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

Here in the Midwest, the death care industry is just beginning to experience the increase in preneed reporting and oversight. Some funeral directors are already frustrated with the new requirements, and are biding the time to when they can vent towards the preneed regulator.

Over the past 4 years, state agencies in Illinois, Kansas and Missouri were made to account for their roles in the failures of preneed programs. The replies were very similar: an outdated law tied our hands. There was some truth to those excuses, and state legislatures responded with laws that provide the regulators greater oversight authorities, including expanded examination powers. What rankles funeral directors is that the examinations are aimed at individual operators who had nothing to do with master program collapses.

With the preneed sale originating at the funeral home or cemetery, the on-site examination is a necessary component to effective oversight. However, state regulators struggle with how to conduct an effective preneed examination program. Limited budgets are also requiring the examination process to be efficient.

Illinois stands out from the other two states in that it had audit and reporting procedures in place before its crisis arose. Illinois funeral homes have given diverging descriptions of their audit experiences. Some reported having regular audits, while others report they had never been audited. To better understand the Illinois procedures, I requested a copy of the Comptroller’s examination guidelines. That request was declined with an explanation that such a disclosure may make it easier for funeral homes to circumvent the audit process.

The Illinois audit process failed both the industry and the consumer because the trust procedures contemplate depository funding and relied too heavily upon the tax cost basis of the preneed trust fund. The examination did not incorporate procedures regarding the qualifications of the depository/trustee, the investment of the funds or the fees charged to the funds. A recent conversation with an Illinois examiner suggests that the Comptroller continues to follow the old audit procedures despite their deficiencies.

In contrast, the staff for the Missouri State Board of Embalmers and Funeral Directors has been giving a lot of thought to how the on-site audit should be conducted. Prior to the collapse of National Prearranged Services, the State Board had minimal preneed reporting and examination powers. The examinations conducted this year are the first in 20 years, and recent regulation proposals provide a clue to what concerns the State Board staff have from those initial exams (isolated insurance policies, old contracts, etc).

While the State Board tabled the staff concerns for future discussion, those issues will continue to be reflected in the procedures followed by examiners (and by the preneed seller reports submitted to the State Board). For Missouri preneed sellers, the situation may only add to their frustration. First, there is the uncertainty of what to expect when the examination is conducted. And then, there are the issues raised by the examiner regarding practices that funeral directors may have been following for years.

There is not much that can be done about the frustration that stems from the evolving examination process. The preneed transaction is changing, and regulators will have to adapt their exam procedures accordingly. But the State Board will serve an important role in keeping the examination process focused on the crucial issues. That focus will be defined by the exchange that occurs between the staff and the Board over specific audit findings. These exchanges serve to educate the staff and examiners on the business of the death care industry, which should improve the efficiency of preneed oversight.

As other Midwest states initiate new preneed examination procedures, their regulators must find different ways to ‘learn the business’. Pursuing the wrong issues will only waste precious resources and alienate funeral homes and cemeteries.
 

• Email This
• Print
• Comments
• Trackbacks

The new era of preneed exams and audits got off to a slow start in Missouri, but now there are indications the process is picking up speed.   The first notices of preneed financial examinations went out to sellers last January, and some are now going through on-site examinations.  A second wave of examination notices has gone out, and the State Board has begun preparations for the first examination reports.       

While the examination process will continue to evolve, the process will likely involve the following stages:

• The notice and request for documents
• A desk audit of the seller's documents
• An on-site examination
• An exit interview
• An examination report and the seller response
• (If violations are found) a request for a corrective plan proposal

In our next blog posts, we look at each of the stages in more depth.

• Email This
• Print
• Comments
• Trackbacks

As reported previously in the blog, the State of Nebraska began to implement a preneed contract database in 2010 when master trusts were requested to provide individual contract data in an electronic format. The request was expanded to all preneed sellers in 2011.

Kansas Secretary of State sought legislation in 2010 for the authority to seek individual preneed data from its cemeteries selling preneed. While the KSOS initial effort fell short, a second effort passed the legislature a few weeks ago. Under this new bill, cemeteries will be required to trust preneed sales at 50% of the sales price and to report those sales (together with deposits and distributions) on a quarterly basis.

Illinois has now joined the preneed database club with an amendment made to SB0675. The bill will require preneed contracts to be entered into a database maintained by the Comptroller within 45days of the contract date.

As opposed to the paper report of individual contracts, the preneed database provides the regulator more flexibility in reviewing information and creating contract listings from which to begin audits and examinations at the funeral home or cemetery.
 

• Email This
• Print
• Comments
• Trackbacks

Maybe it’s a response to shrinking state budgets, or the fact that the tracking of preneed funds is becoming more effective, but state and local prosecutors are assuming an expanding role in the enforcement of preneed laws.

While a recent report released by the Missouri State Board of Embalmers and Funeral Directors reflects a drop in the number of preneed complaints that it handled in 2010 (44 complaints after a spike in 187 complaints in 2008 and 127 complaints in 2009), the Missouri Attorney General’s Office reports having handled 887 preneed complaints in 2010. One of those complaints ended with a former Butler, Missouri funeral operator being sentenced to seven years in prison.

