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

More than one funeral director has expressed the opinion that the State Board should never have been given rule making authority. We'll never know, but if the State Board had rulemaking authority 22 years ago, it could have implemented rules to help enforce NPS' 1990 settlement agreement, and thereby avoided that company's collapse. But equally important, rule making authority provides the State Board the means to clarify the ambiguities and gaps that exist in Senate Bill. No 1. This is as much to assist the preneed seller who has a business practice that does not fall neatly within the law as it does the State Board attempting to address how that practice should be regulated.

But, Missouri's first attempt to pass a 'conventional' preneed regulation has been a trying exercise for the State Board, its staff and the industry, with mutual frustrations getting the better of everyone. All concerned may have been spoiled by the level of cooperation exhibited when emergency regulations were needed to keep Missouri's preneed industry operating. Had it not been for those emergency regulations, Missouri's preneed industry would have come to a screeching halt for months.

Following the passage of the emergency rules, the State Board staff recommended that the industry's other SB1 complaints be tabled to provide the financial examination process the time required for Division personnel to 'get their arms around the issues". That made perfect sense to this author, that is until the insurance assignment became the focal point for the Board's first regulation.

The political realities are that the State of Missouri needs revenues, and the excess insurance proceeds paid to funeral homes should be paid to the State pursuant to RSMo 208.010.7(4) before refunded to the families of assistance recipients. If funeral homes use the spend down provisions to their benefit when meeting with families, then they should also have a duty to comply with Chapter 208. But, the problem has been that families were allowed to exclude insurance policies for asset testing without a preneed contract, and the drafters of SB1 were focused on NPS and the sale of preneed contracts.

SB1 has flaws, and the Division once acknowledged that corrective legislation would eventually be needed. Our question is whether the Board's first regulation is indication that the State now has a double standard when it comes to preneed regulations and the need for corrective legislation: a restrictive interpretation of SB1 for the industry and a liberal interpretation for itself?

Like SB1, the Board's first regulation proposal was forced by the State, and has its own flaws. The proposal is too broad in attempting to define all insurance assignments and beneficiary designations as the consideration that triggers SB1. The proposal also extends the preneed contract fee without an explanation of the examination procedures needed for the transaction. Then to buttress the position that the regulation binds all outstanding insurance assignments, the State relies upon a confidential legal memorandum as having put the industry on notice. If the industry does not find the State's rationale credible, many funeral homes may refuse to comply. We find it frustrating that the State could accomplish most of what it wants without sacrificing credibility. That credibility will be important to getting funeral homes to embrace the future changes required for compliance with SB1. It remains to be seen whether the State will be flexible with the industry in achieving their mutual goals.

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

The monks of St. Joseph Abbey received good news in their battle to sell caskets when a Federal appeals court affirmed a lower court’s decision that struck down a Louisiana law that would have required the monks to either open a licensed funeral home or get a funeral director’s license. The District Court held that the restriction on casket sales amounted to a brand of economic protectionism that was not a legitimate state interest. The Court of Appeals applies a test that we find relevant to current controversies in Missouri and Kansas, but for this blog post we want to question whether the opinion would have been different if court had been asked to review the application of a preneed law to the preneed sale of Trappist caskets.

The purpose for preneed laws, protecting consumer payments until delivery is made, would seem to be equally applicable to funeral homes, cemeteries, casket stores, monument vendors or Trappist monks. However, most state preneed laws were written when the death care industry did not have significant competition for casket, vault and marker sales. Consequently, preneed laws are directed at death care licensees, and the occasional examiner or auditor will not be checking on the casket store to determine its compliance with the preneed law. If the casket store is making preneed sales, and marketing to out of state residents, multiple preneed laws could be implicated. The casket store’s website may reflect whether it offers deferred delivery. One of the Trappist’s websites offered the following:

Advance Arrangements

Peace of Mind for You and Your Family

Selecting a casket prior to need is a gift you can give your family. This arrangement ensures your wishes are met by securing your choice of casket for future use. By purchasing your casket in advance of need, you are relieving loved ones from making this often difficult decision, while closing your life's story on your own terms.

Purchase at Today's Prices Now, Ship When Needed

A pre-need arrangement with the Trappist monks of New Melleray Abbey allows you to purchase in advance, and have it shipped to the destination desired by your family at the appropriate time. You can rest assured the casket that you ordered will be available for immediate shipment when the time of need arrives.

We at Trappist Caskets feel very blessed to be able to so humbly provide these caskets, made with the work of our hands and with prayer in our hearts, to bring some small measure of comfort and solace to families in their times of need.

I hesitated to post on this issue because I love the Trappist’s ale so much, but preneed regulators need to be uniform and consistent.
 

• Email This
• Print
• Comments
• Trackbacks

Three years ago we asked that question with regard to the power struggle occurring between the Missouri State Board of Embalmers and Funeral Directors and the Missouri Division of Professional Registration staff. That post was influenced by our experiences with preneed regulators from other states, who range from elected politicians to the revolving door bureaucrat. I would always prefer the experience and stability of a Dennis Britson or a Mack Smith, but they honed their skills over decades, and Missouri is under a bit of pressure to get reform rolling. With the Missouri Legislature having vested preneed supervision with the industry, we saw hope that Missouri could establish a unique structure where the experience of the industry would mesh with a staff with long term commitments. But silly me; the regulations drafted in response to a December vote on insurance assignments provide the answer to “Who is the Boss?” It is the Governor.

I must confess that my mind drifts at times when I attend the State Board meetings. Okay, I also check emails from time to time when the Executive Director gives her reports. But, the regulation proposals leave me wondering whether I was in the wrong room last December. But, Mr. Otto did whisper to me from time to time during the meeting I thought was the State Board’s. Maybe we were at a MFDEA meeting? Then again, I recall a unanimous vote that defined the insurance assignment as a preneed contract that was to be exempt from the $36 fee.

My warning from the “Who is the Boss” post in 2010 was this:

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

It is obvious the Governor doesn’t read this blog. Since 2010, an elected politician has made insurance assignments our preneed reform priority. I get it. The excess insurance proceeds could help offset the benefits paid to nursing homes, and Chapter 208 requires a Chapter 436 preneed contract. The State doesn’t want to revisit Chapter 436. It would be easier to manipulate the language of SB1 to get the desired result. (It’s not like the industry doesn’t do it too.) It took the State Board 18 months to offer a compromise, and one that was a win-win for the state and the industry. But, you are overplaying this hand by demanding the $36 per contract fee.

For the past two years, the industry and Board members have asked what the Division really needs in terms of fees to conduct exams. The answers have been evasive at best, but I could defend that response because the examination procedures are work in progress. But, your regulation proposals indicate that “The costs for the Board to administer preneed contracts is the same per contract, regardless of the value of the preneed contract.” If that is the case, then what is the cost per contract to perform a preneed examination? I find the Division’s budget for the State Board confusing, but the numbers attached to the agenda are significant. Is the Division receiving more that it needs, and if so, where do those funds go?

Up to this point, the examination procedures have focused on recordkeeping and confirming that consumer funds were deposited to banks and insurance companies. At some later date those procedures will need to look at how those funds are administered and paid out to funeral homes. But, until then, why is the $36 fee required on a transaction where the funeral director does not receive funds until after a death has occurred?

Three years ago I defended the slow pace of the Division, and advised the industry that reform required a shared responsibility between the Division and the State Board.  Accordingly, please respect the Legislature and let the State Board perform its role for reform under SB1.
 

• Email This
• Print
• Comments
• Trackbacks

If you haven’t noticed, there has been some turnover among the associations’ preneed fund managers. With the threat of additional litigation in Wisconsin, this trend could continue. But not all of the turnover has been as publicized as what we have seen in Illinois and Wisconsin. After 20 years at the helm, Merrill Lynch recently gave notice to the Michigan Funeral Directors Association of its resignation. There are no search protocols for preneed fund managers, and so Michigan borrowed from the retirement fund community by publishing a request for proposal (RFP). While the MFDA should be commended in their effort to bring transparency to their program’s asset management, they missed (or ignored) an opportunity to shift more investment responsibilities to the financial industry. Instead of using FINRA Rule 2111 (“know your client”) to their advantage, the MFDA structured the RFP to perpetuate (and extend) the funeral director’s controlling role in investment decisions.

Hidden investment charges have been ‘part of business’ in the death care industry for decades, and this author has contemplated whether ERISA’s fee disclosure requirements could ever be incorporated into preneed trusts by the Federal Trade Commission. The Michigan RFP focused on the same ERISA fee disclosure requirements, which could lead one to assume that association’s leaders did not want to make the same mistake again. The Michigan RFP also raised another ERISA concept worthy of the preneed industry’s consideration: the 401K approach to investment by individual contract. We too have wondered why larger programs have not looked at data from individual contracts and the sponsoring funeral homes to build an investment options matrix.

But, the Michigan RFP can be faulted for cutting off the diligence requirements of FINRA Rule 2111. To insulate the Association from solicitations, the RFP provided summary information about the program and required all inquiries to go through an ERISA consultant. Prospective fund managers were required to submit investment strategies on limited facts and without direct communications to the Association. It is understandable that the Association would want to narrow the field before initiating an exchange of confidential information with prospective managers, but the screening of candidates should have preceded the request for investment strategies. Subsequent to the screening, the MFDA should then have provided detailed information pursuant to a confidentiality agreement. Under FINRA 2111, this sequence would have expanded the fund manager’s diligence responsibilities regarding investment strategy recommendations. The nature of the questions posed by the candidates would also have helped the MFDA in its assessment of the candidates. Instead, the RFP narrowed the fund manager’s diligence to an old investment strategy with a history of mixed results and challenges.

Within the context of ERISA retirement funds, RFPs may take a formula approach to finding a replacement fund manager. But the preneed industry is fragmented by 50 different state laws, and by program issues such as whether non-guaranteed contracts are sold, the association’s role as a seller versus an agent, investment restrictions, and trusting percentages. Injecting preneed asset management with a dose of ERISA could help to discourage hidden fees and improve the quality of fund managers, but the industry also needs an alternative to the strategy of offering funeral directors three investment options to choose from.
 

• Email This
• Print
• Comments
• Trackbacks

Both the Memorial Business Journal and the Funeral Service Insider commented last week on the Milwaukee Journal Sentinel’s February 7th article regarding the former executive director of the Wisconsin Funeral Directors Association. Several issues were raised that should be included in future industry debate, and in particular, I would agree with Mr. Isard’s questions whether association executives are qualified to manage a master trust. But the following comments beg an immediate response:

“The whole situation with [the] Wisconsin Preneed Trust went off the rails when the goal shifted from trusting funds to investing funds.”

“The assumption that these trust funds are in the investment business is a mistake. We’re not. We’re in the trust business. From my view, that is a presumption of a preservation of principle. With a trust, you have an obligation to be prudent.”

Those comments suggest that trusting funds and investing funds are somehow mutually exclusive. While the comments may reflect the views of much of the death care industry, they also reflect a failure to understand the fiduciary’s duties. When entrusted with the money of another, the fiduciary has a duty to invest those funds consistent with the purposes of the trust and the interests of the trust beneficiaries. The fiduciary’s investment duties are governed by other laws, and a majority of our states have adopted the Prudent Investor Act. Wikipedia provides the following explanation of that Act:

In enacting the Uniform Prudent Investor Act, states should have repealed legal list statutes, which specified permissible investments types. (However, guardianship and conservatorship accounts generally remain limited by specific state law.) In those states which adopted part or all of the Uniform Prudent Investor Act, investments must be chosen based on their suitability for each account's beneficiaries or, as appropriate, the customer. Although specific criteria for determining "suitability" does not exist, it is generally acknowledged, that the following items should be considered as they pertain to account beneficiaries:

• financial situation;
• current investment portfolio;
• need for income;
• tax status and bracket;
• investment objective; and
• risk tolerance.

The majority of preneed trusts involve a single seller/provider and guaranteed preneed contracts. Under such circumstances, the funeral home operator has assumed the investment risk when the preneed contract is performed as written. Fiduciaries (and fund managers) have viewed the operator as the account beneficiary for purposes of the Prudent Investor Act. But depending upon state law, and whether the contract is ‘re-written’ at the time of death, the preneed purchaser may bear the investment risk. Accordingly, the fiduciary and fund manager should not completely ignore the preneed purchaser as the account beneficiary for purposes of the Prudent Investor Act.

Neither fiduciaries nor fund managers want to bring the preneed purchaser into the Prudent Investor equation for obvious reasons. But are suitability of investments for two that dissimilar? We would suggest not if the objective is to have investment performance track the prearrangement’s purchase price increases. As we noted in a March 2010 post about the IFDA master trust, the purchaser of a non-guaranteed contract was unhappy because the return on her non-guaranteed contract (1.7%) did not keep pace with the price increases of her planned funeral (4.2%).

Determining who to include as an account beneficiary in the Prudent Investor equation only gets more complicated when the preneed trust is an association master trust with dozens, or hundreds, of funeral home operators. If the master trust includes a healthy percentage of non-guaranteed contracts, the number of account beneficiaries could swell to the thousands. If the association is not the preneed seller (as is the case in Missouri, but not Illinois), what interest does the association have in the trust so as to justify being considered an account beneficiary? There are arguments in support of the association being such a beneficiary, but can those interests ever outweigh the funeral operator and the non-guaranteed contract purchaser?

One could argue that the Wisconsin Master Trust was never fully on the rails. The Association determined early on that a depository account could not keep up with rising funeral costs. Rather than seek legislation that would clarify the trust’s investment authority, the Association leadership sought regulatory permission to allow the master trust to embark on the path of investment diversification. The program derailed only after the executive director enmeshed his personal objectives with those of the association and then conspired with the fund managers to treat the association as the master trust’s primary account beneficiary.
 

• Email This
• Print
• Comments
• Trackbacks

On January 14th, Missouri Governor Jay Nixon will be sworn in for his second term, and we are wondering whether the Governor’s plans for 2015 are influencing the direction of Missouri’s preneed reform. With commentary such as that published by the St. Louis Post Dispatch, the Governor may have his eyes on a 2015 campaign for national office. At a minimum, Governor Nixon could be targeting an old rival’s U.S. Senate seat. Either way, the Governor faces a nagging situation with NPS, and may feel compelled to accelerate preneed reform and deflect the criticism that has persisted for almost five years.

When National Prearranged Services collapsed in 2008, NPS funeral providers were especially critical of how then Attorney General Nixon settled the 1991 NPS lawsuit. The Attorney General’s office responded that they did the best possible with the weak enforcement powers provided by Chapter 436. Missouri’s Republican administration countered with a review committee formed for the purpose of finding industry consensus for preneed reform. But, the industry struggled to agree on key issues, and the State’s regulators took the lead in drafting Senate Bill. No. 1. In 2009, a newly elected Governor Nixon inherited the NPS fallout and a prior administration’s effort at preneed reform. Now four years later, the NPS fallout has somewhat abated (but not resolved), and there isn’t much to show in terms of preneed reform.

In contrast to the mortgage crisis or the state budget crisis, the NPS situation will not benefit from the recoveries of the nation’s economy or the financial markets. The Cassitys’ emptied the cupboards, and funeral homes are dependent upon the fixed recoveries negotiated with the state insurance guaranty fund. Most NPS providers are finding ways to cope, but one industry group persistently reminds the Governor and legislators of their discontent. The Governor would like to counter their criticism with evidence that preneed has been made safer under his watch, but it can take years to implement effective reporting and examination procedures.

As we noted in July 2011, a sudden increase in the number of financial examinations suggested that the Division was being pressured to accelerate the process. Shortly thereafter, the Division staff also began to press the State Board to define the insurance assignment as a preneed contract. The State Board and the Division staff disagreed on the insurance assignment issue, and frustration began to develop as the issue was pressed in subsequent meetings. That frustration culminated with a December 12th unanimous vote by the Board members to define insurance beneficiary designations as a preneed contract, but a preneed contract that would be exempt from the $36 preneed fee. Division staff warned that the distinction may not be legal. Within hours of the vote, the Governor’s office announced a Board appointment to replace Todd Mahn, the Chairman who had called for the vote.

The Governor’s website for Missouri’s Boards and Commissions states

"I am always looking for qualified, energetic applicants to serve on Missouri's 200-plus boards and commissions. Please spread the word. I would greatly appreciate it if you would encourage your colleagues and friends to review the vacancies and complete an application."

While this author has disagreed with some of the positions taken by Mr. Mahn, I do not question his commitment to the industry, or to the State Board. Nor did the former Chairman lack for enthusiasm and energy while serving the Board. But, rather than replace a Board member with known health issues that was serving on an expired term, the Governor replaced the younger Chairman.

