the right questions, and getting the answers in writing.
It didn't take long for an Illinois funeral director to confirm that IFDA members have disagreements with their association leadership.
Several Illinois funeral homes filed a lawsuit in Cook County Circuit Court on January 28th. The petition, a derivative complaint, seeks remedies and damages on behalf of all Illinois funeral homes that participated in the IFDA master trust. Various IFDA officers, board members and agents are named the defendants. The defendants include Merrill Lynch, in its capacities as an advisor to the IFDA.
The Derivative Complaint asserts facts that indicate the IFDA not only concealed critical information, but mislead funeral directors and consumers. However, the Complaint does not answer the question from my prior post: Who is the seller of the IFDA preneed contracts?
Page 20 of the Complaint approaches the issue with a discussion of "Participating Member Firm Agreements", but ultimately sidesteps the question and its legal ramifications.
Last October, the Illinois Funeral Directors Association posted some “Frequently Asked Questions” on their website. The FAQ page was intended to address questions and concerns raised by funeral directors and consumers about changes being made to the IFDA Master Trust. Page 6 of that FAQ was addressed to the Illinois families that had purchased an IFDA preneed contract, advising that “consumers should feel perfectly confident” in those contracts, and that “guaranteed preneed contracts are guaranteed to provide services in full”. With regard to non-guaranteed contracts, the IFDA represented that the contract’s “principal is protected by the funeral director who sold them”.
If the Class Action Complaint filed last November is an accurate barometer of consumer confidence, the IFDA leadership missed the mark with the public that it’s members serve. Documents also suggest that IFDA leadership has been less than candid with the funeral directors they have pledged to serve.
The current IFDA website offers an explanation that suggests cooperation with regulators, and the presence of financial circumstances that caught everyone off-guard. For consumers, the IFDA offers assurances to the preneed purchaser that the transition will have “very little, if any, impact on them because both ‘non-guaranteed’ and ‘guaranteed’ preneed contracts contain protections for consumers”. The IFDA represents the following:
In the case of “guaranteed” preneed contracts, Illinois law clearly states those contracts are guaranteed and funeral directors are to provide those services in full.
The message to funeral directors is that they must service these contracts regardless of what is in trust to pay them.
Time to step back and look at theIllinois law and the IFDA preneed contract.
The requirements of guaranteed preneed contracts are set out in 225 ILCS 45/1a-1. Pretty typical of the provisions imposed by other states, but not quite consistent with the IFDA representation. In general, there are two promises made through the guaranteed preneed contract: the purchaser promises to timely pay the sales price according to the contract’s terms, and the contract seller promises not to charge the purchaser any additional amounts for the goods and services described in the contract at the time of the beneficiary’s death.
When the preneed seller and the preneed provider are the same party, the funeral home is on the hook to service the contract regardless of how well the trust performs. But, the funeral home’s legal obligation to perform a preneed contract becomes more complicated when a third party seller is involved. Illinois law authorizes third party preneed sellers so long as disclosures are made in the preneed contract. The $264 million question: the who is the seller of the IFDA preneed contract?
The IFDA has probably used different versions of a guaranteed preneed contract form over the years, but a 2006 form provides clear definitions of “Trustee”, “Provider”, “Purchaser”, “Beneficiary”, and “Depository”, but no definition of “Seller”. There is a single reference to Seller, where the Purchaser is required to acknowledge an explanation of the contract. The context of that provision would suggest the funeral director is the seller. However, Paragraph 15 of the contract muddies the waters.
Per Illinois law, preneed sellers are allowed to retain a portion of the purchaser’s payments. Paragraph 15 is intended to authorize the retention of such amounts, but references the “Trustee, Provider and Depository”. Which one of these entities is the seller? (We can probably rule out U.S. Bank Corp.)
Without the benefit of the agreements and documents that may exist between the IFDA and its member funeral homes, the answer may be reflected by conduct and the application of the Golden Rule. Not that Golden Rule, but rather: he who has the gold, rules.
This would not be the first time an association’s leaders placed control of its master trust above the interests of consumers and its members. The Minnesota Department of Health had such an experience. That association even challenged regulatory orders for the dissemination of information to funeral home members. In the end, the association was forced to enter a Stipulation and Consent Order, and to provide information to its members. Individual funeral homes also signed consent orders that allowed them protect the consumers by assuming control of the trust funds sold in their name.
Resolving the problems of the IFDA Master Trust will be far more difficult than following the Minnesota example. If the $160 million of life insurance held by the master trust is key man insurance, the IFDA’s valuations need to factor in the proper tax consequence. Hopefully, the IFDA board members purchased some errors and omissions insurance coverage at the same time they purchased those key man policies.
If the IFDA and its membership are in a dispute over the management of the master trust, the Illinois Comptroller holds the key to breaking the logjam.
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