As previously reported in this blog, the new Illinois Comptroller responded very quickly to a preneed complaint by referring a funeral home to the State Attorney’s office for prosecution. In 2009, the Kansas cemetery regulator worked with local prosecutors when a Hutchinson cemetery acknowledged that funds were missing from both a preneed trust and a permanent maintenance trust.

Here in the Midwest, a death care operator could go years without an audit. While some states required some form of preneed reporting, there was little evidence those reports were being reviewed. Consequently, the operator who may have had trouble making payroll had little fear of prosecution so long as the preneed contracts were being serviced. That is changing.

Illinois, Missouri, Kansas and Nebraska have implemented (or will implement) new reporting requirements (and in some cases, audits). If trusts are found to be deficient or empty, regulators seem to be more willing to turn the matter over to a prosecutor who has a vested interest in protecting voters with an empty preneed account.
 

• Email This
• Print
• Comments
• Trackbacks

The start of Missouri’s new era of preneed oversight began when document requests were mailed to sellers on January 3rd. Sellers were requested to provide the following documents by January 28th:

· A current statement from your state or federally chartered financial institution’s authorized to exercise trust powers in Missouri of any preneed trust accounts that you have identifying the payments, earnings, and disbursements for each active preneed contract.

· A current statement from any/all applicable insurance companies with which you have insurance-funded preneed contracts for each active preneed contract.

· A current statement from your financial institution/s of preneed joint accounts for each active preneed contract.

· A copy of a ledger or computerized report showing all outstanding preneed contracts.

· Copies of agreement(s) with providers, agents, funeral director agents and if any contracts are funded by trust a copy of the trust agreement with the trustee.

· A copy of the trust agreement with financial institution for any preneed trust.

· A blank preneed contract currently used by you as a seller. 

If a seller established separate trusts for “Pre88” contracts, “Post88” contracts and “SB1” contracts, all trust agreements should be provided in response to the request. If the trustee has contracted for services (whether it be with the seller or with a third party), copies of the service agreements should be included. Sellers should have revised their preneed contracts since the passage of SB1, and so samples of relevant preneed contract forms should be provided.

From the trustee, the financial examiners will expect a report of the trust assets and a transaction report. The asset listing will be used to determine the trust’s compliance with the prudent investor rule, and the transaction report will be used to determine compliance with deposit requirements, distribution documentation and expenses charged to the trust.

Sellers should also anticipate that the financial examiners may request additional documents or reports before scheduling the on-site exam.
 

• Email This
• Print
• Comments
• Trackbacks

With the exception of a few states, each form of preneed funding has its own statutory requirements. Consequently, different contract forms are required for each method of preneed funding. So, what does this mean for the consumer worried about the safety of funds paid to the funeral home or cemetery.

Among the pecking order of contract forms, insurance funded contracts generally tend to be among the more compliant forms. The larger preneed carriers understand that if they are to win the funeral home’s business, the carrier must be able to provide the funeral home with the preneed contract form. When there is a problem with an insurance funded contract, often it is because the agent has chosen the wrong form. For example, the recent law change in Illinois requires new disclosures to be made in the contract form. If the agent pulls an old form, the contract is in violation of SB1682.

In terms of compliance, the trust-funded contract may place a distant second depending on who sponsors the trust (and whether the consumer’s state requires the filing of the preneed contract form). While the national companies (and some state associations) are diligent about having their contracts reviewed for compliance, that has not been the case for many independently owned funeral homes. While state associations are due credit for bringing a higher level of compliance to their state’s contract form, some associations (such as the contract forms used by the IFDA) set a very low bar.

The most suspect of the funding methods contracts is the depository (or self administered) account. With this funding method, the preneed seller is going solo without the assistance of an insurance company, the state association, or even a fiduciary. All too often, the operator assumes a contract is a contract, and ‘borrows’ a contract form from another funding method. Or worse yet, the funeral home uses the FTC at-need goods and services form as the preneed contract.

To prepare for a regulatory examination, sellers need to confirm they are using the correct (and current) contract form. Within each funding folder, the seller should establish a current contract form folder and a historic contract form folder. Similarly, the operator will want to maintain a current GPL and Outer Burial Container price list and a historic GPL and OBC price list folder (going back indefinitely).

While many consumers tend to purchase preneed based on personal trust earned by the funeral director, contract form compliance demonstrates that funeral director’s understanding of the preneed law. Preneed contract form compliance is also the consumer’s protection should the trusted funeral director ever be hit by a bus. The next owner of the funeral home will be bound by the terms of those preneed contracts, not necessarily the oral assurances of his predecessor.
 

• Email This
• Print
• Comments
• Trackbacks

It seems paradoxical to see preneed regulators ramping up audit programs while state budgets are being slashed to the bone. Yet, several I-70 corridor states will soon implement new preneed audit programs.