It may not have been the Governor’s intent, but the appointment could be taken as message to State Board members to ‘get with the program’. But the Governor, and the Division, risk losing the confidence of both the Board and the industry. Someone has lost sight of the first issue discussed at the 2008 legislative meetings: who should have jurisdiction over preneed. Several state agencies attended that meeting, and none expressed any interest in assuming jurisdiction over the preneed transaction. As explained in a 2009 post, financial and insurance regulators often struggle to provide effective preneed oversight because they tend to focus on the ‘backend’ of the transaction (that part of the transaction they are most familiar). The front end of the transaction can take many different forms, which can push the transaction outside the normal scope of the agency’s jurisdiction. (For example, the Nebraska Insurance Department has jurisdiction over preneed sales, which includes trust funding.) When State Board members ‘stepped up’ in 2009 to retain jurisdiction (and demonstrate that the industry could provide meaningful self regulation), a collective sigh could be heard from the Missouri Division of Finance and the Missouri Department of Insurance. The Missouri legislature signed off on State Board jurisdiction, and in doing so made a trade off: reform would rely upon the collective experiences and training of six State Board members instead of an appointed department official. Governance by a board will never be the most efficient or expedient path to action.

In SB1, the State Board was given the task of protecting consumers against another NPS by developing procedures for preneed reporting and auditing. However, the Board is dependent upon the Division of Professional Registration for staffing, legal counsel, funding and reporting administration. Together, the Board and Division crafted a mission statement for the financial examinations that was to be the cornerstone of Missouri preneed reform. From this observer’s perspective, the State Board members never understood how the insurance assignment fit in to that mission statement. Explanations given to the State Board were unpersuasive, leaving an industry to wonder whether the issue was fee driven.

It may have taken the State Board a year to reach an agreement on the insurance assignment issue, but we believe the Chairman made the right call. This issue had a greater importance to the Division than it did the State Board, and there is speculation that the $36 fee, Chapter 208 and the state budget played a factor. Regardless, a resolution was needed so that the Board and the staff could turn to more substantive reform issues, including whether SB1 provides sufficient audit powers and protections. If the Division can look no further than the funeral home’s records, would SB1 have even stopped NPS?
 

• Email This
• Print
• Comments
• Trackbacks

In our prior post, we commented on the lack of detail provided by the Consumer Funeral Assurance group regarding their NPS recovery plan.  We have obtained a copy of the plan, and redacted from the document correspondence that reflect names and/or contact information of recipient organizations or legislators. What is left includes a summary of the group’s proposal, which we find incoherent and difficult to understand. 

The CFA was established when NPS first collapsed and funeral providers faced an information crisis, as well as an economic crisis.  Five years later, funeral homes have a better understanding of what will be paid and when.  While no one is happy about the situation, the immediate crisis of 2008 has been eliminated.  So, today, it is not clear how many funeral homes count themselves as CFA members.  That fact is not provided by the CFA in its NPS recovery plan. 

The day may come when an NPS recovery plan is needed but the current CFA proposal detracts, rather than enhances, the group’s credibility with legislators and the industry.  Accordingly, CFA members (and former members) should request that the plan be withdrawn.    

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

On December 12th, a Missouri coalition of NPS preneed providers will have a second opportunity to state their case for legislation to establish a NPS recovery plan. As we noted back in September, that coalition should anticipate a tepid reception from the State Board of Embalmers and Funeral Directors (and much of the Missouri funeral industry). Funeral operators may be sympathetic to the harsh economic realities of the guaranty fund’s ‘fixed recovery’, but few operators perceive how those future financial losses are ‘their problem’. Legislators cannot be as dismissive because the coalition is warning that it is a matter of time before funeral homes start to fail, and when that happens, consumers will ultimately suffer the financial loss. Not knowing whether two funeral homes or twenty funeral homes are at risk, the legislature gave the coalition a hearing to present a plan. The details remain vague, but it has been reported that the plan calls for a “mandated” preneed trust. If those rumors prove accurate, the plan has two major hurdles that could block its takeoff.

In concept, a state wide, cooperative preneed trust could provide financial relief to the NPS provider. A master trust could provide participating funeral homes the economies of scale to reduce administration expenses and increase investment performance. As a collective group, the NPS providers may be able to achieve a return that not only offsets the cost increases of the future preneed business, but also some of the costs of the NPS contracts yet to be performed.

But, any thought of using investment returns of future business to fund old business would have to be closely regulated. The trust cannot take investment returns from Funeral Home A contracts and allocate them to Funeral Home B contracts. Nor can the trust take investment returns from non-guaranteed contract a001 and allocate them to NPS contract b002. With the proper administration, the investment return of Funeral Home A’s new guaranteed contracts (or old Pre-SB1 guaranteed contracts) could be split with Funeral Home A’s NPS contracts. Such a split would occur only after the proper income/expense allocations have been made to originating accounts. Under Missouri law, the consumer of one of those new accounts could chose to designate a new provider, and transfer the entire account value (including the amounts allocated to the NPS contracts) to a new trust. Consequently, the level of administration required for such allocations would be complicated. If the NPS recovery plan should seek to short cut that administration with a fixed rate of return (and using excess investment returns to fund the NPS contracts), then the plan should be rejected.

The other hurdle to takeoff is the plan obtaining the requisite trust assets for economies of scale. The rumor is that the NPS recovery plan would require all Missouri preneed sellers to participate in the trust. (If mandatory participation can be required for the Obama health plan, then it can be required for the NPS recovery plan.) Kansas regulators floated a similar idea a few years ago and quickly withdrew the suggestion after hearing the initial response from operators.
 

• Email This
• Print
• Comments
• Trackbacks

We previously discussed how the funeral home or cemetery assumes most of a preneed trust’s investment risk when selling a guaranteed preneed contract, and therefore should be afforded a role in the trust’s investment decisions (Fund Managers: Is Your O&E Coverage Current?). But in that same post, we were careful to point out that there are no absolutes. More funeral homes are switching to non-guaranteed preneed. And, a certain percentage of guaranteed preneed contracts are also re-written at death when the family switches funeral homes or revises the prearranged funeral (or burial) arrangement. Yet, preneed fiduciaries seem to ignore these facts when relying upon uniform trust code provisions for their authority to exchange investment powers for a hold harmless agreement.

Death care fiduciaries first need to determine whether there are any conflicts between the applicable state death care law and the broader uniform trust code. Fiduciaries in states such as Missouri and Kansas are bound by statutes which require the trustee to retain investment oversight. Such conflicts will be reconciled in favor of the more specific death care law.

If the death care law is silent on investment delegation, the applicable uniform trust code may not necessarily authorize the trustee’s exculpation from investment oversight. Some states’ trust code conditions the fiduciary’s investment exculpation upon 1) the appropriateness of the trustee’s selection of the investment advisor, and 2) upon the notice given to trust beneficiaries. Illinois’ Trusts and Trustees Act is a good example of such a requirement. But too frequently, the fiduciary views the funeral home, or cemetery, as the sole beneficiary of the death care trust for purposes of both requirements.

Assuming notice could be given to each and every preneed contract purchaser, a court would likely evaluate the sufficiency of that notice from the perspective of the elderly preneed contract beneficiary. Would the average preneed purchaser understand the implications of the investment delegation? Or, could that purchaser effectively monitor the investment decisions made pursuant to the delegation? The fiduciary’s reliance on the uniform trust code for authority for exculpation under such circumstances should be deemed unreasonable. The validity of the exculpation may also hinge on the investment advisor’s assumption of applicable death care compliance requirements. If the agency agreement does not properly incorporate a death care law’s investment restrictions (or standard), the fiduciary has not exercised ‘reasonable care, skill and caution’ in establishing the scope and terms of the delegation. Yet, I hesitate to fault the fiduciary for trying. The strategy for seeking the exculpation is often in response to the unreasonable expectations of both the industry and its regulators.

As witnessed in California, regulators often interpret archaic preneed laws so as to argue that a ‘preneed contract is the equivalent of a savings account’. Those statutes reflect the preneed transaction from a generation ago. By applying that law out of the current context, a fiction is used to establish a standard that all fiduciaries could fail. The regulator’s position seeks to make the fiduciary a guarantor of the purchaser’s deposits to trust. The reality is that every trust investment has risk, even our government’s bonds. This exposure is applicable regardless of whether the preneed contract is guaranteed or non-guaranteed.

On the other side of the table, the industry is coming to demand that the trust offset more than just the costs of performing the preneed contract. Lagging membership revenues are an issue for many state associations. The mortgage crisis hit many preneed trusts, and preneed sellers expect those losses to be recovered without additional risk. Greater trust returns are also needed to offset the cremation trend. Of course, the asset management required for higher returns comes at a greater cost to the trust.

The reality is that the industry will continue to be request better returns from the death care trust. As with other trusts, the circumstances may dictate that as expectations rise, a fiduciary may best discharge its duties by delegating the investment responsibilities to an investment advisor. As discussed in the linked law review article, the model uniform code should be used to support the delegation of investment duties. But, in contrast to the classic trust situation, the death care trust is a creature of statute, which has the consumer’s protection as its purpose. While the preneed seller may be allowed to step into the settlor’s shoes for purpose of authorizing the delegation, the seller cannot override the preneed statute by exculpating the fiduciary from investment liabilities. At a minimum, the fiduciary needs to stand ready to override investments that are unsuitable or clearly imprudent. The two largest preneed scandals involved investments which were clearly unsuitable for the death care trust. Despite what Merrill Lynch may argue, I doubt any corporate fiduciary would have found the key man insurance policy to have been suitable for investment for a preneed trust. And if R.S.Mo. Section 436.031 had been written differently, NPS’ Missouri fiduciaries would have sought more information about the insurance transactions they were directed to make.
 

• Email This
• Print
• Comments
• Trackbacks

In the days that followed the Wisconsin Funeral Directors Association being placed into receivership, some of the WFDA’s sister associations were quick to point out they had ‘checks and balances’ that would protect consumers’ funds from the problems that tripped up the Wisconsin Funeral Trust. As we reported in our last post, a crucial ‘check and balance’ missing from the WFT was investment oversight. The fact that a trust has a corporate trustee does not necessarily mean that fiduciary has responsibility for monitoring the prudence of the investments. Corporate fiduciaries often look to uniform trust codes for the authority to delegate investment responsibilities. If a grantor wishes to use an outside asset manager, general trust laws will accommodate those wishes. The problem with preneed trusts (and cemetery endowment funds) is that there is more than one “grantor” to the preneed trust.

We have previously stated our support for allowing a relationship between preneed seller and a qualified fund manager. However, the fiduciary must provide a ‘check and balance’ to that relationship by maintaining responsibility for the investments. The ‘scandals’ from Missouri, Illinois, California and Wisconsin stem from a lack of investment oversight. Missouri’s regulators responded to NPS with a law that precluded any relationship between the advisor and the seller. Appropriately, the Missouri association obtained revisions to allow an agency relationship between its fund manager and the trustee. However, the Missouri law does not go far enough to require the disclosures we recommended in 2011. Funeral directors and consumers need to know that Missouri preneed fiduciaries ‘have their back’ when it comes to investment oversight.

Investment oversight is also a concern for cemetery regulators. Kansas’ cemetery regulators were dismayed to find that a corporate trustee had turned over the investment reigns to a Hutchinson cemetery operator. The operator hoped to cover declining revenues (and the failure to make trust deposits) with higher investment returns. For months, the operator attempted to hide the ball from the auditor, but eventually it was discovered that those investments had lost hundreds of thousands of dollars.

The investment supervision issue is also a concern for Nebraska regulators. As they prep the death care industry for legislation in 2013, they raise this issue:

Seller’s Power to Direct Investments

A question has arisen regarding the seller’s ability to direct the trustee’s investment decisions. Specifically, should the seller be able to instruct the trustee to deposit or invest funds in securities that do not meet the trustee’s own investment guidelines?

If it is determined that the trustee should be free from the seller’s investment influence, section 12-1107 should be amended to reflect this fact.
 

In what may be a perfectly legal arrangement, Illinois funeral directors have handed off investment oversight to their new fund managers. The master trust instrument carefully outlines the code provisions which authorize the delegation of investment authorities. But the document goes that extra step of exculpating the trustee from responsibilities for investment oversight. Where is the check and balance in that structure? Are the industry’s expectations so high that a trustee will not accept the fund without a hold harmless? If the industry does not establish its own ‘checks and balances’ with regard to investment supervision, the authority to participate in the investment decisions could be taken away.
 

• Email This
• Print
• Comments
• Trackbacks

A short three and a half years ago, the funeral industry reeled from the collapse of National Prearranged Services and the emerging story of the Illinois Master Trust. The NFDA was slow to respond to the crisis, and when it did, this blog joined the criticism. Fast forward to September 2012, and the NFDA responds to the Wisconsin Master Trust controversy with the same guidelines.

Granted: associations are cumbersome organizations that are dependent on volunteer members.

Granted: changing the mindset of a membership that has been historically opposed to preneed will be difficult.

Granted: it is a matter of time before another state association master trust fails.

We need to augment the advice offered the NFDA in 2009: eliminate from your trust evaluation guidelines any suggestions that a guaranteed rate of return is permissible. The days of set rates of return or book/tax cost of account for distributions are over.

The fixed rate of return approach allowed the Wisconsin and Illinois programs to avoid investment transparency and individual account allocations of income and market value. But, providing investment transparency in terms of the investments held by the trust, and the rate of return, can be more complex that the NFDA guidelines suggest. It is not uncommon for three or more investment pools to be offered by a master trust program. Administrators may have different ways to provide transparency at the trust level, in terms of in investments held by the trust and their rates of returns.

Whatever procedure is followed, the end result should be a ‘mark to market’ that will allow an auditor to reconcile each individual preneed contract’s value to the individual funeral home account(s), and in the case of master trusts, each individual funeral home’s account(s) to the aggregate master trust market value.
 

• Email This
• Print
• Comments
• Trackbacks

With the backdrop of another major preneed debacle, Missouri turns its attention (yet again) to the assignment of insurance policies to funeral homes.  On September 25th, the State Board of Embalmers and Funeral Directors will consider a regulation proposal addressing insurance assignments.  Is it, or is it not, a preneed contract?   The industry, and the staff, need an answer. 

The proposal establishes a presumption that all insurance assignments give rise to a preneed contract.  I don't have a problem with such a presumption so long as the funeral home is given the opportunity to rebut that presumption.  The regulation does provide a mechanism for rebuttal, but no guidelines are provided as to what would be excluded from the preneed definition.  Instead, the intent of each funeral director must be examined, and to compound matters, the proposal references 'intent' twice.  There is the question of whether the funeral director had intent to use the assignment for "payment in advance" for goods and services.  And, there is also the question of whether the funeral director had intent to form a preneed contract.  (We can reasonably predict the funeral director's answer to the latter inquiry.)

To avoid a circular inquiry in the mind of the funeral director (and an examination backlog), the Board needs to establish a set of facts that would reasonable exclude transactions that do not constitute the sale of an insurance funded preneed contract.  

• Email This
• Print
• Comments
• Trackbacks

Per capita, Missouri funeral directors were hit hardest by the collapse of National Prearranged Services.  And those funeral directors who suffered the greatest losses continue to demand help from the State of Missouri.  Although Missouri re-wrote its preneed law just 3 years ago, the Legislature begins hearings today on whether more legislation is needed.

With the economy as it is, the NPS providers may not find a receptive audience in Jefferson City.  Finding a receptive audience among other funeral directors can even be difficult. 

• Email This
• Print
• Comments
• Trackbacks

The staff for the Missouri State Board of Embalmers and Funeral Directors released the revised preneed renewal reports this week, and those revisions include a few new additional requirements.  Those requirements include a seller providing a ‘no tax due’ letter, proof of corporate status and any ‘doing business as’ filings.  However, the new requirement that will catch most funeral directors by surprise will be the new Section Q: preneed contracts funded by insurance assignments. 

Section Q seeks from the preneed seller information about each insurance assignment taken to fund a preneed contract.  Funeral directors will find the instructions somewhat confusing.  Those instructions advise that a report is to be prepared for each insurance company, but the spreadsheet format incorporated into the report suggests each column could be for a different insurance company.  The seller is also instructed to mark the spreadsheet with 'NA' if the section does not apply.  With the form instructions alluding to preneed contracts “sold” pursuant to Sections 436.400-436525 RSMo., most funeral homes will assume the assignment of an existing insurance policy is not covered by Chapter 436.  The instructions do not address policy beneficiary designations.

The staff scheduled an August 21^st  State Board meeting that includes “renewal update” on the agenda.  With the renewal forms having only been published on August 17^th, the staff hasn’t given the industry adequate time to provide input at the August 21^st meeting.  This should make for an interesting September State Board meeting, and for October chaos for Missouri’s preneed sellers (and those funeral homes dependent upon third party sellers).     

• Email This
• Print
• Comments
• Trackbacks

Who can honestly say they saw this one coming?

