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

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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While the reasons are open to debate, it is common knowledge within the funeral industry that a small percentage of consumers cancel their preneed contracts. Consequently, some funeral directors tend to view their preneed block of business with a degree of certainty. Performance of the contracts, and recognition of the revenues, seems to be just a matter of timing. A few state laws reflect the perception that performance of the preneed contract is a ‘lock’. For 37 years, Missouri law allowed preneed sellers to withdraw trust income. Nevada’s law has similar provisions. Preneed trust income became a source of funds that could subsidize funeral home operations.

While the preneed subsidy had long been a source of frustration for certain Missouri officials, they were powerless to stop the practice until the failure of National Prearranged Services. With the 2009 passage of Senate Bill No.1, Missouri officials feel they have a law that they can use to force a new business model upon the funeral industry.

In the case of the California Master Trust, the Department of Consumer Affairs has taken a similar position with regard to an administrative fee that has been paid to participating funeral homes for decades. Consistent with the historic industry view, the CFDA response relies in part upon the preneed guarantee and the risk assumed by the funeral home.

The position becomes tenuous when the administrative fee is judged on terms of whether a necessary service has been rendered to the trust, and whether the amount paid is reasonable for the services received. It is apparent from the documents that the DCA will also apply that analysis to what the CFDA has charged the trust. Depending upon how this controversy is resolved, other states’ regulators may ask whether the administrative fees charged to the master trust are appropriate.

As a recent Funeral Service Insider comment suggests, some industry associations have also become dependent upon the preneed subsidy. The classic guaranteed argument loses traction when facts such as those in Illinois emerge. By one account, non-guaranteed preneed contracts accounted for one third of the contracts administered by the IFDA.

But, in defense of the CMT, preneed trusts are labor-intensive enterprises where the funeral home, administrator and fiduciary have shared responsibilities. In its challenge of a different CMT issue (the maintenance of preneed records within California), the DCA acknowledges this reality while discussing the funeral home’s recordkeeping duties. Effective field examinations will require that certain preneed records be maintained at the funeral home. But, is it reasonable to impose greater administrative requirements on the funeral home without allowing any compensation to be paid to them?

The emerging regulatory challenge to the preneed subsidy is premised on the position that the funeral home’s right to preneed funds does not vest until the contract is performed. That position is consistent with Missouri’s efforts to improve portability. But, regulators must also find a consistent and reasonable position with regard to the services that they mandate from the funeral home. 

(The Funeral Service Insider excerpt was included by special permission from Kates-Boylston Publications and Funeral Service Insider.)

 

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In contrast to how the IFDA situation was handled, the California Department of Consumer Affairs has taken a public approach to disclosing its issues with the CFDA’s master trust by posting its website an audit report and the Association’s reply.

The DCA is unhappy with the Association, and the master trust fiduciary, with regard to (among other things) the fees that have been charged to the trust, the authorities that have been delegated by the fiduciary, and their refusals to respond to certain audit inquiries and document requests.

The audit report reflects a very literal interpretation of the applicable California laws. A close reading of the report should leave one scratching his/her head on a few of the issues (hint: corpus issues). But, auditors have no choice but to apply the laws that are applicable to the entity under examination, and unfortunately, the California preneed law and rules are dated and disjunctive.

For those who summarily advise that the audit report and the DCA actions reflect yet another example of a preneed program gone bad, that is not the case.

The DCA website includes the April 29th response from the law firm representing the Association. I doubt the attorneys knew that the letter would end up on the DCA website, but the reply is very illustrative of the issues that exist with a dated, and ambiguous, law. While the Association has made some serious missteps with regard to some of the law’s ambiguities, the auditor’s interpretations of the law and its requirements are inconsistent or unreasonable in some respects. Accordingly, the DCA would be well advised to accept the offer extended in the “Conclusions” on page 46 of the reply.

The crucial issues raised by this dispute are relevant to all master trusts, and will be addressed in future posts. Hopefully, the DCA will continue to make the discussions and eventual resolutions public so that death care regulators and preneed program administrators can take note.
 

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