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

According to Wikipedia,

Regulation is "controlling human or societal behavior by rules or restrictions." Regulation can take many forms including legal restrictions promulgated by a government authority…….

So, regulators are charged with the task of interpreting “legal restrictions” and determining what businesses can or cannot do. When the applicable law is well drafted, and further defined by regulations, a business has the means to research compliance and develop appropriate practices and procedures. A business may only need to seek regulatory approval when implementing a novel practice. In the context of Securities regulation or ERISA, procedures exist for businesses to seek written guidance before implementing a new practice. But, as California funeral directors have found out, that is not the case with preneed regulation.

The dispute between the California Funeral Directors Association and the DCA’s Cemetery and Funeral Bureau was widely reported when allegations of mismanagement and lost funds were made. In typical fashion, the Bureau set out its findings regarding the Master Trust. The Association’s administrative subsidiary (the “FDSC”) responded. The Bureau was not satisfied, and a war of written responses ensued. Frustrated with the Bureau, the FDSC has now filed for an injunction. (For a detailed explanation of the situation, click here for a recent Memorial Business Journal article.*)

The FDSC would seem to be asking the Bureau to step out of the traditional regulator’s box, and discuss some practical approaches to the issues. We’ve heard your positions and criticism, but tell us how to reconcile these dated, and somewhat disjunctive, code sections, and apply that to today’s facts and circumstances.

History has a way of repeating itself. In 1988, after years of audits, the IRS decided to force a universal method of income reporting on preneed trusts by issuing Rev. Rul. 87-127. Other than terminating reporting methods that it found objectionable, the Service hadn’t given much thought to whether the industry could comply with the new reporting requirements. Nor did the Service think to provide compliance procedures. For more than eight years, the industry struggled to find a way to comply with the grantor reporting requirements. (Some funeral directors are still struggling today.)

If effective preneed reform is the goal, death care regulators need to do more than inform operators what they cannot do. These laws tend to be ambiguous, and regulators need to participate in the process of finding workable solutions.

*Reprinted with permission from the November 18, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

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California funeral directors face a September 13th deadline that could have substantial financial consequences, including the repayment of trust distributions.

A July 1st letter sent by the California’s Cemetery & Funeral Bureau to funeral homes in the California Master Trust outlined the regulator’s rejection of the Association responses regarding the Master Trust audit. An impatient Bureau gave funeral directors 3 weeks to respond. That deadline was quickly extended to August 11th. Then the week before the August 11th deadline, the Bureau granted another extension to September 13th.  On the eve of the deadline, there is nothing on the Bureau's website to suggest another extension is in the offering.

The Bureau is demanding several significant changes to be made to the administration of the California Master Trust. But one demand that may prove problematic for the Association will be the Bureau’s demand that funeral homes repay to consumers’ trusts the administration fees that have been paid out over the years. The Bureau has rejected the Association’s proposal for prospective procedures to document the fees.

Within the past year, Nebraska preneed sellers were also called upon to replenish trusts for the method in which income taxes were paid. The Nebraska examinations also went back several years, and involved substantial amounts.

With new reporting requirements, Missouri funeral homes will also have to explain trust and joint account shortages. Some Missouri funeral directors have failed to appreciate how Missouri law distinguishes between trusting and joint accounts. Missouri’s old preneed law allowed sellers who used trusts to retain 20% of the consumer’s payments, and to withdraw income (subject to the mark to market) requirement. Those provisions don’t apply to joint accounts. With regard to the new Missouri law, sellers also need to grasp that the 10% sales expense is permitted only with regard to trust contracts that are guaranteed. With regard to Pre-SB1 trusts, sellers could be held accountable for income, taxes and expense distributions that cause the trust to drop below aggregate deposits.

Illinois preneed sellers have a similar limitation on their claim to the 5/15% permitted under their preneed law. While the lawsuits that have embroiled the IFDA claim about 1/3 of the master trust’s contracts were non-guaranteed, it’s not clear the funeral homes made that distinction when claiming their ‘administrative fee’.

For those funeral directors who participate in a master trust, the California drama is worth watching. While the Association is crucial to negotiating a resolution, the Bureau has taken its fight to the individual funeral homes. Will other state’s regulators follow suit?
 

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Who do you turn to when grass isn’t being cut, or the grave marker falls over? Or, who can approve the transfer of the ownership of my mother’s grave space? 

Ultimately, the answer depends on who owns the cemetery. But, determining who owns the cemetery can often prove confusing to both the public and the cemetery regulator. 

A recent Manteca Bulletin article about the ‘friends’ of the East Union Cemetery would seem to be just another story about a pioneer cemetery that has no funds for care and maintenance. But a closer examination suggests a situation where concerned citizens signed on to serve on a cemetery association board without understanding the accompanying responsibilities. 

East Union Cemetery is located in Manteca, California, a community of 50,000 that is located 80 miles east of San Francisco. As with most “public” cemeteries, East Union Cemetery is required by state law to file reports for authority to continue operations. But apparently, East Union Cemetery failed to file those reports a few years ago and the California Cemetery and Funeral Bureau began to send out notices.   When no one responded, the state began to investigate, and issues of ownership, missing funds and accountability began to surface. 

News reports indicate the cemetery had an endowment fund of $800,000 as recently as ten years ago. But then, one member was accused of embezzling funds and the cemetery association board membership dwindled down to two members. 

With the state still conducting its investigation, Manteka’s citizens responded to the situation by forming a new and expanded cemetery association board. However, reports and regulator press releases suggest that the new board may have exceeded its authorities in the zeal to address the cemetery’s needs. Subsequent to the appointment of the new board, the state seized the cemetery’s remaining funds and submitted a proposed agreement to the cemetery association. Shocked by this turn of events, the new board resigned, and pointed a finger at the cemetery regulators. 

The facts suggest the cemetery association board did not appreciate the laws governing cemetery care funds. It may be that the new board followed a course of action that had transpired over the past ten years. Endowment care (or perpetual care) funds are intended to provide income to subsidize the cemetery’s maintenance expenses. Most states’ cemetery laws prohibit the fund fiduciary from invading principal to meet the cemetery’s needs. 

The California Cemetery and Funeral Bureau is caught between a rock and a hard spot. Well-intended citizens stepped up to a situation that demanded attention, but acted without knowing the rules.   The Bureau’s press release and Q&A posting help tell its side of the situation. 

Individuals who have an interest in serving on a cemetery association board need to appreciate the responsibilities that accompany that service.   Those responsibilities will be defined in part by the association articles and bylaws, applicable state cemetery laws and the agreements and documents that bind the association.   As witnessed by a lawsuit filed recently in Brooklyn, New York, those legal documents have life beyond the grave. 

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