 On July 5, 2012, the Missouri State Board of Embalmers and Funeral Directors filed a complaint with the Missouri Administrative Hearing Commission against a Missouri funeral home for alleged violations of Chapter 436, including several transactions that predate Senate Bill No. 1. So, three years after the passage of Senate Bill No. 1, the State Board has initiated its first formal proceeding against a preneed seller.  SB1 armed the State Board with several new tools, including the preneed financial examination.   Pointing to the massive fraud committed by National Prearranged Services, the State’s regulators convinced the Missouri Legislature that such tools were necessary to protect the consumer.  What misconduct did the new financial examination tool uncover that warranted a formal complaint: the funeral home failed to report, and adequately document, insurance assignments and beneficiary designations.

The crux of the State Board‘s argument is stated in Paragraphs 49 and 50 of the Complaint:

49.       A preneed contract is sold when a seller accepts an insurance assignment or is named as owner (prior to August 28, 2009) or beneficiary of a life insurance policy pursuant to an arrangement between the seller and the consumer to ensure payment for the final disposition of the consumer's dead human body and for funeral or burial services, facilities or merchandise upon the death of the consumer.

50.       ******  Funeral sold and entered into preneed contracts with those consumers specified in Exhibit A when ******* Funeral accepted insurance assignment or was named as beneficiary on an insurance policy when the consumer made such assignment or designation with the intent of paying ******* Funeral for the costs of his or her own final disposition.

The State Board’s position (with regard to insurance assignments and beneficiary designations made prior to August 28, 2009) is based on the following:

31. Section 436.005, RSMo (2000), set forth definitions for the Old Law and stated, in relevant portion:

(5) "Preneed contract", any contract or other arrangement which requires the current payment of money or other property in consideration for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required, including, but not limited to, an agreement providing for a membership fee or any other fee having as its purpose the furnishing of burial or funeral services or merchandise at a discount, except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

What the State Board is asserting is that Chapter 436 has always defined as a preneed contract any insurance assignment or beneficiary designation made in favor of a funeral home prior to the death of the insured.   That will come as news to most of the industry (99.9% or so), and cause some operators to ask what those six Board Members are smoking.  But for those individuals who regularly attend the meetings of the State Board, this position may not necessarily reflect the views of the State Board members.

The Board’s staff began pressing the State Board more than two years ago to provide clarification on when insurance assignments and beneficiary designations constitute a preneed contract.   At that meeting in Festus, Missouri, the staff also reminded the Board and the industry of the funeral director’s duties under Chapter 208 to make inquiries to the Third Party Liability Unit (of the Department of Social Services) before making refunds to families.   The insurance issue resurfaced last fall (with the conclusion of the initial onsite financial examinations).  Since then, the issue has been bounced back and forth like a ping pong ball between the staff and the Board.   The staff has made various proposals, which the Board has rejected. 

As we have previously suggested, this transaction is one which should be documented by a contract.  Some within the industry assert there is no contract.  I disagree.  The policy owner has made the assignment or beneficiary designation with the expectation that the funeral home will apply the proceeds to their funeral.  The funeral director understands that expectation, and often relies on Chapter 208 for recommending the assignment of insurance.  I agree with the staff in that the ‘professional trust and confidence’ contemplated by Section 333.330.2(14) dictates that this transaction be documented by a contract.  The staff would then argue that any contract made by a funeral home that contemplates future performance must be a preneed contract, and ergo, a Chapter 436 contract.  I disagree. 

Chapter 436 was first enacted in 1965, but was re-written in 1982.  The 1982 law provided the industry the first definition of a “preneed contract”, which was the same as that cited by the Complaint, except that it did not include the following: 

except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

There was sufficient confusion whether insurance policies were covered by Chapter 436 that the preceding phrase was added by legislation that took effect in 1986.  The 1986 legislation was hotly debated, and the product of various compromises, and the result included a horribly ambiguous definition.  A literal interpretation of the new “preneed contract” definition would find that an insurance contract is not a preneed contract ‘unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance’.    But when the seller or provider is named as owner or beneficiary, the contract of insurance is a preneed contract.   That bears repeating: the contract of insurance is a preneed contract.  What the heck does that mean?

The old law was poorly drafted, and ambiguous, in many respects.  There always has been confusion over the extent to which Chapter 436 governed insurance funded preneed.   The old law was written with one preneed transaction in mind: the trust funded guaranteed contract.   Joint accounts were addressed as the first afterthought, and then four years later, insurance was added as another afterthought.   For years the Board staff struggled with whether insurance funded contracts had to be deposited to trust.   And now, 30 years after the old law was enacted, the staff (or is it the State Board) wants to begin enforcing those ambiguous provisions?

What motivations does the staff have for pressing the State Board on the insurance assignment issue?   The need for clarity was the initial explanation given.  The next justification given was the need to protect the consumer.   Both of these have merit, but one can’t help but wonder if Chapter 208 may also provide a third motivation. 

It would be political suicide for any candidate to suggest that Missouri needs to raise taxes.  Instead, state agencies look for other ways to generate revenues, whether that be through fees or charges.  Accordingly, someone in Jefferson City may also be looking at the funeral home’s obligations under Chapter 214.  In conjunction with that 2010 meeting in Festus, the staff has incorporated a MO HealthNet page on the State Board website.   That page is meant as notice to the industry that funeral homes have a duty to make inquiries to Department of Social Services before making refunds back to families.   (You funeral directors can now add tax collector to your job description.)  But that duty only applies to Chapter 436 contracts.

The Complaint seems a heavy handed attempt to force the State Board to define the insurance assignments as Chapter 436 contracts.  While there is need for clarity and consumer protection, neither the old law nor SB1 was intended to regulate the assignment of an existing insurance policy.  SB1 is intended to regulate the sale of contracts where performance is deferred to a future date, and the administration of the consumer’s payments.    The staff must twist SB1 provisions to reach the conclusion that all insurance assignments give rise to a preneed contract.   That approach is not much different from the one NPS used with the old law. 

So, what are those State Board members to do?  Here is a proposal for their consideration.

• Email This
• Print
• Comments
• Trackbacks

As alluded to in our prior post, the cemetery’s ability to deliver burial rights and merchandise prior to death complicates the preneed transaction.  In a post, we labeled this the ‘bucket factor’ (Cemetery Preneed Oversight: the bucket factor).  In addition to burial spaces, cemeteries can deliver markers, monuments, vases, urns, outer containers and vaults prior to the purchaser’s death.  While not the norm, cash flow needs and rising granite and bronze costs may dictate that more cemeteries accelerate deliveries of merchandise.  In some situations, services (opening and closing, and inscriptions or engravings) could be the only ‘items’ left to be delivered after death. 

Few (if any) state laws require the trusting of grave payments, and accordingly, cemeteries have never viewed these sales as preneed.  Payments made on a grave space went directly into a cemetery’s operating account.  If the purchaser paid for the grave in installments, a deed was issued when the purchase price was paid.  While there may be a risk that the cemetery operator could fail before the deed is issued, there is little out of pocket expense for a successor when completing the transaction.  Otherwise, the cemetery would tend to defer merchandise and services sales to the time of need.  But, competition over burial merchandise sales resulted in a fragmented approach to cemetery preneed.

Some cemeteries face competition from monument dealers, while others competed with funeral homes for vault sales.  Cemeteries approached these sales in a piecemeal fashion, using separate contracts, and adding merchandise sales after the grave purchase was completed.  This typically resulted in single item preneed contracts with a funding requirement based on a wholesale cost. 

With the emergence of the national death companies came the preneed packaging of cemetery property, merchandise and services, and later, the preneed packaging of funeral and cemetery selections.  Not wanting to leave the future sale of cemetery merchandise to chance, the national companies introduced contract forms that allowed burial rights, merchandise and services to be sold together.  These contact forms also allowed the consumer to write a single monthly check, with that payment being applied to the various items purchased. 

The national companies also utilized the common ownership of the funeral home and cemetery to offer ‘packaging’ of funeral arrangements and cemetery arrangements.  As cremation rates increased, this packaging evolved into economy arrangements where a grave space is combined with select merchandise sales and/or funeral services.  The grave sale is often discounted to make the traditional funeral and burial more affordable. 

These forms of preneed packaging provide convenience to the consumer and pricing flexibility to the cemetery.  But, the bucket factor requires the cemetery to apply the purchaser payment to the various subcategories of merchandise and service.  With deliveries prior to death, the cemetery cannot to turn to insurance as a source for that accounting.  Consequently, trusts are essentially the only form of preneed funding available to cemeteries. 

Preneed fiduciaries will always be dependent upon the death care company for contract data and administration, but that dependence is more acute between the cemetery and the bank.  With the funeral contract, the trustee has but a single funding liability and a single distribution.  As competition heats up, cemeteries will divide and sub-divide the merchandise and services offered to consumers.  Each division represents a bucket if offered on a preneed basis.  As cemetery regulators require greater distribution oversight from the fiduciary, the cemetery will be required to produce some very detailed reports.  This will be a tall task for an industry that remains at-need oriented.   

• Email This
• Print
• Comments
• Trackbacks

For some Missouri funeral homes, the ‘disagreement’ over the Section 436.405.1.(8) and insurance assignments has been brought to their doorstep.  In January, the State Board and their staff debated the issue of whether insurance assignments and beneficiary designations made in favor of a funeral home should constitute a preneed contract. The State Board rejected the staff’s interpretation of the fore mentioned section, and now the auditors seem to be pressing that disagreement to the Missouri’s funeral homes by way of the Chapter 436 financial examination.

This blog went on record in opposition to the staff’s regulation proposal as too broad, but there is also a need to go on record for the need for better consumer protection in these transactions.

When an assignment of insurance (or the designation of beneficiary) is made, it is done so in anticipation that the funeral home will apply the death benefits to the insured’s funeral arrangement. But have there been any promises about the prices or the right of the insured’s family to use another funeral home?  Such issues should be set out in an agreement between the funeral home and the insured so that the insured’s family is not left to guess. 

• Email This
• Print
• Comments
• Trackbacks

Every funeral home and cemetery feels the pain of this economy, but that pain runs deeper for Missouri and Illinois funeral directors. Per capita, Missouri funeral homes bore the greater brunt of the NPS collapse. In the same year NPS collapsed, the IFDA master trust was forced to divest its key man insurance policies and force substantial losses on preneed accounts. While both states’ funeral directors were angered by the losses, Illinois funeral directors have been faster to accept some of the responsibility for their preneed failure, and to work towards change. Recent comments of MFDEA representatives reflect an association in denial, and on the path of further alienation.

In February, the Missouri funeral association held a legislative day that called for members to blitz state legislators on three bills: SB767, HB1769 and HB1770. When the Missouri cemetery association voiced opposition to SB767, that bill’s sponsor sought input from the State Board of Embalmers and Funeral Directors. The State Board called a meeting to discuss the three bills.

 With regard to each Bill, the funeral association was afforded the opportunity to explain the bill and their intent for the legislation. With regard to the two House bills, the association stated its intent was to elevate the professionalism of the industry. Really?

One of the bills, HB1770, proposes to prohibit preneed sales by any person other than a licensed funeral director. One association representative offered to the State Board that if preneed sales had been restricted in such a nature years ago, the industry would not have suffered through the National Prearranged Services collapse. Such reasoning requires everyone to turn a blind eye to the fact that NPS’ demise was accelerated by a program that was sold by licensed funeral directors. NPS maintained two separate sales programs, and the one sold by funeral directors made promises that were too good to be true.

The association’s twisted logic is further magnified by HB1769. Through this bill, the association supports a new two-year degree/certificate requirement for funeral directors that would eliminate the current apprenticeship program. To make the education requirement more palatable, current licensees will be exempted. Absent from the bill (and any other association proposal) is a requirement for continuing education. So, the association sees a need to educate the state’s future funeral directors, but no need to educate those funeral directors who sold NPS preneed contracts.

When the three bills were met with criticism and opposition at the State Board meeting, association representatives (and supporting Board members) became defensive and accusatory by admonishing the opposition for blocking education needed so badly by the industry. In reality, the bills were opposed because they are protectionist in nature, and poorly written. When the association had ‘floated’ these issues at prior Board meetings, they were met with many of the same criticisms. Such actions only serve to erode the association’s credibility and effectiveness.

In contrast, the recent successes of the IFDA can be attributed to industry representatives who became involved in the association, put aside their differences, and searched for common ground. Through that approach and hard work, the IFDA is earning back credibility with the industry, regulators and legislators.
 

• Email This
• Print
• Comments
• Trackbacks

Every funeral director has faced the situation where Mrs. Smith comes in with an insurance policy and her funeral plans. Often, Mrs. Smith has gone to trouble of designating the funeral home as the policy beneficiary before having discussed her plans with the director. Often funeral directors file the policy and plan away until Mrs. Smith’s time of need. Frequently, the file includes nothing more than Mrs. Smith’s policy and funeral preferences, and this is troubling for Missouri’s new preneed audit staff.

Although Missouri’s preneed reforms went into effect more than 2 years ago, the new examination process has gotten off to a slow start. The first hurdle was funding. The new law imposed a $36 per preneed contract fee. New licensing fees were also imposed. However, these fees were tied to annual reports and renewals that were not due until October 31, 2010.

The Division of Professional Registration has also had the task of hiring preneed examiners and establishing audit guidelines. Defining those audit guidelines has proven difficult due to fact Missouri has hundreds of funeral home sellers that have been operating with little regulatory input or oversight for 25 years. Consequently, every single examination poses its own unique issues. But the one issue that must be surfacing with regularity is Mrs. Smith and her insurance policy.

After ‘practicing’ on the State Board’s industry members, the examinations began in earnest this past summer. By the Board’s September meeting, Mrs. Smith and her insurance policy were on the agenda. The staff floated a proposed regulation regarding a definition of preneed that would trigger Chapter 436 reporting requirements when Mrs. Smith walked through the funeral home’s door. Once the funeral director was put on notice of the insurance beneficiary designation, he must either report it or take action to reverse the designation.

The staff’s reasoning is that a contract has formed when the funeral director is put on notice of the policy designation. That contract is for a funeral arrangement that is not immediately needed, and therefore falls within the definition set out in Section 436.504(7). The staff further argues that this interpretation is needed to protect the consumer when the only evidence of the contract that exists was a ‘handshake’. While the staff has a point regarding the risks of the handshake, this transaction falls outside the legislative intent of SB1.

SB1 regulates the industry’s ‘sale’ of preneed contracts where consumer funds are paid to the funeral home or cemetery. The law’s intent is to make sure the preneed seller deposits those funds to trust or a joint account, or pays them to an insurance company. In contrast, Mrs. Smith may have purchased her Prudential Life policy from the same agent who sold her car and home insurance.

But, the staff’s concerns are not without merit. If Mrs. Smith’s children do not know of either the insurance policy or the handshake with the funeral director, they may go to another funeral home. The staff also asks what it is to stop the funeral director from retaining the insurance proceeds when the family has gone to a competitor.

To ensure Mrs. Smith’s wishes are fulfilled, the funeral home should document the policy designation with a written contract (which provides for a return of the proceeds if a different funeral home is used). The contract should also spell out the promises with regard to prices.

However, Missouri consumers would be better served if SB1 fees were spent towards audit procedures that focus on preneed sales, and not Mrs. Smith and her insurance policy. Missouri’s Chapter 333 provides the State Board with authority to implement additional protections when the funeral director accepts an insurance policy in exchange for a handshake.

• Email This
• Print
• Comments
• Trackbacks

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 licenses required to sell or service preneed in Missouri must be renewed annually, with the deadline for filing the required paperwork falling on October 31st. Technically, these licenses expire on Halloween unless the State Board staff has renewed them by that date. But, it is human nature to procrastinate, and many licensees wait until the final days to file their paperwork. With 545 licensed providers, 331 licensed sellers and 179 licensed preneed agents, the deadline paperwork handled by the State Board staff is substantial.

Regulation proposals discussed at the State Board’s September meetings underscore the frustrations the staff have with the licensing deadlines and the paperwork submitted by licensees. The proposals would add pressure to licensees having renewal paperwork filed weeks (instead of days) prior to Halloween (so that the staff would have more time to review the paperwork before renewing the license).

The ‘rub’ for the State Board staff is that SB1 sets Halloween as both the deadline for filing paperwork and the expiration date of the licenses. The law fails to provide a window for the administrative review of paperwork. Before dismissing this as the staff’s problem, sellers should consider that SB1 also allows a consumer to void his/her preneed contract if the seller did not have a license when the contract was sold.

The problem for the staff is that a number of sellers are submitting renewal reports that have not properly completed. Sellers who only use one form of funding are omitting the schedules for the funding vehicles they do not use. The renewal forms also require a summary of all contracts sold during the reporting period. If the summary is left blank, the staff has no way of knowing whether the fee accompanying the renewal is correct.

For the most part, the current renewal report form is the same as last year’s. However, sellers that use joint account funding need to recognize the report has a new Section M that requires information about the preneed contracts sold prior to the current reporting period. If the seller waits until October 31st to file the renewal, and omits the Section M report in error, the State Board letter received in November will seem like a late Halloween trick.
 

