Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

The MFT Complaint: A Sham Seller

Posted in Compliance, Exams/audits, Missouri - SB1, Recordkeeping, Uncategorized

In paragraphs 53 through 71 of the MFT Complaint, the State Board sets out certain duties that only a licensed Missouri preneed seller may perform.  The Complaint asserts that these seller duties are either being performed by the funeral homes that contract to be ‘providers’ with the MFT, or by Eagle Bank as trustee for the MFT. In essence, the State Board is arguing that the MFT is a sham seller.

Many business organizations transact through agents, but the Complaint asserts that, per the provider agreements, the funeral homes are not agents of MFT.  We can’t help but think that the State Board has misstated this issue.  The funeral homes are the point of sale for MFT contracts, and are collecting funds from consumers.  The funeral home are acting in some form of an agency capacity when preparing contracts and forwarding consumer funds.  But, if the State Board is given the benefit of the doubt, this problem could be remedied with an amendment to the MFT provider agreement.  If funeral homes are unwilling to assume an agency relationship, the State Board could easily bring disciplinary proceedings against the funeral homes for performing seller functions without a license.

The risk to the MFT in establishing agency relationships with each funeral home provider is that it assumes responsibility for the agent’s compliance with Chapter 436.  One funeral home’s refusal to comply could jeopardize the MFT’s seller license, and all those funeral home providers who rely upon that license.

With regard to the MFT trustee, the Complaint states the MFT has delegated all of its duties to Eagle Bank.  As between a preneed seller and the trustee, there will be some overlapping administrative duties.  A trustee could well agree to assume all administrative functions regarding the acceptance of contracts and funds, and the distribution of trust funds directly to funeral homes and/or consumers.  But, the delegation of such functions is typically set out through an administration agreement between the seller and trustee.  Fiduciaries customarily require administration agreements to limit their liability exposures.  The Complaint does not describe the agreements that exist between the MFT and its trustee.   Nor does the Complaint offer whether the MFT has provided Eagle Bank written policies and procedures.  Such documents would evidence the oversight needed to overcome the sham allegation.

The MFT Complaint: Rollovers and Sellers

Posted in Administration, Exams/audits, Missouri - SB1, Recordkeeping

In our prior post, we looked at Paragraphs 39 through 52 of the Complaint filed against the Missouri Funeral Trust, and the implications of Missouri’s Common Trust Fund law.  In this post we will look at paragraphs 79 through 95 of the State Board Complaint, and what exposures rollover funeral homes could have.

The Complaint asserts that the MFT has denied that it is the seller of some, or all, of the preneed contracts rolled over by funeral homes that they had sold prior to 2009.  The Complaint alleges that the rollover funeral homes informed the State Board that they were relieved of the seller duties when MFT assumed the seller functions, but that neither the funeral homes nor MFT have provided the State Board any “rollover” agreement.

These sections of the Complaint suggest to us that the MFT may have entered into an administrative arrangement with funeral homes that had been their own seller under Missouri’s prior Chapter 436.  We anticipate that MFT then became the funeral homes’ seller for preneed contracts sold subsequent to August 2009.  MFT has asserted from time to time that seller responsibilities created under SB1 could not be applied retroactively to funeral homes that were never sellers under the new law.  Accordingly, the Complaint seems to be taking issue with that position, and seeking to discipline MFT for misrepresenting the law’s requirements to funeral homes.  If MFT were to be wrong about this issue, the State Board could bring disciplinary proceedings against each rollover funeral home for failing to obtain a seller’s license.

