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

As discussed in prior posts, the Missouri preneed audit process begins with a notice to the preneed seller for the production of documents and data. After a review is made of the documents, data and the annual reports filed with the State Board, an on-site examination is scheduled with the seller. Most Missouri preneed sellers are unsure of what to expect. To an extent, Missouri has borrowed from the Texas Department of Banking examination manual in developing preneed audit procedures. However, Texas has the benefit of years of reporting and exams. Missouri is playing catch up, and the desk audit of the seller’s documents, data and annual reports are the State Board’s first in depth look at how funeral homes have structured their preneed programs.

SB1 made substantial changes to Missouri’s trusting requirements, and one purpose for the desk audit is to determine if the seller’s preneed contract form and trust agreement are compliant. But, the desk audit will also be used to match trustee reports to outstanding contracts, and determine whether the proper funding has been maintained.

For the State Board examiners, the first look at a seller’s records includes all outstanding preneed contracts. Missouri’s first preneed law was written in 1965, and some funeral homes have contracts dating back that far. Consequently, the initial desk audit could be a lengthy process for Missouri’s larger funeral operators.
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The Texas preneed regulator may have left some consumers scratching their head. On September 16th, the Department of Banking issued a press release that a cease and desist order had been issued to prohibit a Lubbock funeral home from selling trust-funded prepaid funeral contracts. But, a Lubbock newspaper reported comments from the Department of Banking that the funeral home could still sell insurance-funded prepaid funeral contracts. So, how is the funeral home can sell one form of preneed but not another?

With insurance-funded preneed, the funeral home typically acts as an agent for the insurance company. The insurance company provides a preneed contract form, and establishes procedures regarding the administration of premiums. The insurance company also provides consumer statements and regulatory reports. Essentially, the funeral home has a minor role in the preneed transaction once the insurance application is completed.

With trust-funded preneed, funeral homes either act as their own ‘seller’ or they contract with a third party sales organization. In many states (such as Missouri), the state association master trust is a third party seller and assumes the seller’s compliance responsibilities. Those responsibilities include contract compliance (preneed contract form and trust agreement), consumer payment accounting, trust allocations, recordkeeping, and regulatory reports.

Apparently, the Lubbock funeral home acts as its own seller. DOB auditors cited the funeral home for poor recordkeeping, and the failure to deposit consumer payments. There is nothing in the press release (or news article) to suggest the funeral home was guilty of any criminal act or that preneed funds are missing. It is quite possible the funeral home’s inadequate records contributed to its failure to make the required deposits.

The funeral profession is on call 24 hours a day, seven days a week, and providing service to families comes before everything else. And, for many funeral directors, preneed compliance is an intrusion on the time that should be devoted to families.

But, regulators are warning that if the services offered to families include trust-funded preneed, the funeral home cannot push the preneed paperwork into the bottom drawer.
 

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In terms of the toxic NPS fallout, Texas ranks a close second to Missouri.  In response, the Texas Department of Banking has released a legislative proposal aimed at closing what it perceives are the loopholes in Chapter 154 of the Texas Finance Code. 

To facilitate discussion of the issues with death care operators, insurance companies and fiduciaries, the Department of Banking released an Explanation of Intent of Proposed Changes.   A few of the DOB issues include:

• Putting cemeteries on notice that they could be defined as a "funeral provider".
• The seller/permit holder must exercise reasonable controls over contract administration.
• The elimination of third-party preneed sellers.
• A minimum net worth of $100,000 for permit holders.
• A standard information brochure that covers both forms of funding.
• Income allocation requirements for non-guaranteed items.
• Distribution documentation.
• A new guaranty fund.

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