• Email This
• Print
• Comments
• Trackbacks

Earlier this week, the Missouri State Board of Embalmers and Funeral Directors posted their agenda for the September 27-29th meetings, which includes 65 pages of regulation proposals or revisions. The Board has probably heard the same complaint that we have: what the industry needs is less regulation, not more. However, regulations can serve a useful purpose in clarifying ambiguities in applicable law (and Senate Bill No. 1, and this past year’s SB 340 have their share of ambiguities and conflicts).

While most of proposed regulations involve death care licensing issues, the proposals do include some preneed issues. One of those issues is the exemption of cemeteries from Chapter 436 and another is the relationship (or non-relationship) between the preneed seller and the trust investment advisor. Both issues have been addressed in earlier posts to this blog. The debate continues.

The Board’s agenda also includes a modest legislative agenda. Well, modest but slightly controversial. The Board’s decision to raise the trusting requirement from 85% to 100% remains the main proposal.
 

• Email This
• Print
• Comments
• Trackbacks

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.
. 

• Email This
• Print
• Comments
• Trackbacks

A few weeks ago, we wrote on the approach being taken by regulators of posting discipline proceedings on their website.  The purpose of the posting is to inform consumers of such issues so that they can make additional inquiries.   The concept is now a reality for the Missouri State Board of Embalmers and Funeral Directors.    

• Email This
• Print
• Comments
• Trackbacks

The examination of a Missouri preneed seller begins with a request that certain documents be submitted to the State Board within 3 weeks. The purpose for the document production is to allow the examiner to perform a desk audit of the seller’s operable documents before an on-site visit is made. From those documents the examiner will determine the funding methods used, the compliance of the preneed contract form (and other documents) with Chapter 436, possible funding deficiencies, and possible administration issues.

An important distinction that Missouri funeral homes must make is that the request is aimed at its preneed business written as a seller. The document request does not include preneed written on a third party seller’s preneed contract such as Missouri Funeral Trust, American Prearranged Services, National Prearranged Services and Funeral Security Plans.

The Board's document requests are as follows:

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

If the seller has trust funded preneed, the State Board is requesting a statement from the trustee that sets out aggregate payments, earnings and distributions for each active (outstanding) preneed contract. This requirement will prove problematic for most preneed sellers, particularly for their trusts established under the prior law. While many preneed trusts report income for purposes of Internal Revenue Section 685, they do not maintain records of the aggregate income and expense per consumer account. It is also unlikely the income distributions have been tracked by account.

With this request, the State Board is also putting the seller on notice that the trustee must be authorized to exercise trust powers within Missouri. Foreign chartered institutions have special requirements to satisfy this requirement.

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

This seems fairly self explanatory. But, the funeral home needs to distinguish insurance assigned for a spend down for that insurance written concurrently with a prearrangement. Some insurance companies have taken an aggressive position on what constitutes a spend down, and the examiners will have the right to review both types of transactions.

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

If the funeral home used joint accounts, the State Board wants a copy of the current bank statements for the certificates of deposits and depository accounts. If funeral home receives individual statements, this production could require some work. Some banks provide a composite statement (that shows all the CDs). The funeral home may need to cross reference the account numbers to specific contracts.

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

The State Board is looking for a comprehensive list of all outstanding preneed contracts. The current annual report only reflects those contracts sold during the last reporting period. It would probably be sufficient if the outstanding contracts were reported by funding (one report for trusts, one for insurance and one for joint accounts).

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

The State Board is looking for all relevant agreements to the preneed seller program. SB1 was passed in response to National Prearranged Services, and its practice of representing a funeral home without an agreement. While SB1 does not require an agreement between a funeral home and funeral director agent, not all funeral director agents are employees of a funeral home. If a funeral home allows an independent agent to sell preneed on its behalf, an agreement exists. If that agreement has not been put in writing, and the agent violates Chapter 436, a swearing contest will ensue.

If the seller uses trust funding, the State Board is looking for the trust agreement and all contracts or agreements related to the administration of the trust. Many of the preneed programs offered to Missouri funeral homes involved the outsourcing of administration, and the examiners will need to know where to direct questions that may stem from that administration.

• A copy of the trust agreement with the financial institutions for any preneed trust.

Yes, this is a redundant request, and no, the seller doesn’t have to provide the trust agreement twice.

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

The examination will eventually review old contracts (and their compliance with the prior law), but the Board is concerned primarily with the current contract form’s compliance with SB1.
 

• 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

The need for better preneed oversight is obvious, but regulators often lack resources and expertise. The state of Connecticut made headlines recently for the decision to make budget cuts by de-regulating the death care industry*. Connecticut funeral directors challenged the decision, and the state issued a ‘clarification’ and withdrew the plan. (That’s correct, the funeral industry challenged a plan that would have reduced their regulatory oversight.)

Connecticut still faces the issue of funding for death care oversight, an issue that every state faces. In researching last week’s post about the Maryland Office of Cemetery Oversight, we reviewed the meeting minutes posted to the Office website. Budget issues have been an on going concern, and the Office and the Advisory Council had discussed the per contract fee approach in one meeting, and then the problems with this approach in another meeting. The per contract fee amounts to a tax on the preneed transaction.

Missouri has one of the nation’s highest preneed taxes ($36, thanks to National Prearranged Services). But, as the Maryland regulators have experienced, it is not clear whether the preneed tax will be sufficient. Oversight has to be provided to even the smallest seller, and ten sales a year won’t pay the time required to make an on-site exam.

Missouri’s preneed oversight is provided by an industry board that is made up primarily of licensed funeral directors. You’ve heard the criticism of this arrangement before (the fox has been put in charge of the chicken coop), but service on the State Board of Embalmers and Funeral Directors is a time consuming obligation. These board members are looking for ways to improve the image of the industry, and credit is due to them when they come up with ideas that have merit. One such idea is the posting of disciplinary matters on the Board website so that consumers can perform their own due diligence on an operator before purchasing a preneed contract.

This is not a new concept. The Mississippi Secretary of State posts disciplinary orders on its website. For the most part, the postings are fully adjudicated matters that involve an agreed upon procedure for future conduct. But, the postings also provide some of the facts that gave rise to the disciplinary proceeding. Such postings help to inform not only consumers, but also funeral homes and cemeteries. 

*Reprinted with permission from the August 11, 2011 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.

 

• Email This
• Print
• Comments
• Trackbacks

Preneed scandals in Illinois, Missouri, Texas, and California have state regulators moving to implement new audit procedures. But with new laws passed in the wake of NPS and state master trust problems, the frequency and scope of the future audit could change dramatically.  It is no secret that the scope of the preneed audit in Missouri is work in progress. When asked how the audit was being revised for its licensees, Illinois regulators politely declined to provide their written guidelines. Regulators in Kansas and Nebraska are also evaluating their audit procedures. But, the legal battle being waged in California provides a glimpse of one regulator’s intent to change the scope of the preneed audit.

The Ninth and Tenth Causes of Actions from the California Attorney General’s lawsuit against the California Master Trust allege that defendants either failed to maintain, or to produce, the preneed records required by law and regulation. California Code of Regulations, title 16, Section 1267 sets out those records that must be maintained by the funeral home. The regulation dates back 30 years, and reflects a view of the preneed transaction that is no longer consistent with the view taken by the Attorney General, and with the direction of the audit and lawsuit.

In a nutshell, the regulation asks for records which are intended to confirm whether the preneed payments were deposited to trust. The underlying principal is that the preneed contract represents a sale that the funeral home will book to its GAAP financial records. The regulation defines the funeral home’s cash receipts journal and general ledger as preneed records. The requirements contemplate that the funeral home will book these sales and payments for compliance with income tax reporting. By requiring the financial books and records, the preneed auditor can then track a consumer payment from funeral home receipt to the preneed trust. While the funeral director might not fear the preneed regulator, he is not likely to hide the income from Uncle Sam.

However, the California litigation is not about money that didn’t make it to trust, it is about the administration of the trust assets. In attempting to investigate the administration of the trust, the preneed auditor went beyond what the regulation calls for. The best evidence of the expanding scope of the audit is the defendants' response letter to the Cemetery and Funeral Bureau audit findings. The response letter indicates that one funeral home was cited for failing to have the following records:

• All correspondence with the trust administrator
• Copies of contracts that provide services to the trust
• Records of administrative costs
• Records of administrative costs allocated among the trustee and its vendors
• The portfolio of trust investments

When questioned about its authority for the requests, the Bureau reply stated that the trustee failed to make available “complete financial records for all preneed contracts and arrangements”. This answer fails to clarify what trust and financial records the funeral home must maintain on its premises.

What seems to come through from the California litigation is that original approach to the audit, ensuring the funds made it to trust, and leaving trust oversight to the independent CPA and an opinion, failed the California consumer. But, could the Bureau have better protected the consumer if the financial records have been kept at the individual funeral homes? (No, not without additional guidelines on the management of master trusts and pooled accounts.) And even if such regulations existed, it would be expecting too much from the auditor whose duties entail visits to hundreds of the funeral homes.

While the field auditor is an important element of the preneed compliance program, the program has to include the administration of preneed trust. Does this mean the funeral director must maintain correspondence and records related to the trust’s administration? The best course of action would be to establish a file for all trust related documents and correspondence. With the increase of preneed portability and the sale of non-guaranteed contracts, the funeral director's reliance on the ‘guaranteed contract defense’ becomes more tenuous. In a limited sense, the funeral director is becoming a fund manager on behalf of the consumer.
 

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors staff has some new faces, and in contrast to most rookies, these newcomers are playing pivotal roles in developing examination procedures for the state’s preneed funeral sellers. The Division of Professional Registration chose personnel with prior auditing experience, but as these ‘rookies’ are learning, there is little in the way of guidelines for the examination of trust funded preneed. Missouri’s preneed heritage only makes their task more difficult.

With one of the nation’s more generous trusting requirements, Missouri is dominated by preneed trusts. Until SB1’s passage in 2009, the State Board lacked rulemaking authority to address the numerous gaps and ambiguities in Chapter 436. Chapter 436 also governed the sale of vaults and burial services, which brought cemeteries into the mix. Allow an industry to operate 25 years without examinations or rules and you get a hodge podge of seller programs, each operating differently from the next guy.

Like Forest Gump’s box of chocolates, the preneed examiner may experience a surprise with each seller he/she visits. While these surprises may not necessarily constitute violations of Chapter 436, they can be challenging when seeking a certain continuity from seller to seller. It is that continuity that will help define the examination procedures to use with the preneed trusts established prior to SB1.

As a consequence, Missouri’s preneed examination procedures remain a work in progress. The initial exams will probably take longer, with the examiners comparing notes and revising the draft procedures with each examination. For the time being, those procedures will focus on whether preneed sellers and providers are complying with new preneed contract and licensing requirements, and with the handling of that the preneed payments are being made to the proper funding agent. One of the procedures to be tested by the examiners will be a consumer letter.

As a part of the final stages of the preneed seller exam, the State Board staff will generate a consumer letter with information from the annual report filed by the seller. The letter will go to each consumer who is making payments on a contract, or who has lapsed in making payments. A sampling (5%) of the seller’s paid in full contracts will also receive the letter. The letter will set out the consumer’s contract number, the sales price and payment balance (as reported by the seller), and the request that the consumer contact the examiner only if the consumer’s records conflict with that data.

As reported by the blog in February, Illinois also has a consumer statement requirement, but it differs from Missouri in that the preneed fiduciary must send out the statement, and provide information about expenses and the trust ‘inventory’.

Funeral directors are fearful that such consumer notices will cause confusion, and lead consumers to believe the funeral home is in trouble. While problems may be encountered, the consumer notice is one of the few procedures available for detecting the small percentage of funeral directors who pocket the consumer’s payments. But if handled correctly, the statement could be used to help to maintain consumer confidence in the funeral home.
 

• Email This
• Print
• Comments
• Trackbacks

Missouri’s preneed regulator, the State Board of Embalmers and Funeral Directors, will meet June 2nd to continue its discussion of agenda for the upcoming legislative session. Due to the lead time required to formulate legislation, the State Board is forced to begin discussions before its 2011 legislative agenda (SB325) even becomes law on August 28th. With the examination process having only begun this past January, the State Board does not even have the basis to evaluate crucial provisions of Senate Bill No. 1. Accordingly, the State Board faces decisions about what its legislative goals should be for the next year.

For the June 2nd meeting (and its prior May 18th meeting), the State Board staff went back to the various legislative proposals made during the summer of 2010 as a starting point. The temptation of Board may be to go through those proposals and evaluate each one on its merits. But the better approach would be to evaluate each proposal in terms of need and consistency with the legislative intent for SB1.

For example, page 9 of the June 2nd agenda includes changes intended to take preneed trusting to 100%. The proposal was discussed on May 18th, put up for a vote, and then withdrawn for further discussion on June 2nd. While it would be worthwhile to have a discussion on the merits of the proposal (including how 100% trusting would benefit both the consumer and the industry), the more important questions are whether the proposal is needed, and whether it is consistent with the legislative intent of SB1.
 

• Email This
• Print
• Comments
• Trackbacks

Continuing the theme that effective preneed regulation requires the occasional update, the Missouri legislature is poised to pass the first ‘patch’ to SB1, the 2009 legislation that ‘re-wrote’ Chapter 436. Senate Bill No. 340 will make four noteworthy changes to Chapter 436.

Concerned that preneed sellers would use variable annuities to fund preneed contracts, Missouri’s insurance regulators sought to have SB1 limit the use of annuities to the single premium variety. This proved burdensome to funeral homes committed to insurance funded preneed. The single premium requirement denied the funeral home the use of variable pay annuities for consumers who either do not qualify for life insurance, or who cannot afford the premium of a life insurance policy. SB340 appropriately allows variable pay annuities to be used to fund preneed contracts so long as death benefits are never less than the premiums paid.

While SB1 preserved the use of joint account funded preneed, small operators encountered problems with banks and the Patriot Act. SB340 will allow POD accounts to be used in funding preneed contracts.

SB1 provided for retroactive application in certain respects. But, with regard to preneed trusts in existence prior to August 28, 2009, SB1 provided for historic law treatment with regard to income distributions to sellers and the use of income to pay trust expenses. Section 436.031 authorized the distribution of trust income to the seller provided the mark to market requirement was satisfied. The section also obligated the seller to pay trust expenses and taxes because of trust income withdrawals. SB340 will delete that provision, and it isn’t clear the intent for this change.

Section 436.031 of the prior law also allowed a preneed seller to designate an investment advisor, and in doing so, relieve the trustee of all asset management responsibilities. This provision was exploited by NPS, and was pivotal in conversion of millions of dollars of preneed trusts to worthless insurance. Seeking a completely independent trustee, SB1 imposed restrictions on who could serve as an investment advisor to the trust. While the NPS experience proved the need to keep the fiduciary responsible for asset management, SB1 went too far in driving a wedge between the asset manager and the seller. SB340 will create an exception to that restriction for the “external” investment advisor who satisfies Section 436.440.

• Email This
• Print
• Comments
• Trackbacks

Microsoft’s early efforts to force regular program updates were a nightmare. Like a gremlin that visited at night, the update often changed default settings that you never completely understood in the first place. Sometimes the update would impact the compatibility of other critical programs. To avoid the hassle of these updates, I toggled off the Microsoft updates for several years. And then when a drive failed, dozens and dozens of MS patches and updates had to be downloaded and installed, costing me time and expense.

The preneed regulatory systems set up by various state legislatures in the 1980’s have begun to crash for the same reason: a failure to update. Preneed has changed since the days when bonds paid double digit returns and preneed programs were the fad. California was no different from most states where preneed opponents outnumbered preneed proponents. Legislative compromises favored the traditional operators who opposed preneed, and the resulting law was disjunctive and confusing.

As time passed, more and more California funeral homes began to offer preneed. In most cases, it started as an accommodation to the consumer who sought to put funds aside. Eventually, competition not only drove all funeral homes to offer some form of preneed, it also drove them to factor preneed into their business plan. The investment markets also became more complex.

But, the California funeral industry left the preneed law update toggled off, and instead, stretched the law’s ambiguities the best it could to “authorize” new business practices. And, the preneed regulators (first the State Board, and now the Bureau) often played the same game. The Bureau and the CFDA are now locked in a lawsuit (over an antiquated law) that will leave both sides bruised and defensive. The posture taken by the AG suggests the fight could be nasty. But the facts suggest, the State should look to make prospective changes.

NPS exploited the weaknesses of Missouri’s 1986 law, and that company’s collapse gave Missouri regulators the ammunition required to force a new preneed operating system on its funeral industry. The 2009 law has its flaws, and needs changes (other than those in SB340), but preneed life continues in Missouri. Missouri regulators would like to go back in time to change some of the prior law’s flaws, but the push to make retroactive changes has been measured.

In Illinois, the IFDA put together a master trust and an insurance program that pushed the envelope beyond the Comptroller’s tolerance. The Comptroller’s responded much in the same vein as the California regulators did. While entrenched in a lawsuit, the Comptroller pushed his legislative agenda through the legislature. But, Illinois got more of a preneed system patch than a new operating system. Eventually, Illinois is due for a significant preneed system upgrade.