The MFT Complaint: Rollovers and Common Trust Funds

Posted in Administration, Investments, Recordkeeping, Reporting

In paragraphs 39 through 52, and paragraphs 79 through 95, of the Complaint filed against the Missouri Funeral Trust, the State Board of Embalmers and Funeral Directors raises issues with regard to the preneed trusts that were transferred by funeral homes to MFT.  The re-write of Missouri’s preneed law in 2009 provided the MFT an opportunity to invite funeral homes to rollover their existing preneed trusts into the MFT program.  But in paragraphs 39 through 52, the State Board alleges that MFT cannot accept other funeral homes’ preneed trusts without assuming the seller responsibilities under Missouri law.  The Complaint alleges that MFT has denied being the ‘seller’ of rollover contracts, and that Chapters 333 and 436 prohibit the commingling of sellers’ trusts within the MFT trust.  To recharacterize the Complaint’s allegation, the State Board is asserting that Missouri law prohibits a common trust fund where the assets of contracts from multiple sellers are commingled in the same trust.

In making this argument, the State Board must anticipate the MFT countering with language from the old law that was omitted from SB1:

Payments regarding two or more preneed contracts may be deposited into and commingled in the same preneed trust, so long as the trust’s grantor is the seller of all such preneed contracts and the trustee maintains adequate records of all payments received.

Section 436.021 authorized a trustee to pool a single seller’s preneed contracts for investment purposes, but precluded the trustee from pooling the assets from other sellers’ preneed contract assets in the same trust.  The probable reasoning for this restriction was that while common trust fund accounting is relatively complicated, a seller would need to pool consumer payments for investment efficiency and diversification.  When limited to a single seller, who probably had the same rule with regard to income distributions, accounting for multiple consumer accounts could be relatively easy.  But, when multiple sellers were added to the equation, the common trust fund requirements would make preneed contract accounting too difficult.

Initially, Senate Bill No. 1 included language that eliminated the single seller restriction:

  1. Payments regarding two or more preneed contracts may be deposited into and commingled in the same preneed trust, so long as the trustee maintains adequate records that individually and separately identify the payments, earnings, and distributions for each preneed contract.

However, that language was omitted from the bill that eventually re-wrote Chapter 436.  Consequently, Chapter 436 does not have language which either prohibits or authorizes the commingling of multiple sellers’ contracts within a single trust.  In the absence of an express prohibition, the MFT can argue the pooling of multiple sellers’ contracts is contemplated by Section 362.580, Missouri’s Common Trust Fund statute.  This is a fairly typical CTF statute, and without much commentary because state chartered fiduciaries that offer common trust fund services fall under the jurisdiction of the Federal Deposit Insurance Corporation.  Federally chartered fiduciaries’ CTF activities are supervised by the Office of the Comptroller of the Currency.  Both Federal agencies apply 12 CFR 9.18.  If the MFT trustee can show compliance to the FDIC, the program could prevail on this issue.  The following hyperlink will open the FDIC’s Trust Examination Manual.

However, it does leave open the question whether the transferring funeral homes are still on the hook for maintaining the seller licenses.

The MFT Complaint: Assumption of Duties of a Prior Seller

Posted in Exams/audits, Missouri - SB1, Recordkeeping

In Paragraphs 35 through 38 of the Complaint filed against the Missouri Funeral Trust, the State Board of Embalmers and Funeral Directors seek discipline against MFT for its inability to produce copies of contracts sold by a funeral home that transferred its trust to MFT.  The original seller funeral home apparently amended several of its preneed contracts, and did not retain the original contracts.   The Complaint asserts that because the MFT trust holds the assets of those preneed contracts, MFT has assumed all of the “seller” responsibilities of the funeral home.  Paragraph 38 also states that the MFT did not have an agreement with seller funeral home regarding the administration of the assets held for the preneed contracts.

The allegations made in this part of the Complaint are a lead in to what may be the strongest argument of the Complaint: rollovers.  The re-write of Missouri’s preneed law in 2009 provided the MFT an opportunity to invite funeral homes to rollover their existing preneed trusts into the MFT program.  The Complaint suggests that these rollovers were not documented.  We’ll look at the rollover issues in our next post, but the missing contract allegation has ramifications for any seller that takes over the trust of another funeral home.

