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

A trade newsletter recently reported on funeral homes forming buying groups to negotiate better terms with casket vendors. Through cooperative alliances, the funeral homes can achieve the numbers required to negotiate better discounts from vendors. Those same economies of scale also benefit preneed programs that utilize trust funding. The larger trust not only provides the operator leverage in negotiating terms with a fiduciary, the trust provides the asset manager the critical mass required for a sophisticated asset allocation model for proper diversification.

However, state laws are often a hurdle to independent funeral homes or cemeteries seeking to form a master trust that would commingle funds from multiple sellers. Laws such as Missouri’s Section 436.031 authorize collective investing by preneed trustees, so long as the funds deposited belong to a single preneed seller. This restriction reflects a legislative concern for the trust’s accounting of deposits, distributions, income and expenses.

Rather than close the door completely on collective investment trusts, the Michigan cemetery law signed into law last week left the door open to a new breed of master trusts.

Section 16 of SB 674 establishes a transition period for Michigan cemeteries to transfer their endowed care trusts to corporate fiduciaries. Subparagraph (2) of that section addresses the traditional master trust established by a single cemetery that has multiple trusts or a master trust among multiple cemeteries with common ownership. The subparagraph also references preneed trusts. The opening for pooling among unrelated trusts comes in subparagraph (3) where Michigan’s cemetery commissioner is given the authority to approve ‘other comparable methods of bundling or pooling of trust or escrow funds for investment purposes’.

The fiduciary services provided by national banks are subject to Federal regulations set out in 12 CFR Part 9 (“Reg 9”), and more specifically, collective investment funds are subject to 12CFR 9.18. State chartered fiduciaries and Office of Thrift Supervision chartered fiduciaries are subject to similar requirements. The fiduciary’s authority to pool preneed trust accounts is derived from 12 CFR 9.18(c)(4). The regulation sends the fiduciary back to state law for its authority, and prohibitions. In the absence of express authority (and express prohibitions), the fiduciary is in ‘no man’s land’ with whether it is required to follow the requirements of Reg 9, which include a written plan, audits and asset valuations.

The Michigan law seems to appreciate that Reg 9 requirements go beyond what should be required of a preneed master trust, and appropriately, make the non-traditional master trust subject to a case-by-case approval. The test will be whether the proposed pooling arrangement has sufficient accounting procedures to protect participating operators and their consumers. Missouri is particularly sensitive to this issue in light of the NPS failure, and its procedures for trust rollovers.

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The Federal Reserve’s December 17th decision to cut its interest rate to less than a quarter of a percent is meant to encourage investors back into the stock market. But for many cemeteries, the prospect of depressed interest rates will have dire consequences to endowed/perpetual care trusts that are subject to state laws which limit or restrict equity investments.

State laws have historically imposed conservative investment standards upon endowed care funds to ensure preservation of the trust corpus. However, the bull markets experienced during the past decade often came at the expense of bond returns and other fixed income investments. With stagnant returns, cemeteries in states such as Michigan and Missouri have been seeking law changes to allow endowed care trusts to diversify for growth and larger distributions.

In 2006, a straightforward approach was introduced in the Michigan legislature. HB 6254 would have allowed an endowed care trust to distribute 50% of its accumulated net capital gains to the cemetery operator. However, that bill got lost in the turmoil of the Clayton Smart fraud. Instead, Michigan is now on the road to a more complex approach to diversification that incorporates the Prudent Investor Rule and oversight governed by rules and regulations to be promulgated by the Cemetery Commissioner.

Some of Missouri’s cemeteries introduced the unitrust concept to legislative negotiations held in 2007, and then again in Chapter 214 hearings held this past summer. That proposal would allow the cemetery operator to make an election to require the trust to make an annual fixed distribution of between 3 to 5% of the trust’s value. Missouri’s cemetery law (Chapter 214) lacks a clear definition of “income”, and regulators have taken contradictory positions over the years about whether capital gains may be treated as income to be distributed to the cemetery operator. In an attempt to clarify this ambiguity, the cemeteries turned to Missouri’s Uniform Trust Code and RSMo Section 469.411 to provide a clear standard for income, to promote diversification and to provide cemetery operators greater distributions. But in doing so, the proponents have ignored certain realities, and the controversies that surround the unitrust concept.

Many endowed care trusts are too small to effectively diversify for a fixed distribution of 5%, and proponents have fought alternatives that would grant the trustee authority to reduce distributions below 3%. The proposal would also restrict a trustee’s authority to make income and principal adjustments, a crucial element of the Missouri law.

In view of the current financial environment, cemeteries need the authority to diversify endowed/perpetual care funds. But, a balance needs to be struck between fostering growth in the trust and meeting the cemetery operator’s income needs for maintenance and care. Finding that balance should not be left to the unitrust concept, and faith in the stock market.

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Even when the need for reform is apparent to all, the legislative process can take years. With the Michigan Senate having approved a House substitute, that state’s cemeteries are a step closer to reform that could have avoided Clayton Smart’s pillaging of $70 million dollars of endowed care funds.

The Michigan Legislature’s website provides the history of SB 0674, from its introduction in August 2007, to the Senate’s December 19th vote to adopt the House substitute. Including the Attorney General’s investigation, the Michigan reform process has taken over two years. As with all reform efforts, some were not happy with the delays encountered in the Legislature’s efforts. Getting it right is not as easy as it would seem.

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