Nebraska is another state that may be due for some form of a preneed update. With a reporting system based on tax cost basis, preneed regulators want to introduce market value into the computation for income distributions. The objective has merit, but the 1987 law can only be stretched so far.

Getting a preneed law that works for both operators and regulators will never be a “one and done” project. Occasional updates will be required.
 

• Email This
• Print
• Comments
• Trackbacks

For most Illinois funeral homes, March 15th is the due date for the filing of their preneed data with the Comptroller’s office. For those funeral homes that bolted from the IFDA after the master trust melt down, this has been an extremely frustrating process. The majority of funeral homes must file on line, with supporting documentation to be mailed no later than March 16th. Those funeral home operators of Irish descent will have reason to hoist an extra brew come St. Patty’s day: the Comptroller’s office has ample reason to change the contract reporting requirements yet again.

The 2010 reporting forms were changed to reflect SB1682’s elimination of depository accounts. However, the annual reports are still premised on the old IFDA master trust structure that credited consumer accounts with an amount of fixed interest. For each consumer preneed contract the funeral home is required to report beginning principal and interest, additions of principal and interest, withdrawals of principal and interest, and ending totals of principal and interest. In essence, the annual report views each consumer account as a passbook saving account.

No need to beat a dead horse, but the IFDA master trust was wrestled away from the association because the Comptroller determined the trust could not sustain itself. Contracts were being credited with interest rates greater than the trust’s investment return.

In response to the situation, the IFDA selected Fiduciary Partners to succeed Merrill Lynch as the master trust fiduciary. The switch to Fiduciary Partners includes a needed change in the investment strategy of the IFDA master trust: diversification through pooled funds.

To determine whether the IFDA master trust (or score of master trusts spawned in the mass exodus) will be self sustaining, the Comptroller’s office will need to revamp its annual report to track such contract issues as sales price, deposits to trust, and market value allocations. In light of the IFDA’s past use of insurance vehicles, Illinois fiduciaries should anticipate providing detail of their trusts’ investments and transactions.

Other states’ preneed regulators are also drilling down to the individual contract with new reporting requirements. Most notably, Nebraska revised its 2010 annual report to include new disclosures regarding market values, with all preneed sellers to provide individual contract data in an Excel format. The data must also be backed up with trust asset listings and transaction reports. Missouri has also implemented individual contract reporting, and Kansas has legislation pending that will impose similar requirements on cemeteries that sell preneed.
 

• 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

We don’t like to be reminded of our mortality. Cemetery operators face this issue with many marker and monument sales. An illness may lead a husband and wife to begin making plans, which often includes the purchase of a grave space and a marker. But, it is difficult for many individuals to view a marker complete except for a date of death. Consequently, it is common for the couple to defer delivery of the marker until some future date. Unfortunately, some cemeteries (or monument dealers) go out of business, or change ownership, and the marker goes undelivered.

Until the law changed in Missouri in 2010, cemeteries were required to either deliver the marker within a reasonable time, or place 110% of the wholesale cost of the marker in a segregated account. The Missouri law now requires cemeteries to trust or escrow 80% of the marker’s purchase price when delivery is deferred. The new law presents two dilemmas for the cemetery.

In the situation where the marker is to be paid with installments, the cemetery will often defer delivery until the purchase price is paid in full (or at least until the cost of the marker has been received). Many consumers need the flexibility of installment payments to meet the costs of the marker. However, the cemetery has little recourse if the family ceases to make payments, except to defer delivery of the marker. Under the new Missouri law, cemeteries will be required to deposit 80% of those payments to trust or escrow, even if the contract only involves a 12-month installment period, and a prompt delivery on the last payment. This will add another layer of expense to the marker sale.

For the consumer who does not want to see his/her name on the marker, the cemetery also has the dilemma of rising costs. The costs of granite and bronze have risen dramatically over recent years, and show no signs of leveling off. With a marker, the cemetery has a product that it may be willing and able to delivery, but may be forced to defer, and in doing so, is also forced to watch the profit of the transaction being eroded over time.

Consumers who need the flexibility of installment payments should not be surprised if cemeteries pass on the additional costs imposed by Missouri’s new law. Similarly, consumers who don’t want to see their name on the marker (for which they have already paid) may also be required to bear additional expenses when delivery is deferred.
 

• 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

Missouri cemeteries received a brief questionnaire last week from their primary regulator. The Office of Endowed Care Cemeteries (the OECC) has responsibility for enforcement of Chapter 214, the Missouri law that governs endowed care requirements and preneed sold by licensed cemeteries. The OECC would seem to be sizing up cemeteries as candidates for Chapter 214 preneed audits. If a cemetery is selling preneed pursuant to Chapters 333 and 436, the OECC can cross the cemetery off its list. But the likelihood is that most cemeteries selling preneed have opted away from Chapter 436.

What may not be apparent to consumers is the fact that many Missouri cemeteries claim exemption from Chapter 214 endowed care licensing requirements. Some cemeteries site exemption from these license requirements based on religious affiliations, or because they restrict grave space sales to family or association members. These ‘exempt’ cemeteries face new regulation requirements if they sell merchandise and services that would be deemed “preneed” by Chapter 436 (and the State Board of Embalmers and Funeral Directors).

Consumers can conduct their own survey of a cemetery offering to sell burial services, monuments, urns and vaults before there is a death.

If the consumer is purchasing a monument or marker, and is making a single payment, ask whether the contract complies with Section 214.385 and provides for prompt delivery.

If the purchase of the monument or marker is being made with installments, with delivery deferred to the future, ask the cemetery for documentation regarding the trust or escrow account used for the payments. The cemetery will have to either comply with Section 214.387 of Chapter 214 or Section 436.435 Chapter 436.

If the cemetery is offering to sell burial services or vaults prior to a death, a portion of the consumer payments should be deposited to either a 214.387 trust or a 436.435 trust. If the cemetery claims to be exempt, or can’t answer the question, the consumer has reason to be concerned. Such concerns should be addressed to either the OECC or the State Board of Embalmers and Funeral Directors.

Finally, ask the cemetery about their endowed care license. If it does not have a Chapter 214 license, ask to see its Chapter 333 preneed seller license. If the cemetery is not licensed as an endowed care cemetery, it has no option but to be licensed as a preneed seller under Chapter 333.
 

• Email This
• Print
• Comments
• Trackbacks

The ‘deadline’ for Missouri preneed sellers to ‘voluntarily’ report their pre-SB1 trust funded sales is a mere two weeks away. Again, this is a voluntary report. As such, missing the ‘deadline’ or failing to use the Board’s form carries no penalty to the preneed seller. So, why file?

The reason expressed by one State Board member was that the report would give preneed sellers the opportunity to demonstrate their trust was appropriately funded. Funeral directors active before the 2009 Missouri Legislature advised their legislators that the actions of NPS were not reflective of the industry as a whole. Legislators were informed that the vast majority of funeral homes put the consumers’ funds in the bank.

Missouri preneed sellers have three funding options: joint accounts, trusts and insurance. The issue of whether joint accounts are properly funded was addressed with the first provider renewal reporting filed this past October 31st. With insurance premiums posted to an insurance carrier, the Board decided trust funding would be their second priority.

The voluntary trust report is the opportunity for those sellers to put their money where their mouth is. Granted, the financial examinations proposed by the Division are far more intrusive than what had been discussed. But, the failure to back up the talk to the legislature will ring hollow in the face of the Board’s initial efforts to back up the industry’s representations.

Individually, funeral homes need to approach the voluntary reporting as another step in organizing their records in a manner to expedite the eventual financial exam. The goal is to get the exam over with a minimum of disruption and problems.

While many sellers are professing to be ‘as clean as a whistle’, most sellers will have issues. In the absence of regular oversight and guidance, funeral directors were left to interpret the law on their own. Mistakes were made, and the State Board would rather help correct those mistakes than pursue disciplinary actions that clog the administrative hearings docket. Accordingly, sellers could use the voluntary trust report to identify any issues they may have, and to outline their own corrective plan. Be a problem solver.

For those sellers who decide to make the Board examiners earn their keep, the expense of oversight will be pushed higher. The $36 per contract fee will prove inadequate, and the discussion will turn to increased fees. If the data should prove that a disproportionate amount of examination time was spent on small sellers who made no effort to comply, the larger preneed sellers will force the cost of the system to be more equitable. Under Illinois law, the preneed regulator has the authority to tag such a seller with a $20,000 audit fee. That represents 555 preneed contract fees that must be borne by the seller, not the trust or the preneed consumers.
 

• Email This
• Print
• Comments
• Trackbacks

Triggered by the NPS collapse, preneed reform rolled out of the Missouri legislature like a tsunami. When the funeral industry was slow to organize and respond to the situation, legislators worked with state officials to imposed sweeping changes. While SB1 does reflect input provided to the State Board by the industry, the law has flaws and omissions that need to be addressed. It will take time to determine how best to revise SB1, but for the current legislative session, I have a short Christmas wish list:

• A continuing education requirement – as a profession, funeral directors have an obligation to stay abreast of new issues and changes. Aside from preneed reform, the industry is in transition in many aspects. Few professionals like forced educational requirements, but the time has come for the Missouri funeral industry.
• Section 208.010.4 – no one can fault the local MO Healthnet worker who interprets this section to require an assistance applicant to purchase a Chapter 436 preneed contract. This law needs to be revised to clarify that other acceptable forms of final expense funds may be excluded for asset testing.

Merry Christmas!
 

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors will take another step on December 7th towards the process of defining the examination process for preneed funeral contracts. True to mantra that has been repeated over the past several months: this is a work in progress that will evolve as more is learned.

The agenda for the December 7th meeting includes an attachment titled “Financial Examination Process – FAQ”. For the most part, the FAQ is rehash of what discussed at the Board’s October meeting. The FAQ sets out in general terms the steps that will be taken in an examination.

One issue that is not clear from the FAQ is whether the examination will review preneed contract forms for compliance with applicable law. If so, the seller’s contract forms should be included in the Paragraph 2a review request. Including the contract review as a part of the prep work for the on-site exam should cut down on the time spent on the seller’s premises.

Paragraph 2f should prove a crucial step in the process of resolving issues before they reach the Board. If the staff and examiners merely write up the issues and defer all decisions to the State Board, the Board will need to schedule more meetings.

Finally, the FAQ does not offer much with regard to the review of serviced contracts. While the staff’s proposal to review all outstanding preneed contracts drew the most comments, the serviced contract review could prove more instrumental to disclosing compliance errors or fraud.
 

• Email This
• Print
• Comments
• Trackbacks

In a move to remain autonomous from the funeral industry and its oversight, the Missouri cemetery industry met with its regulator during the summer of 2008 to discuss reform legislation. Disagreements precluded effective legislation from being passed in 2009, but extensive changes was passed in 2010, and became effective on August 28, 2010. Now, the Missouri cemetery regulator has the task of implementing the law, and notifying cemetery operators and trustees of the new requirements.

Missouri’s Cemetery Endowed Care Trust Law (Sections 214.270 et seq) is administered by the Office of Endowed Care Cemeteries. A brief summary of the new law’s requirements can be found on the OECC’s website.

The new law makes substantial changes to perpetual care trusts (Section 214.330), sales documents (Section 214.282) and the preneed merchandise sales (Section 214.387).
Some perpetual care trusts define capital gains as income.

The new law incorporates the uniform principal and income act, precluding capital gains from being treated as income. This change is being imposed retroactively to existing trusts, thus forcing many cemeteries to amend their trust agreements. But, the new law does authorize fixed distributions that can exceed the trust’s income.

The new law also imposes the following requirements on perpetual care trusts:

A. Trust records must be made accessible to OECC examiners.
B. Trust instruments must be filed for approval.
C. Sales documents for interment rights and merchandise must comply with the Law, or the contract can be voided with interest refundable to the consumer.
D. The OECC can order the trustee to suspend your PC distributions.
E. PC deposits must be made on a monthly basis (instead of semi-annually).
F. The PC requirements have been raised for certain interment rights.

With regard to preneed, cemeteries must start from scratch. The prior law provided a low trusting requirement for services (opening and closings), and a segregated account requirement for marker and monument sales. To avoid the funeral licensing and trusting requirements of SB1, Missouri cemeteries must now comply with RSMo. Section 214.387. (To read a prior post on the new trusting requirement click here.)

Section 214.387 will require a cemetery to establish either an escrow account or a new trust, and comply with the following:

A. Escrow agents must be independent of the cemetery.
B. Escrow agreements and trust agreements must be filed with the OECC for approval.
C. Twenty percent of consumer payments may be retained but all subsequent payments must be deposited to a trust or an escrow account.
D. If a trust is used, all income must remain in the trust.
E. Deposits must be made within 60 days of receipt by the cemetery.
F. Preneed reporting to the OECC will begin in 2011.
G. New sales contract forms are required.

Banks that serve as a cemetery trustee will soon be receiving a letter advising of the new requirements. Missouri cemeteries will have more than New Year's resolutions to prepare for 2011.

 

• Email This
• Print
• Comments
• Trackbacks

Missouri is one of the few states that does not impose a continuing education requirement for funeral directors. Where continuing education is required, the state funeral director association typically sponsors programs that satisfy the CE requirements, and provides revenues needed to supplement the association’s budget needs.

The passage of SB1 has provided the Missouri Funeral Directors and Embalmers Association with an opportunity to reach out to members (and non-members) with classes about the new law’s requirements. However, the MFDEA faces challenges in reaching the Missouri industry: attendance is not mandatory, the economy is down, funeral directors are taking a wait and see approach, and the interpretation of the law’s requirements by the Board/staff is muddled.

Since the law’s passage in August 2009, Board members and staff have expressed frustration with the industry. Funeral directors did not attend legislative hearings or Board meetings in the numbers that were anticipated. Response to the new licensing requirements has been slow, and accompanied by complaints.

The past two years have been demanding and time consuming for the Board and its staff. Those two years have been marked by trial and err processes, some of which have succeeded and some of which have been jettisoned. For an industry that rarely attends a Board meeting, the result has been confusing.

The proposed examination procedures discussed at the State Board’s October 27th meeting include controversial provisions that will likely change before the Board’s meetings in December. Reviewing every outstanding preneed contract of every seller would be time consuming and excessive. Under certain circumstances, such a procedure may be warranted. If a seller cannot provide indicia of what his outstanding preneed liability is, then the Board has no recourse but to look for every contract.

However, there will be an on site examination of every seller. And, there will be a review of at least a sampling of the seller’s contracts. The exam will also involve a review of the performed contracts. At the conclusion of the review, the examiner will conduct an exit interview to advise the seller of the findings. These minimum procedures will provide the Board and the staff an opportunity to educate each seller regarding issues on non-compliance. But, the next steps of the examination process will provide sellers an opportunity to educate the Board and its staff.

The examination procedures represent the best efforts of the staff, with input from the Board and other states’ preneed regulators. Preneed is not only unique from state to state, but often from seller to seller. And, there are Missouri funeral homes that will argue the current Board membership is not a fair representation of preneed sellers.

So, after the exit interview is conducted, the examiner will return to the Board offices to prepare a report. That report will be sent to the seller to so that it may provide comments, rebuttal and proposed corrections. Then the examiner and staff will have to opportunity to revise the report that is filed with the State Board. Then the Board will decide what actions should be taken. If the Board/staff and the seller are in disagreement, a hearing will follow.

The rebuttal report and Board hearing will provide sellers the crucial opportunity to educate the staff and the Board about practices and procedures that were not adequately addressed in the Chapter 436 hearings, or subsequent Board meetings. Pressures to pass a law, and then implement that law, have resulted in the Board (and staff) pushing aside issues. One on one with the Board, sellers will have the opportunity to slow the process down and address SB1 and how it’s being interpreted and applied. For staff that has only dealt with problem programs, or Board members familiar with their approach to preneed, the rebuttal report and hearing will continue Missouri’s preneed educational process.
 

• Email This
• Print
• Comments
• Trackbacks

The earliest form of preneed consisted of a depository account at the local bank. Often, the paperwork included a statement of goods and services describing the individual’s preferences. The account was set up so that the funeral director could access the account upon the consumer’s death. The statement of goods and services would then be followed for the funeral. This arrangement was convenient to both the consumer and the funeral director. But, a recent news report out of Louisiana serves as a reminder of how the depository account has been too convenient, forcing states to take it away.

As preneed proliferated, state legislatures imposed safeguards to protect the funds paid by consumers. With the exception of New Mexico, all states now have trusting requirements. When those trusting requirements were initially imposed, a few states made exceptions to allow small funeral homes to continue to use the depository account. Abuses now threaten to eliminate the depository account as a form of preneed funding.

Illinois was the most recent to eliminate the depository account. In response to IFDA abuses, SB1682 now requires Illinois funeral homes to move their depository accounts to a corporate fiduciary and to revise their preneed contracts. Some Illinois funeral directors are painfully learning that the new law precludes them from using their local bank and familiar contract forms.