When there is an acquisition between two funeral homes, Section 436.500 requires approval be obtained with regard to the outstanding preneed contracts of the acquired funeral home.  The section requires notification that includes:

(1) A notarized and signed statement from the person assuming or agreeing to assume the obligations of the seller indicating that the assuming seller has been provided with a copy of the seller’s final annual report and has consented to assuming the outstanding obligations of the seller;

(2) In lieu of the notarized statement required by subdivision (1) of this subsection, the seller may file a plan detailing how the assets of the seller will be set aside and used to service all outstanding preneed contracts sold by the seller;

In years past, the State Board had taken the position that the assumption form contemplated by subparagraph (1) required the acquiring funeral home to make good on all seller responsibilities, including funding deficiencies of the prior funeral home.  But, under subparagraph (2), the acquiring funeral home can limit its duties with a plan that sets out how the assets are to be administered, and how the preneed contracts are to be serviced.

In the absence of a written plan, the State Board seeks to hold the MFT accountable for the prior seller’s record keeping responsibilities.  Missouri funeral homes need to pay heed, and use the “plan” option of section 436.500.

Missouri HB 596: Messages Received?

Posted in Exams/audits, Legislation, Missouri - SB1

The legislation that would have converted the Missouri State Board of Embalmers and Funeral Directors from an industry board to a consumer board did not get to a vote on the floor, but got further than most expected.   Seeking to make the State Board more responsive to preneed consumers, Rep. McGaugh’s efforts got an unexpected boost from the Missouri Funeral Directors and Embalmers Association.  Taking a flyer on HB 596, the Association provided its backing in exchange for amendments that would transfer preneed exam powers from the State Board to the Division of Finance.  The MFDEA advised its members that the industry had lost control of the examination process.

In the end, the Association’s backing of HB 596 did not prove enough and Governor Greitens will eventually fill the three vacant Board chairs.   If both of HB 596’s messages are taken to heart,  the State Board should reevaluate its preneed exam procedures and goals.  The exam process needs to be more efficient, and provide better consumer protection.

MFT Complaint: Canceled and Performed Contract Accounts

Posted in Exams/audits, Missouri - SB1, Recordkeeping

The next claim made in the Missouri State Board Complaint against the Missouri Funeral Trust is that the program is holding funds for preneed contracts that have either been serviced or canceled.   The Complaint cites Section 436.456 as legally requiring the MFT trustee to distribute an account’s funds when it receives documentation that the contract has been canceled or performed.

Based on personal experience, we suspect that funeral homes are deferring distribution requests from the MFT trust.  With banks paying low interest rates, funeral homes are probably getting a better return on their MFT account than what they would get when depositing the distribution at the local bank.   Funeral homes will even front the refund owed a consumer on preneed contract cancellations.

Putting aside the requirements of Section 436.456, a problem with the practice of deferring trust distributions is that funeral directors forget about these accounts.   These accounts can become a source of litigation when the funeral home changes ownership and the prior owner failed to withdraw the accounts before making representation and warranties in the sales documents.   The new owner will view those accounts as assets of the business.

From the regulator’s point of view, the practice makes auditing more difficult.

MFT Complaint: Insurance Contract Records

Posted in Compliance, Exams/audits, Missouri - SB1, Recordkeeping

Paragraph 26c of the Complaint filed by the Missouri State Board of Embalmers and Funeral Directors alleges that the Missouri Funeral Trust fails to maintain “records regarding the insurance policies for insurance funded preneed contracts….”  We suspect this claim may be directed at a practice where the MFT trustee has accommodated funeral homes that have been “assigned” insurance policies in a spend down situation.  Funeral homes in both Illinois and Missouri have made similar requests of our client banks.  However, we routinely advise our client banks from accepting such arrangements because of several potential compliance issues, including recordkeeping.

Other than the prohibition of term life insurance, Missouri’s Chapter 436 does not offer guidance to a preneed trustee that accepts insurance policies or annuities.  Accordingly, it becomes incumbent upon the seller and the trustee to define the fiduciary duties of the bank, and consumer contracts would need to be consistent with the trust agreement.

As with some of the prior allegations made against the MFT, this issue is one that can be remedied with the appropriate agreements and documents.