Missouri’s preneed funeral audits will be funded out of a combination of license fees and preneed contract fees. Missouri’s new cemetery law did not provide for any additional fees to offset the expense of a new reporting system and audits, and so, one most anticipate the state will look to recover from its expenses from non-compliant cemeteries.

Colorado had a modest, but significant, law change: the preneed regulator was granted authority to assess fees against preneed sellers to fund examinations. With a source for funding, new audit procedures have been submitted for approval.

With regard to cemeteries, Kansas quietly promulgated a regulation authorizing a $20 per preneed contract fee. Kansas would like to use a portion of those fees to implement a preneed contract database that would provide data that would be used in cemetery audits.

Nebraska also has plans to implement a new preneed database for auditing master trusts. In the absence of funding legislation, the Department of Insurance must use a carrot and stick approach with the state’s larger preneed sellers. Similar to the Illinois approach, the Nebraska stick would be the assessment of audit expenses against the non-compliant preneed seller. Illinois’ recent preneed law change (SB1682) raised the possible assessment from $7,500 to $20,000. For the preneed seller found to have issues of material non-compliance, the costs of a full audit could cost tens of thousands of dollars. And then there’s the issue of funding up deficiencies. As the Illinois law spells out, the audit penalty cannot be paid out of the preneed trust.

For preneed sellers from Illinois to Colorado, it isn’t a matter of whether there will be exams or audits, but when. For some states, those exams will come sooner than others. Missouri is currently training new examiners, and could well release them on those sellers who miss the October 31st renewal deadline.
 

• Email This
• Print
• Comments
• Trackbacks

Several states have passed laws in the past few years mandating greater preneed oversight. But with state budgets in decline after the 2008 market crash, regulators are hard pressed to find a way to pay for consumer protection.

Colorado’s new law simply states that the contract seller shall bear the cost of its examination.

In failed legislation earlier this year, Kansas sought to finance preneed cemetery oversight through a per contract fee. Sources indicate that Kansas will attempt to implement a $20 per contract fee later this year through new regulations.

Missouri took a hybrid approach last year through seller/agent/provider license fees and a $36 per contract fee. Ten months into the mission to provide preneed oversight, the State Board of Embalmers and Funeral Directors do not have enough data to know how well this approach will work. The first reporting period is still four months away, and no one knows how many preneed contracts have been sold since August 28th. As a consequence, license fees will likely be increased, which hits the smaller operator the hardest.

In a 180 degree change from last year, the State Board is mulling whether to increase the per contract fee, knowing that most sellers pass that fee on the consumer. In response to pressures from consumer advocates, the State Board had originally taken the position that sellers should be required to absorb the $36 fee. The reality is that the costs of preneed oversight are passed on to the consumer in one form or another by the preneed seller, and the per-contract fee provides transparency to the consumer.

Agencies, such as the State Board, that are charged with licensing preneed sellers and agents, need to charge some form of fee to cover the administrative costs of licensure. However, there is justification that the transaction (i.e. the consumer) should primarily bear the cost of examinations and oversight. On the other hand, it is not equitable that consumers bear the costs of disciplinary proceedings for the operator that fails to materially comply with the law.

With the per-contract fee, consumers and operators are provided a clear benchmark of the costs of their state’s preneed protection program. Such a fee will place a burden on regulators who must budget for fixed program costs (such as dedicated staff).
 

• Email This
• Print
• Comments (1)
• Trackbacks

Implementing new regulatory requirements is a difficult and thankless job. Businesses hate change when it comes to government interference, and (most) regulators understand this. Accordingly, regulators typically prefer to implement incremental changes. In contrast to other industries, regulatory changes have been less frequent within the death care industry because legislators and regulators don’t understand the business. This came to an end for Missouri when NPS galvanized a legislature into re-writing the book on preneed, and then saddling the State Board with the task of implementing new mandates for licensure, oversight and enforcement.

There was no question what the State Board’s first priority under SB1 had to be: emergency rules to satisfy the new preneed licensure requirements. Until the law went into effect on August 28, 2009, the State Board lacked the authority to issue preneed licenses. But once the law went into effect, funeral homes were prohibited from selling preneed without a license. Licensing an entire industry at the stroke of midnight was beyond the Board’s limited resources.

As of February 4th, the State Board was five months into the mission, and faced a growing list of SB1 issues. Having addressed the immediate licensure issues (more or less), the Board took a step back to frame a preliminary approach to what may prove to be its top priority: financial examinations.

The State Board approved a plan that would involve an internal unit of 4 to 5 employees that would gather and monitor preneed transactions. The plan would include a period of training to develop the expertise needed to reduce the reliance on independent auditors, and thereby reduce the fees being charged to the industry.  The Board's decision is consistent with Scenario 2 of the Small Business Impact Statement filed with its emergency fees rule.

Determining that “the money is there” has been the priority in Nebraska and Iowa, and now, has also become the priority for Kansas’ cemetery regulator. The challenge for the Missouri and Kansas regulators will be the implementation of an effective, but efficient, system of providing financial oversight to a diverse and fragmented industry.

• Email This
• Print
• Comments
• Trackbacks