Missouri’s 2009 law preserved the depository account, but with substantial reporting requirements. Funeral homes dependent upon the depository account were required to report those contracts this past October 31st. Those reports will be used for on-site exams to begin in 2011. The future of depository accounts in Missouri will depend on how well funeral directors have complied with both the old and new requirements.

As discussed in a prior post, funeral directors who have been forced from depository accounts, or who must meet new requirements, need to seek legal assistance when revising their preneed contract form. The old practice of preparing a statement of goods and services is not enough for compliance with the new (and most old) preneed laws.
 

• Email This
• Print
• Comments
• Trackbacks

That’s the question a member of the Missouri State Board asked of his staff last Wednesday during a discussion of controversial examination procedures. Prior to the NPS fiasco, the answer to that question would have been “the Board is”. While SB1 (appropriately) continued to vest preneed supervision in the State Board, the new law also vests concurrent authorities in other state bodies.

From state to state, preneed supervision is assigned to either elected politicians, appointed agency directors or industry boards/commissions. As the Missouri Board was reminded this past week, the criticism made of vesting preneed supervision in an industry board often includes the characterization of having “put the fox in charge of the chicken coop”. But the advantage of having an industry board as the preneed supervisor is the experience those industry members bring to a complicated transaction.

If the Missouri funeral industry looks east to Illinois, it will find peers regulated by an office with a Tuesday election. The Comptroller candidates who would rather transfer preneed to another state agency than wade into a crisis that offers few answers. If Missouri funeral directors then look to the west, they will see that the fate of Kansas cemetery regulation is also dependent upon Tuesday’s elections. But after a year of meetings and warnings that changes are coming, the Kansas Secretary of State election could mean a new direction (or no direction at all).

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

While Missouri funeral homes may be frustrated by the past year’s changes, the Missouri reform process has been slow and measured in part because the Division of Professional Registration is contemplating its role when someone asks “Who’s the Boss?” In the future, effective preneed supervision must be a shared responsibility.
 

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors has released its proposed preneed examination procedures. The release comes just 24 hours before the Board’s October 27th meeting, and so few funeral directors will be prepared to ask questions.

The proposal contemplates different procedures for ‘compliant sellers’ and ‘non-compliant sellers’. With most of the industry concerned about some issue of compliance, the proposal begs the question how the determination of non-compliance is made. The timing of the release and the October 31st renewal deadline suggest that the failure to timely file a properly prepared seller’s renewal may be the easiest way to fall into the non-compliant stack.

The October 27th meeting only allows an hour of discussion of the proposal, so the industry will have to anticipate the time for questions and discussion will occur at the Board’s December meetings.
 

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

For the past several years, most preneed sellers were more likely to have been audited by the IRS than their state funeral or cemetery regulator. That will likely change in the next year or two for operators in a Midwest state.

The common response to an IRS audit would be to throw the relevant records into a box the weekend prior to the scheduled trip to the examiner’s office. But since the point of sale for preneed is at the funeral home, most states begin the examination process at the funeral home. In some states, the historical approach was to initiate the exam with little or no advance warning. Under such circumstances, it would behoove the preneed seller to organize and maintain his preneed records so as to expedite the examination.

While the duty to prove compliance is upon the licensee, few state death care regulators have issued any guidance regarding preneed record requirements. One challenge to providing such guidance is that a different set of rules is required for each method of preneed funding. Generally speaking, cemeteries are confined to trust funding because deliveries are made prior to death (thus eliminating insurance for much of what the cemetery sells). However, funeral homes often use both trust and insurance, and often multiple insurance companies and multiple trusts (Pre-88, Post-88, New Law, Old Law, my trust, state association trust, etc). And then some states also allow for depository accounts.

Sellers should set up different ‘boxes’ (or file drawers) for each method of funding. If the seller has offered insurance, trust and depository accounts, then plan on three drawers of documents. And if the seller has used Forethought, Homesteaders and NGL, three dividers will be needed for the insurance drawer. Similarly, the trust-funded drawer should have a Pre-88 folder, a Post-88 folder, and a new law folder. A folder for each bank used to fund a preneed contract should divide the depository drawer.

For the funeral home that approached the different sources of funding as diversification, this benefit comes at the cost of time to organize and maintain the necessary paperwork. Those operators that take the time to prepare and organize their records will minimize the examination’s disruption to their business, and the potential for citations for non-compliance.

In upcoming posts, the content of those folders will be addressed.

• 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

On September 9th, Missouri’s State Board of Embalmers and Funeral Directors conducted its first public meeting since forwarding new (and extensive) reporting requirements to preneed funeral sellers and providers. In no mood to entertain complaints from the industry, the Board advised licensees to “do their best”. In response to criticism of the new trust reporting requirements, the Board advised that fiduciaries are only being required to certify individual account data regarding transactions for which they have oversight responsibilities. Fiduciaries are not being required to certify the preneed contract data for which the seller is responsible (purchaser and beneficiary names and addresses).

What the preneed fiduciary is being required to certify is aggregate trust data regarding deposits, income and expenses. With regard to each preneed contract, the trustee must also certify the 5% origination fee and 10% sales expense that have been paid to the seller, and the market value of each contract. The State Board advised the industry that these reporting requirements will likely change next year. For example, the current report does not contemplate the amount deposited to trust per contract, or whether the preneed contract is guaranteed or not (which is necessary to determine whether the 10% sales expense is appropriate).

The course of reporting requirement changes will be influenced by the industry’s efforts as a whole to comply with the October 31st renewal requirements, and the January 31st voluntary reporting request.
 

• Email This
• Print
• Comments
• Trackbacks

Missouri preneed law (past and present) authorizes three forms of funding: trusts, insurance and joint accounts. Of the three, joint accounts have been used by many rural funeral homes that did not want the hassles of trusts and insurance. But with new reporting requirements, these funeral homes are on the clock to pull together information and seek certifications from bankers who, up to this point, haven’t been required to review a preneed contract.

With regard to their joint account funded contracts, the funeral home with a seller’s license has two renewal forms that must be filed by October 31st. The seller renewal form includes a report of contracts sold since August 28, 2009. That report has to be certified by the bank that maintains the joint account.

The provider renewal form requires a report of all active joint account contracts sold prior to August 28, 2009. In contrast to the seller renewal form, this report does not have to be certified by the banker. But, the State Board is requesting that funeral homes with joint accounts file a third report by January 31, 2011. While the January report is voluntary, it will require a bank certification for the number of contracts, the total face of the contracts and the amount paid by the consumer.

The refusal (or failure) to file the voluntary report will likely affect the nature and timing of the funeral home’s financial exam. The State Board has to perform a financial review of each “seller” once every five years. The State Board also has the authority to perform a financial review of providers. Regardless of whether the funeral home gave up the joint account contract when SB1 went into effect, the State Board will eventually review the contracts and accounts listed on the Provider renewal form that is due on October 31st.

In preparing the joint account reports, funeral homes need to read the instructions carefully. The forms are seeking information about the contracts sales price, what was deposited to the joint account and any distributions that have been made. Unlike trust-funded contracts, all consumer payments have to be deposited to a joint account (there is no 20% retainage for the joint account contract). Nor may the funeral home withdraw income from the joint account.

For the funeral home that takes the defiant stance about their preneed, be sure your contracts and CDs (or depository accounts) are in order. If you have doubts about the compliance of the contract forms or the amount in the bank, you may want to seek guidance from the Board’s inspectors.
 

• Email This
• Print
• Comments
• Trackbacks

Missouri’s preneed seller renewal forms include reports regarding each contract that is funded either by a trust, a joint bank account or an insurance contract. What may not be apparent to both funeral homes and funding agents is the requirement under SB1 that the funding agent attest to the accuracy of the information set out in the seller’s report.

 While the report forms accurately track the provisions of SB1, some banks officers may balk when asked to provide their signature to the form.

Banks, whether they issue joint accounts or serve as a preneed trustee, are dependent upon the funeral home for accurate information regarding the preneed contracts reported to them. While the intent of the report is to obtain financial information regarding each contract, there will be a few bankers hesitant to sign for fear they are being asked to certify the completeness of the contracts reported, or the accuracy of data reported about the purchasers and beneficiaries.

 If a Missouri funeral home finds itself caught between a hesitant banker and the October 31st reporting deadline, it should make an inquiry to the State Board to determine if the certification can be revised to the following:

The undersigned, after being duly sworn, on his/her oath states: (1) I am over 21 years of age and am authorized on behalf of the financial institution set out above to attest to the information set out in this report; (2) the preneed contract information set out in columns 1 through 6 of this report has been provided by the seller identified above; and (3) the joint account information set out in columns 7 through 13 is complete and correct to the best of my knowledge.
 

• Email This
• Print
• Comments
• Trackbacks

In August 2009, the members and staff of the Missouri State Board of Embalmers and Funeral Directors put in a lot of overtime to keep the preneed industry operating. Senate Bill 1 established brand new licensing requirements for preneed sellers. Without a license, a seller’s preneed contracts could be voided. However, the State Board lacked authority to issue a seller license until SB1 went into effect. With regard to August 28, 2009, the State Board faced the task of licensing hundreds of funeral homes, and responded by providing the industry an abbreviated process for obtaining the initial preneed seller’s license.

With the renewal of a seller’s license, the Missouri funeral home faces a much longer and detailed form (and process). The seller renewal form advises that the applicant may file their annual report upon receipt of the form. Realistically, the seller is precluded from filing the renewal and report until after September 1st. The annual report must include all contracts sold through August 31, 2010 (and beginning with August 28, 2009).

Depending upon how quickly its contracts are processed, the seller will have less than 60 days to work with trustees, banks and insurers to pull together the data and documents required by the renewal form. The failure to timely file the renewal form and report will cost the seller $200 and the authority to sell preneed until the license is renewed. Consequently, Missouri sellers would be best advised to begin working with their funding entities as soon as possible.
 

• Email This
• Print
• Comments
• Trackbacks

License renewal packets mailed to Missouri funeral homes in August are a little thicker than what has been sent out in prior years. The new renewal forms include five new preneed reporting forms: a Preneed Seller Annual Report, a Preneed Provider Renewal Form, a Report form for Trust Funded Pre-Need Contracts, a Report form for Joint Account Funded Pre-Need Contracts, and a Report form for Insurance Funded Pre-Need Contracts.

The latter three reports are voluntary, self-reporting forms that the State Board ‘requests’ be filed by January 31, 2010. In future posts, this blog will address those forms and the motivation for complying with the State Board’s request.

As between the two renewal report forms, the shorter provider license renewal form may be the source of anxiety to some Missouri funeral directors. The instructions for Section E state:

List all preneed contracts that were in existence with a preneed provider as of August 27, 2009 pursuant to 436.053 RSMo, if any.

Missouri has a long history of third party preneed sales organizations, and Chapter 436 has always made a legal distinction between the seller and the provider. Over the course of the last twenty-eight years, the synonyms APS, NPS, FSP and MFT can be found on the majority of preneed contracts sold in the state of Missouri. Missouri funeral homes opted for third party sales organizations for various reasons, including the avoidance of accounting and recordkeeping issues. Accordingly, funeral directors who interpret the Section E instructions to require the reporting of their third party contracts have reason to be alarmed.

However, the instructions refer to Section 436.053 (of the ‘old Chapter 436’), which authorized funeral homes to use joint accounts to fund preneed contracts. This old provision allowed funeral homes to sell the joint account contract as a provider without registering as preneed seller. The intent of the report seems to be the reporting of joint account contracts written prior to the effective date of Senate Bill No. 1, and not the reporting of all contracts sold on behalf of the funeral home by a third party seller. This is bound to be one of the issues raised with the State Board of Embalmers and Funeral Directors when it meets during the second week of September.
 

• Email This
• Print
• Comments
• Trackbacks

Almost a year to the date after SB1 was signed into law, one of the NPS sister companies was forced to close its doors. The recent Kansas City Star article about Mt. Washington Forever Funeral Home and Cemetery describes a situation that confused and disheartened the families who purchased Mt. Washington preneed contracts. The Missouri Attorney General’s subsequent press release offers little hope to the purchasers of preneed funeral contracts. While the press release offers some encouragement to preneed cemetery purchasers, those families also face the prospect of losing the funds paid to the cemetery.

Many consumers will lose some, or all, of the funds they paid Mt. Washington towards preneed contracts, and question why Missouri regulators did not act sooner. While operators and consumers both tend to view death care regulators as the ‘cops’, these state agencies lack both the authority or budget to summarily close businesses that break the law.

Within the next few weeks, both the Office of Endowed Care Cemeteries and the State Board of Embalmers and Funeral Directors will release to their respective industries new reporting requirements. Similar to reporting requirements imposed in Nebraska and Iowa, the Missouri regulators will begin seeking individual contract data from operators, and confirming data from preneed fiduciaries. These new reporting requirements will allow the regulators to begin identifying other potential Mt. Washingtons. But, regulators alone cannot protect every consumer. In the case of Mt. Washington, consumers have complained they were caught completely off guard by the closure.

If operator compliance reports were made available to the public, consumers could also assume a role in policing the preneed industry. In this vein, the OECC has expressed an interest in using the reporting requirements to form a grading system for operators’ compliance with state law requirements.

Such systems already exist in other states, Texas for one. Using a system that ranges from 1 (the highest level of compliance) to 5 (the lowest level of compliance), the operator is graded routinely on a number of issues. Such a system must be fair and equitable, and provide operators the opportunity to address issues. But once the process has been completed, the grades are then made public. Consumers are then able to access an operator’s audit report and grade to assess how safe the operator’s preneed funds are.

Rather than rely wholly upon the regulator, consumers must make inquiries before signing the contract and writing the check. If regulators do not make information available to the public, then consumers should begin asking their funeral home or cemetery whether certain types of information is available, and if so, can copies be provided:

• A copy of the death care operator’s current audit/examination report
• A summary of the annual report filed with the state regulator
• A summary of the current trustee report or insurance statement
• A contact name and email address with whom inquiries can be made of the preneed fiduciary or insurance carrier.

The Missouri Attorney General has advised Mt. Washington consumers to contact the AG’s office to file a complaint. Mt. Washington consumers also need to make inquiries to the Missouri funeral home regulator and/or the Missouri cemetery regulator.
 

• Email This
• Print
• Comments
• Trackbacks

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.)

 

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors met June 15th and 16th to consider legislative proposals offered for technical corrections to SB1. In a prior post, this author took exception to one of the proposals made by a Board member to raise Missouri’s trusting requirement from 85% to 100%. However, a majority of the State Board did not, and voted to include 100% trusting among its proposals to the Missouri Legislature later this year.

While the submitted proposal stated this was ‘a consumer protection matter’, the Board discussion was addressed to the fact insurance funded preneed provides the funeral home a better return. Trust funded preneed was criticized for lacking the investment vehicle to recover the 15% of consumer payments retained by the funeral home when the contract is sold. So, how does the 100% enhance consumer protection?

Historically, trust funded preneed in Missouri has been a liability to industry. When allowed to keep 20% and withdraw all income, funeral homes have been left to service a contract on an amount that may not even cover the costs of merchandise after 15 years.

SB1 takes three key steps towards rectifying that situation. First, the ‘retainage’ the seller may keep has been reduced from 20% to 15%. Second, the trust is now required to accrue all income. Third, and most elusive, SB1 now allows sellers to pool their trusts for investment purposes.

Prior to SB1, sellers were prohibited from commingling their trusts. The accounting systems available in the 1980s were not sophisticated enough to track both consumer and seller funds when multiple sellers were involved.

In the defense of the Board’s position, a trust that averages a gross return of 4% will be hard pressed to pay the funeral home enough to cover its at need prices in 10 years. As more funeral homes are pressed to provide preneed, the growth in ‘guaranteed preneed’ eats into the long-term profitability of the business. An indirect answer to the justification to the 100% trusting requirement.

The weakness in this position lies in the alternative that funeral homes are forced to take: insurance funding and the costs to the consumer.

If the funeral home has to offer preneed, and it has costs associated with providing preneed, then insurance funded preneed becomes the vehicle of choice. One of the knocks on insurance is its costs to the consumer when coverage is purchased with installments.

For the older consumer who cannot afford a single premium policy, the financing of the policy over five or ten years will cause the cost of the funeral to increase substantially.

All forms of preneed are beginning to include separate charges or fees to the consumer. It becomes incumbent upon the consumer to approach the preneed transaction with more questions, including: How much is this going to cost me?
 

• 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

Missouri funeral homes will get their first glimpse of their State Board's proposal for self reporting for preneed sales.  Under the prior law, preneed sellers merely reported the number of contracts sold and their aggregate sales price. 

For Missouri regulators to properly assess whether 'old' Chapter 436 trusts and joint accounts are properly funded, the new reporting requirements will have to ask for data that funeral directors may find intrusive.  But the state with the trusting requirements closest to Missouri's has been self reporting for many years. 