The MFT Complaint: Principal in Excess of the Preneed Contract

Posted in Compliance, Exams/audits, Missouri - SB1, Recordkeeping

Paragraph 26b of the Complaint filed by the Missouri State Board of Embalmers and Funeral Directors alleges that the Missouri Funeral Trust fails to maintain “records that explain why the principal held in trust exceeds the face value of the preneed contract associated with that account…”  We anticipate that this claim is considering the contract reports provided by the MFT trustee, and that the bank’s accounting system is reporting principal as opposed to deposits or corpus.  The principal reported by the bank accounting system would include consumer deposits plus realized net income.  This is a typical feature of preneed accounting programs that use tax cost basis as the account’s “value”.  For paid in full consumer contracts, the principal could eventually exceed the contract sales price when income is accruing to the account.  If the bank’s preneed accounting system can track consumer deposits, this could be an issue that is easily remedied.

But, another cause for accounts that have a “principal” amount in excess of the preneed contract sales price is the spend down situation where the public administrator continues to add funds to a contract that is already paid in full.  This is a situation where the funeral home needs to document the transaction with a contract addendum.

Preneed Shortfalls: Extended Installment Options

Posted in Preneed Shortfalls, Price Protection

For consumers who need installments to pay for their preneed arrangement, funeral directors report that the $100 monthly payment is the comfort threshold for most individuals.   For a widow planning her own funeral, the $100 monthly payment will require an installment term of six years or longer.  If the widow needs to also cover an interment space, vault, marker and services, the installment term will be pushed out to ten or more years.

In a prior post we explained how a deficiency between preneed investment returns and performance cost increases will exacerbate preneed shortfalls when the consumer pays with installments.  But, funeral homes suffer preneed shortfalls even when the investment performance keeps track with performance cost increases.   If a 70 year old widow purchases a $7,500 funeral arrangement with a monthly payment of $100, six years is required to pay the preneed contract.  Until the contract is fully funded at the end of the sixth year, the trust must earn more than the funeral home’s performance costs to keep pace.   The Social Security’s life tables indicate that the 70 year old widow will live another 16 years.  As the attached spreadsheet shows, that same funeral will cost $12,154 in 16 years.  But the funeral home’s preneed trust will have only grown to $11,184.  So when the funeral home’s performance costs and preneed trust both maintain the same 3% rate, the funeral home will have a shortfall of $970 when the contract is performed.  If instead, the funeral director’s performance costs rise at a higher rate than his preneed funding, the 72 month installment contract will result in a shortfall of thousands of dollars.

For funeral homes using insurance funding, the shortfall will often be worse.  Funeral homes have been trained to believe insurance is the best funding option for consumers who need the installment option.  We will look at the insurance option from the consumer’s perspective in a future post to explain why insurance contracts have a higher rate of lapses.

The MFT Complaint: Records and the Administration of Consumer Funds

Posted in Exams/audits, Recordkeeping

The next issue in our review of the MFT Complaint concerns the State Board allegation that the MFT fails to maintain adequate records to document how much consumers have paid and that the proper amounts were deposited to trust.   In subsequent sections of the Complaint, the State Board asserts that the MFT in some instances collected and deposited consumer funds in excess of the purchase price of the consumer preneed contract.  In other instances, MFT records reflect consumers have far less in trust than what Chapter 436 requires.   So, the State Board seems to be asserting that the MFT lacks sufficient records and reports for establishing an audit trail that would confirm proper administration of consumer funds.

We do not see how a single record could be create that covers all aspects of the administration of consumer funds.  Many funeral homes issue a receipt to consumers when cash or a check are received.  But a receipt cannot reflect whether the consumer funds were deposited to trust.   Sellers can create a report that documents both the receipt of funds and the transfer of those funds to the trustee.   But, the trustee would then have to create a corresponding record or report of the receipt of such funds, and whether any amount of such funds were then reimbursed back to the seller for sales expense or origination fees.   A series of records and reports are needed to create an audit trail.