Iowa makes its reporting forms available through its website.  Preneed sellers, preneed agents, insurance companies and banks each have their own reporting form. 

By addressing the forms now, Missouri's State Board will be affording funeral directors 3 months to prepare reports on all existing business.  Depending how well the funeral home has kept its records, this should be adequate to meet the October 31st deadline.

Funeral homes that used either trusts or joint accounts under the prior Missouri law may want to look at Iowa's form to anticipate what individual contract data could be required.  The Iowa forms also provide instructions and Q&A sections. 

• Email This
• Print
• Comments
• Trackbacks

The next round of legislative proposals have been posted to the State Board of Embalmers and Funeral Directors website. At the top of the list is whether the trusting requirement should be raised from 85% to 100%. The proponent believes this will enhance consumer protections. He is not alone.

The Illinois Legislature heard the same from Rep. Dan Brady last year. And, the Funeral Consumers Alliance has been advocating the same position for years. But, does this requirement truly enhance consumer protection?

Competition dictates the type of preneed program a funeral home maintains. Metropolitan funeral homes often have no choice but to maintain proactive programs that require training, marketing, management and dedicated staffing. To offset program costs, the funeral home must receive revenue from the preneed sale. Setting the trusting requirement at 100% forces the funeral home towards insurance products, and their commissions. A legislative agenda that forecloses the trusting option makes little sense when insurance played a major factor in both the NPS and IFDA failures.

For the consumer’s perspective, a major weakness in the old Missouri law was the preneed seller’s right to withdraw income from the preneed trust. Without the accrual of income, the preneed contract became less portable as it aged. While SB1 may have other trust issues to address, it did fix the income accrual issue.

Some have argued that SB1 did not go far enough in providing the consumer refund rights to the income earned by a trust. The seller of the guaranteed contract is afforded the right to retain the income on cancellation because he takes the risks associated with the price guaranties. But prior to SB1, there was little authority for the non-guaranteed contract. If the preneed purchaser places a premium on refund rights, then the non-guaranteed contract authorized by SB1 is the better option.

With regard to Illinois law, the glaring weakness regarded the self-trusting provision and the lack of fiduciary oversight. With trusting already set at 95%, many larger funeral homes were already dependent on insurance funding. Deprived of revenues to maintain a trust program, funeral homes relied upon the IFDA. The lack of oversight and transparency lead to abuses by past IFDA leadership.

SB1682 took the crucial steps of requiring corporate fiduciaries, and imposing the prudent investor rule. But a question remains about who should provide oversight to the preneed fiduciary.

So, how does 100% trusting further enhance consumer protections in either Missouri or Illinois?

The debate over insurance versus trust has been waging for twenty years. While each has its strengths and weaknesses, the death care industry has done little to offer the consumer meaningful options for funding and price guarantees. Establishing barriers to either form of funding (or to non-guaranteed contracts) will do little to enhance consumer protections.
 

• Email This
• Print
• Comments
• Trackbacks

The State Board of Embalmers and Funeral Directors gave notice last week of hearings to be held in June regarding proposals made to correct or revise SB1.

If the Board follows the course taken in meetings held earlier this year, the proposals will likely be published to the Board’s website. These postings will provide Missouri licensees and preneed consumers the opportunity to provide the Board feedback on the proposals. Appropriate feedback and questions would likely be incorporated by the Board in its questioning of the proposals.

The following hyperlinks provide the proposals and explanations of the Preneed Resource Company. Start drafting!
 

• Email This
• Print
• Comments
• Trackbacks

Give the State Board credit for attempting to clarify how insurance assignments must be handled for compliance with Missouri laws. 

For several months, the State Board has sought clarifications from MO HealthNet regarding spend-downs. On May 12th, the Board emailed to the industry new MO HealthNet guidelines for insurance assignments. One day later, the legislature passed HB 2290.

HB2290 addressed a gaping hole left in Chapter 208 when SB1 was passed. Chapter 208 excluded funeral contracts that complied with Chapter 436 provisions that no longer exist. The drafters of HB2290 took a broad-brush approach to the problem. Having done so, funeral homes and cemeteries are left to ask MO HealthNet and the State Board new questions.

By the bill’s reference to Chapter 436, must a “Burial Plan” or “Preneed contract” comply with the requirements of SB1? This would be a defeat for cemeteries who have the option of selling preneed under Chapter 214. 

If an insurance policy was not purchased with the intent to fund a preneed contract, why then, bring the true spend down into Chapter 436 (and further burden the Board’s oversight functions)?

The MO HealthNet guidelines can be found on the State Board’s website.

Missouri funeral homes should note that the guidelines impose a duty on the funeral home to notify the Department of Social Services when excess funds remain from a participant’s preneed contract. If the preneed contract was irrevocable, that should flag to the funeral director that he should make an inquiry. 

• Email This
• Print
• Comments
• Trackbacks

For more than 20 years, Nebraska preneed sellers have filed an annual report that accounts for the aggregate contributions and distributions from their trust funds. The annual report form also computes the amount of income that must be accrued to the account if the seller elects to withdraw excess income from the trust. In its quest to determine whether preneed trusts are adequately funded, the Department of Insurance has made a request for individual contract data that supports the annual report.

Nebraska’s request for individual contract data reflects a trend developing with other Midwest death care regulators.

Individual contract data reporting was a priority in failed legislation by Kansas regulators.

Missouri’s State Board of Embalmers and Funeral Directors has acknowledged the need to determine whether existing preneed trusts are adequately funded, and that objective requires some detail about what comprises the trusts established under the prior law.

Missouri cemeteries are about to embark on preneed sales under a new law, and regulators have already expressed a need to know about those sales.

While many death care operators may challenge the individual account data request as burdensome or intrusive, operators harmed by NPS or the IFDA insurance debacle, have reason to be providing such information.

The degree an NPS provider suffers ‘damage” by honoring a preneed contract depends on several factors: the age of the contract, the casket, the funeral home’s current atneed prices, to name a few. To challenge that more than the guaranty association payout is needed, the industry must be willing to provide hard facts based on actual contract data. If the active NPS contracts are included in a state’s annual reporting, a basis has been established for a database for tracking the NPS consequence to the industry.

The same is true for Illinois funeral directors seeking to recover for the IFDA asset meltdown. Recovery has to be based on contract data.
 

• Email This
• Print
• Comments
• Trackbacks

Missouri's funeral industry has been given 30 days to submit proposals for revisions to the preneed law that went into effect last August 28th.  By email, the State Board has provided the guidelines for submitting changes that will then be discussed by the Board at public hearings to be held in June.  The Board has it's own July 15th deadline to adopt any of the proposals and submit them to the Division of Professional Registration. 

For those operators who are displeased with the new law, the clock is running.

• Email This
• Print
• Comments
• Trackbacks

The General Laws Committee of the Missouri Senate will hold a hearing this Wednesday (April 7th) on SB 1025. This bill provides hope to many small, rural funeral directors who would rather avoid the preneed transaction and the regulatory morass of SB1.

The bill would add a new Section 208.010.5 whereby individuals seeking to spend down assets to qualify for assistance could establish an irrevocable trust of up to $10,000. The trust could only be used for funeral and burial expenses. The section would also exclude the arrangement from Chapter 436.

When a similar provision was included in last year’s SB1, the funeral directors association expressed concern that the arrangement would be abused. However, the requirements of SB1 have proven burdensome and confusing to the industry, extremely so for the funeral home that only accepts “pre-arrangement funds” as an accommodation.

A Chapter 208 final expense trust would provide the consumer and his Missouri funeral operator a much-needed alternative to the joint account contract.
 

• Email This
• Print
• Comments
• Trackbacks

The fear of SB1 drove the Missouri cemetery industry to push for Chapter 214 legislation in 2009, only to have the wheels come off at the stroke of midnight last May. While legislation was passed, the original bill was gutted, and the resulting changes were incoherent and confusing. It was no surprise that the industry would pursue a bill to correct what was done in 2009.

An industry bill was introduced in the 2010 session as SB754. However, that bill was quickly replaced by a Senate Committee Substitute. The substitute bill incorporates changes sought by the State, the speed in which the bill was produced signals regulators’ recognition that Chapter 214 reform is needed.

Over the next several weeks, the death care industry and consumers need to take a close look at SCS SB754. Legislators will only provide the parties so many attempts to ‘get it right’. And while this bill contains several needed changes, it also has provisions that beg for questions, and answers. Take preneed for an example.

Section 214.387 will govern how the cemetery industry is to sell preneed in Missouri. Prior to last year’s legislation, Chapter 214 provided minimal oversight of preneed sales of markers and services. If a cemetery wanted to sell a vault on a preneed basis, it had to comply with Chapter 436. Chapter 214 did not contemplate trust funded preneed.

Section 214.387 takes a page from the ‘old’ version of Chapter 436 by requiring Missouri cemeteries to deposit 80% of a consumer’s payments to an escrow account or a trust if the preneed contract defers delivery. Last year’s model of 214.387 first established the new trusting requirement, but did so with confusing language. So in a sense, Missouri cemeteries went from zero to eighty last year without guidelines.

SCS SB754 attempts to provide some of those guidelines, but it misses a few beats.

The 80% trusting requirement will be one of the highest in the country. Many states’ cemetery laws trust on the wholesale costs of merchandise. This poses an audit nightmare (ask the Kansas Secretary of State). The wholesale threshold is crossed somewhere around 40 to 50% of retail. Consequently, the cemetery laws generally have lower trusting requirements than that imposed on funeral homes. But the second piece of the puzzle for cemetery trusting is the income accrual provisions.

Cemeteries have cash flow requirements that differ from that of a funeral home. States’ cemetery laws reflect this by permitting the disbursement of preneed trust income. Typically, the higher the trusting percentage, the more likely income disbursements will be allowed. But, there are exceptions (Iowa for example).

So, it’s no surprise that 214.387 contemplates income distributions. However, the bill only authorizes income disbursements from escrow accounts. The bill does not include a corresponding authority for preneed trusts.

Another glitch in 214.387 would provide consumers a refund that would include half of the income earned on the account. If escrow accounts are distributing income to cemeteries, then someone would have to ‘come out of pocket’ for refunds to the consumer.

The quick solution to these 214.387 issues would be to allow both types of accounts to distribute half the annual income, leaving the balance of income in the account until the contract is canceled or performed. As such, the Missouri law would provide higher trusting safeguards than most other states.
 

• Email This
• Print
• Comments
• Trackbacks

 NPS salesmen had quite a reputation. Commission driven, some were reported to have earned a healthy six-figure salary. And, some had no prior experience in the funeral industry.

To curb the excesses committed by NPS salesmen, Missouri preneed reform bill requires preneed salesmen to be licensed, with a condition that they “have successfully passed the Missouri law examination as designated by the board”.

Since the effective date of the law (August 28th), preneed agents have been required to take the same law examination required of funeral directors. That examination has proved difficult for many preneed agent applicants, and issues were presented to the Missouri State Board of Embalmers and Funeral Directors at their February 4th meeting. The State Board held an open meeting by conference call on February 11th to facilitate further discussion of preneed agent licensing and the Missouri Law Test.

Two basic positions emerged during the February 11th conference call. The funeral directors’ camp views the preneed contract as the sale of a funeral, which should require the licensed funeral director. The proactive preneed seller views the preneed contract as a funding vehicle to pay for the goods and services described in the contract, which would require the salesman to be knowledgeable about the requirements of Chapter 436.

Historically, most Missouri preneed contracts were of the guaranteed variety. If the preneed contract was performed with little or no variation to the prearranged funeral, then the contract represents the purchase of a funeral. But, some families change the terms of their preneed contracts, and under such circumstances, the contract represents a funding vehicle. As more non-guaranteed contracts and final expense products become more common, fewer preneed contracts will represent the “sale of a funeral”.

For the time being, the State Board will continue to require the same law examination given to applicants for a funeral director’s license. But, is the funeral industry best served by restricting preneed agent licensing to legal testing imposed on funeral directors?
 

• Email This
• Print
• Comments
• Trackbacks

Regulators in Missouri and Kansas will be pursuing legislation this spring for more authority in providing oversight to cemeteries. With its Burr Oak problems, Illinois can’t be too far behind.

Whether it is the economy or the unscrupulous owner, regulators are finding they lack both the expertise and authority to properly protect the cemetery consumer.

The media loves a story like the one that broke on Friday about the Maryland cemetery owner that was arrested in Texas. In 2008, Mr. Deffenbaugh was charged with felony theft, and allowed to avoid prison time with an arrangement that was to provide restitution of $1,000,000. When it came time to pay the piper in 2009, the owner staged his own death by “falling off his boat” in the Chesapeake Bay.

In contrast, brief news reports were offered about a Barrett, Missouri cemetery that faces bankruptcy after its owner died, leaving no one to continue its operation.

When regulators seek reform legislation, they have both situations in mind, but it is the “Deffenbaugh card” that wins legislative votes. Cemetery owners rail when the card is played, but it is the troubled cemetery operator that consumes the regulators’ time and resources. With regard to the ‘other’ situation, there are few solutions for failing cemeteries, other than passing the responsibility for upkeep to cities or counties (and their taxpayers).

Finding effective answers to both situations will require greater interaction between the regulator and the cemetery industry. If they are to become more effective at providing oversight, cemetery regulators must gain crucial experience that can only be derived from reputable operators. And until the regulator has a firmer grip on the industry’s better business practices, legislation will often represent a give and take exchange that may span years until a workable solution is reached.

• Email This
• Print
• Comments
• 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

The future of Missouri’s examination of preneed books and records will begin to take shape on February 4th. The State Board of Embalmers and Funeral Directors has put this issue at the top of its agenda for Thursday’s meeting.

Regulatory review of Missouri’s preneed industry has been dormant for almost 15 years, and SB1 now imposes a regular examination of preneed sellers’ records. The scope, and the procedures, of the review process may take months to determine, but Missouri funeral directors should anticipate reporting requirements that impact all preneed contracts subject to Chapter 436.
 

• Email This
• Print
• Comments
• Trackbacks

A “Spend Down” is the transaction where a person seeking public assistance transfers money or insurance to a funeral home to avoid having the “asset” count as a resource. It is a commonly held perception that the Spend Down accounts for many preneed contract purchases. But should all Spend Downs trigger the state preneed law intended to protect the consumer? That question has been the source of disagreement and confusion for Missouri funeral directors since last July when the State Board first began to implement SB1.

The Missouri controversy swirls around the Spend Down that involves an existing insurance policy. It is a fairly common occurrence for a family to approach the funeral director with a small life policy ($10,000 or less) with a request that the policy be held until welfare applicant’s death (when it is to be applied to funeral expenses). Missouri’s public assistance policies are interpreted at the county level, and the result has been widely diverging requirements. Some Missouri counties require the funeral director to provide a contract to the family to evidence the assignment was not made as a gift. The contract requirement also serves to protect the funeral director by setting out the terms and conditions underlying the assignment. For example, the funeral director may not necessarily promise the insurance policy is being accepted as the sole consideration for the future costs. If the policy proves worthless, the family will still be obligated to pay for the funeral.

The Missouri State Board of Embalmers and Funeral Directors has grappled with whether this transaction should be subject to the requirements of SB1. During it’s initial SB1 meetings, the State Board leaned towards excluding the Spend Down from SB1, but in subsequent meetings expressed an intent to include the transaction if a contract were involved.

When the family approaches the funeral director with an existing insurance policy or certificate deposit, and the funeral director receives no compensation in the form of a commission, the Spend Down represents an accommodation to the consumer. Under such circumstances, a regulator should consider whether the licensing requirements are sufficient to protect the consumer. Imposing the requirements of SB1, or any preneed statute with additional fees or costs, on an accommodation transaction burdens both the consumer and the funeral home.
 

• Email This
• Print
• Comments
• Trackbacks

The Missouri Funeral Director and Embalmer Association provided crucial support to the passage of Senate Bill No. 1, but the heart of the association’s membership, the mom and pop operators, may now be second-guessing that decision.

SB1 provides regulators the authority to audit or examine preneed trusts and joint accounts, including those established prior to August 28, 2009. Missouri funeral directors are now hearing that the State Board will enforce provisions of the law against their old preneed business in such a way so to put their funeral establishment licenses at risk.

The State Board’s authority to audit preneed sellers under the old law was vague. During the 1980s and early 1990s, the State Board conducted ‘random’ audits. In reality, the audits were not random, but weighted by the number of contracts sold. Using independent CPA firms, audits were made of the same small group of sellers. The practice was challenged in the mid-1990s, and audits were discontinued.

While the vast majority of Missouri sellers have never been audited, their preneed contracts have been reviewed periodically by State Board inspectors. Funeral directors are now troubled by the prospect of those contracts failing to pass muster when reviewed by an independent CPA firm.

The licensees’ worries are well founded. Few funeral homes engaged legal counsel for the purpose of preparing preneed contracts or trust agreements. Instead, funeral homes shared or borrowed documents, often without regard to such specifics as how the contract was to be funded. Consequently, funeral homes have used trust-funded contracts for joint accounts.

Some funeral directors are bound to take a defiant position with the State Board’s enforcement of SB1 against their preneed paperwork. While it is predictable that the State Board may assert the licensee’s failure to engage legal counsel is no defense, licensees represented by counsel also have reason to be indignant with the Board.
 

• Email This
• Print
• Comments
• Trackbacks

In May 2009, the American Funeral Director editorial advised that fixing preneed has to be a cooperative effort, and that the industry needs to agree upon a plan before attempting to legislate a fix. In that same month, the Missouri legislature passed a ‘fix’ to the NPS abuses that incorporated provisions from a mixed bag of industry recommendations. The Missouri funeral industry is now learning that their recommendations don’t amount to much of a plan.

With rumblings that Chapter 436 would have to be reopened this year to fix SB1’s flaws, the State Board took two important steps towards a plan: suspending any legislative efforts by state regulators for at least a year, and establishing a forum for industry attorneys to provide input regarding SB1. So now, in who’s court is the ball?

Mr. Defort suggests that state associations must take the lead in developing the “plan”. Perhaps, but that would depend upon the strength of the particular association’s membership. The Missouri Funeral Director and Embalmer Association played a crucial role in passing SB1, but the Missouri preneed industry is large and diverse. Consequently, the MFDEA cannot be expected to shoulder the plan-building task alone.

Some might suggest the ‘big’ sellers should step up, but the national companies have preneed programs that already comply with more stringent requirements than those imposed by SB1. The big sellers are waiting for the regulators to clarify SB1’s ambiguities and conflicts.

Rather, the ball would seem to be in the regulator’s court, and more specifically, the court of the Division of Professional Registration.

If the Division needs some starting points for a plan, here are four:

• Develop an annual reporting system that operators can use to demonstrate compliance with the 80% funding requirements of existing trusts (so as to minimize audit expenses and lower the $36 contract fee)
• Develop an alternative to the broken joint account contract
• Establish a voluntary compliance program to fix the technical violations that have accumulated over the past 27 years (when there were no guidelines or oversight)
• Establish a “no action letter” procedure that will allow more sophisticated sellers to determine the boundaries of compliance.

• Email This
• Print
• Comments
• Trackbacks

The anxiety over Missouri’s new preneed law will temporarily peak this Friday with the passing of the due dates for annual reports and license applications. To give the industry a breather, and to assess SB1’s flaws, the Missouri State Board of Embalmers and Funeral Directors reached an informal agreement on October 20th to table any corrective SB1 legislation for one year. While their emergency rules continue on the path to approval, the State Board will begin exploring ways to identify SB1’s problems, and to prioritize issues for permanent regulations.

To view the Board’s emergency rules click here.
 

• Email This
• Print
• Comments
• Trackbacks

Like most states’ preneed laws, Missouri’s Chapter 436 has always contemplated a depository accounts for the small funeral operator who provides preneed as an accommodation. Many funeral homes do not sell enough preneed to warrant the expense and hassle of either a trust or an insurance license. Chapter 436 allows the funeral director to place 100% of the consumer’s funds into a joint depository account at a bank.

Despite certain glaring problems with the joint account contract, the Missouri legislature preserved the structure when it passed SB1, and re-wrote Chapter 436.

The small operator often accepts the consumer’s funds for purposes of a ‘spend down’ that will allow the consumer to exclude the funds from his/her resources for public assistance. Technically, the joint account requirements are not sufficient for excluding the funds, and funeral director is required to set up the account as “for the benefit of”. In doing so, the funeral director has not complied with Chapter 436 (old or new).

Because the transaction is an accommodation, the funeral director has little incentive to incur expense. Consequently, Missouri funeral directors ‘tend’ to borrow from each other with regard to documentation. While Chapter 436 has always required a contract form specific to joint account funding, antidotal evidence suggests many funeral directors borrowed a trust funded contract form for their joint account contracts.

SB1 requires the State Board to examine or audit all preneed sellers, including funeral homes that have joint accounts but decline to become licensed as sellers. This puts Missouri’s regulators in the difficult situation of citing small operators for Chapter 436 violations despite having all of the consumer’s funds in a depository account at the bank. For the integrity of preneed reform, the State Board cannot look the other way with regard to the joint account requirements.

Rather than force the small operator into either of the remaining SB1 options, Missouri should explore a new option for small operator.
 

• Email This
• Print
• Comments
• Trackbacks

The old axiom was that it would take three consecutive legislative sessions to get a preneed bill passed. If Missouri and Illinois are indicators of the current preneed reform movement, the charm may be based not on attempts but actual bills passed by the legislature.

The Illinois Comptroller’s proposal for preneed reform, SB1682, is progressing quickly towards approval of the Governor’s amendatory veto. While the bill fails to address most of the recommendations made by the Governor’s task force, SB1682 will tighten the trusting requirements of preneed funds until comprehensive legislation is passed. Consequently, Illinois’ preneed sellers face the dual task of complying with SB1682 and negotiating the future of the preneed transaction. With the various pending lawsuits, the question is whether the Illinois death care industry has the capacity to work with regulators towards a consensus bill.

Missouri preneed funeral regulators have been slow to communicate the new requirements of that state’s new preneed law, Senate Bill No. 1. That bill was written without much cooperation from either the funeral industry or the cemetery industry, and the result is an ambiguous law that imposes requirements without sufficient consideration of practical compliance by the funeral industry. The law has been the source of tremendous confusion, and many funeral directors would rather ‘opt out’ completely. Against a backdrop of the NPS failure, regulators and funeral homes would be best served to reconcile their differences in an attempt to address SB1’s flaws.

Missouri’s cemetery industry also faces a similar legislative task. With a strategy based on the old axiom, one constituency of the Missouri cemetery industry pursued legislation that included provisions intended to provide preneed sellers an option out of SB1. That legislation included provisions objectionable to cemeteries with preneed programs, and most of the bill was scuttled at the 11th hour. The resulting bill opened the door for Missouri cemeteries to establish Chapter 214 preneed programs, but does not provide any regulatory oversight for consumer protections. The bill also leaves the Missouri cemetery industry with the prospect of being regulated under SB1.

Historically, it was the internal industry disputes that made preneed legislation so difficult to pass. Legislators would send the squabbling parties home until they could resolve their disputes. What has changed in the dynamics of preneed legislation is the role of the regulator. Frauds measured by the millions are forcing regulators to share in the accountability of preneed failures. The regulator’s agenda is now trumping the industry’s internal disputes in Illinois and Missouri.

But, the regulator’s trump card does not necessarily guaranty a law that best serves the consumers’ interests.
 

• Email This
• Print
• Comments
• Trackbacks

Taxpayers, through their local governments, have always borne some of the cost of death care. Taxes go toward the maintenance of abandoned cemeteries and the final disposition of the indigent. But as the New York Times reports, the economy is causing more families to abandon the care of their dead to local governments. While many funeral homes will do what they can to assist the indigent, regulators and legislators are being forced to address this growing problem.

When Missouri’s legislature re-wrote that state’s preneed law this year, one of the earlier bill proposals included a revision to the public assistance law that would have allowed a person to set aside funds in a trust to be used for funeral and burial expenses. The trust would serve as an alternative to a preneed funeral contract. The public assistance law would also have been amended to contemplate the preneed reforms to be made to Chapter 436. However, the Chapter 436 reform passed by the Missouri legislature, and signed by the Missouri Governor, did not include any of the public assistance law amendments.

If interpreted strictly, Missouri’s public assistance law (Chapter 208), does not even exclude an irrevocable preneed funeral contract from the resources of an applicant for public assistance. It is unlikely Missouri residents will be denied the use of “spend downs” to qualify for pubic assistance, but legislators and regulators need to understand that SB1 was not a “one and done” fix for the NPS problems.
 

• Email This
• Print
• Comments
• Trackbacks

The emergency rule that implements Missouri’s $36 per contract fee becomes ‘official’ on October 4th.  Missouri funeral directors question whether the fee is too high, and whether it will contribute to the decline in preneed sales. The analysis required for the emergency rule reports that the fee is expected to generate $612,000 of revenues that will be used by the State Board of Embalmers and Funeral Directors for the enforcement of Senate Bill. No. 1. While funeral directors will challenge the State Board’s need for $612,000, the industry must consider how a few problem sellers contribute to the cost of preneed.

The State Board’s October 20th agenda includes a disciplinary hearing on a preneed seller involving allegations of multiple violations. The administrative order included with the agenda reflects extensive time and effort expended by the Board’s staff, investigators and attorneys. The alleged misconduct covers several years and several preneed purchasers, and the proceeding represents a substantial cost to the State Board.

Missouri has never had an effective preneed exam or audit program.  Consequently, regulators are left to question whether the October 20th hearing is just the tip of the iceberg.

Sellers with a compliant preneed program question why a few bad apples should spoil the barrel for the entire industry. With the $36 fee providing the Board most of its funding for audits and enforcement proceedings, compliant sellers have a reasonable argument that the fee represents an inequitable surcharge to their families. But, Missouri’s sellers face an up hill climb in any fight for a lower fee.

The climb up that hill begins with two proposals: better annual reporting and a shift of audit expenses.

With better annual reporting, Missouri’s regulators could spot trouble accounts without an audit, and when less drastic enforcement actions are an option.

When the State Board’s preneed examination discloses material non-compliance, the costs of an audit and enforcement proceedings should then be borne by the seller.

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors faces two hurdles to implementing SB1: disagreements over the interpretation of key provisions and informing the industry how the Board will enforce the law. These hurdles have put the Board in to a Catch 22 situation.

SB1 was drafted under the cloud of the NPS crisis. Legislators were lobbied from all sides, with positions as diametrically opposed as outlawing preneed to leaving Chapter 436 in tact. With limited assistance from the industry, legislators used the resources at hand and forged compromises. As a consequence, the law has several ambiguities, and crucial provisions can legitimately be interpreted differently. There is ample room for disagreements.

The disagreements over SB1 requirements have caused the State Board to reconsider how to best educate the industry. When contacted with SB1 questions, the Board’s staff (and website) recommends that licensees seek the advice of an attorney. This may be the appropriate ‘legal’ answer, but it is one that will frustrate the licensee. First, the advice requires the licensee to incur an expense at a time when it can be least afforded. Second, there is no assurance an attorney can provide an answer the licensee can rely upon. Some attorneys will turn to the Board’s legal staff, and it is not clear those attorneys are in a position to field questions about SB1.

As licensees, funeral directors do have a responsibility to educate themselves about the law’s requirements. We have heard this at recent Board meetings. But, before the licensee can educate himself on the law’s requirements, the State Board must be able to clearly articulate the law’s requirements. That could require weeks on most issues, if not months on other issues.
 

• Email This
• Print
• Comments
• Trackbacks

One criticism of Missouri’s prior preneed law was that the Attorney General’s office was dependent upon the State Board to refer complaints for legal enforcement. If the State Board didn’t refer a Chapter 436 violation, the AG’s only enforcement alternative was to pursue an action under Missouri’s Merchandising Practices Act (Chapter 407). During the 2008 hearings on Chapter 436 and National Prearranged Services, it was generally recognized that the Attorney General’s office needed independent authorities to pursue Chapter 436 violations. But, the Attorney General also expressed the desire for authority to hold fiduciaries more accountable for their funeral home client’s actions.

The AG’s fiduciary recommendations drew concerns from both funeral homes and the Missouri Division of Finance. The Division of Finance questioned whether the requested powers would make the AG a de facto bank regulator on par with the Division and the bank’s federal regulators. Consequently, the final recommendations for Chapter 436 legislation conditioned the AG’s authority to take action against a fiduciary on having received the consent of the fiduciary’s primary regulator.

However, the Chapter 436 Working Group recommendation regarding this limitation on the Missouri Attorney General did not survive the Senate Bill No. 1 revision process.

Section 436.470.12 of SB1 grants the Attorney General the authority to bring action against a preneed fiduciary whenever an “inspection, investigation, examination or audit” reveals a violation of Chapter 436. A prior subsection provides for information sharing among the relevant Missouri agencies, and arguably, the AG’s authority over preneed fiduciaries could be triggered by the AG’s own investigation or examination.

And, there seems little doubt that the AG may be inclined to apply this new authority with regard to preneed trusts that existed prior to August 28th. Accordingly, Missouri’s preneed fiduciaries should evaluate their accounts with the knowledge that Big Brother may be looking.
 

• Email This
• Print
• Comments
• Trackbacks

Missouri will look to a combination of licensing fees from preneed sellers, providers and agents to fund a portion of the projected costs of preneed oversight under SB1. But, most of SB1’s enforcement price will be funded by the $36 to be charged for each preneed contract sold. The ‘per contract’ fee is not new to the Missouri preneed industry, but the fee does represent a substantial increase from the $2 charged under the prior law.

According to State Board’s statistics, the Missouri preneed industry has sold an average of more than 22,000 preneed contracts each year during the past 6 years. Using that average, the new per contract fee will increase the State Board’s annual budget by more than $750,000. Appropriately, consumers and death care companies are asking how this budget will be used.

Another question is who should bare this expense. When the fee was at $2, many funeral homes absorbed that cost. But in today’s economy, the fee represents an expense that many funeral directors can no longer absorb. One of the proposed emergency rules reflects the division that exists between the Attorney General and some the State Board members with regard to how this new fee should be assessed.

With the purchase price of a preneed contract based on the funeral home’s current prices, a preneed seller must already absorb the costs of developing and maintaining a compliant program. Funeral homes and cemeteries must also bare a portion of SB1’s costs through new licensing fees. By passing the per contract fee on to consumers, the death care industry can begin to make regulators accountable to the public for the oversight they plan to provide for the preneed consumer.
 

• Email This
• Print
• Comments
• Trackbacks

The first week under the new preneed law was a confusing one for the Missouri funeral industry. SB1 has many drafting conflicts and ambiguities, and that has give rise to different interpretations from the Attorney General’s Office, the State Board of Embalmers and Funeral Directors, and the death care industry.

The State Board and the Attorney General’s Office have been criticized for the NPS debacle. While some of that criticism may be justified, NPS exploited the weaknesses of Chapter 436 (and the Board’s enforcement budget), and kept the regulators at bay for years. With SB1, the regulators have been given the keys to a new vehicle for preneed oversight and enforcement, but they are not in total agreement about the map to follow.

The State Board’s immediate agenda are the emergency rules that will keep the preneed industry functioning for the next 3 to 9 months. Consequently, debate over interpretations must be brief and concessions must be made. In some respects, the resulting emergency rules will be overly burdensome. But, these emergency rules will be the law until regulations are promulgated pursuant to the normal rulemaking process. Funeral homes that disregard the emergency rules, do so at substantial risks. It is crucial that funeral directors also understand that the emergency rules will impact the preneed contracts sold prior to August 28th.
 

• Email This
• Print
• Comments
• Trackbacks

As its first step in educating the preneed industry about SB1’s requirements, the Missouri State Board of Embalmers and Funeral Directors posted the Top 12 Changes to Missouri’s Pre-Need Law to its website. However, I had trouble getting past No. 2. The explanation about fiduciary reimbursements of sales expense on Pre-SB1 sales sent me back to SB1’s ‘Grandfather clause’:

436.412. Each preneed contract made before August 28, 2009, and all payments and disbursements under such contract shall continue to be governed by this chapter as the chapter existed at the time the contract was made.

As authorized by RSMo. Section 436.027, it has been fairly standard practice for Missouri preneed contracts to recite that Sellers may retain the first 20% of the purchaser’s payments. However, the State Board is advising all Purchaser payments, including PreSB1 business, must be deposited to trust before the 20% sales expense is retained.

While the State Board’s intent may have been to address the old statute’s failure to address when purchaser payments must be deposited to trust, the Board has overstepped its authority if its intent is to require sellers to deposit payments on PreSB1 contracts to trust without retaining sales expense.

• Email This
• Print
• Comments
• Trackbacks

For the past fifteen years or so, Missouri cemeteries could sell markers and memorials on a preneed basis without making delivery of the marker, or depositing purchaser payments into a trust. RSMo. Section 214.387 authorized cemeteries to use a segregated account to hold an amount equal to 110% of the marker’s wholesale cost. If the purchaser did not want the marker delivered, the cemetery could set up a bank account to hold the required amount. The procedure was easier and cheaper than establishing a trust account. But, the cemetery’s authority to use the segregated account came to an end on August 28th with the effective date of SB296.

If delivery is not made within a “reasonable time”, the cemetery must now deposit 80% of a purchaser’s payments on cemetery merchandise (including markers) to a trust account or an escrow account.

The elimination of the segregated account also had theunintended consequence of subjecting the preneed cemetery merchandise sales to the jurisdiction of the Missouri State Board of Embalmers and Funeral Directors.

To the extent cemeteries are subject to licensure by the Office of Endowed Care Cemeteries, the State Board has tentatively approved an emergency rule that exempts preneed merchandise sales that are made in conjunction with a burial space with endowed care. Ostensibly, cemeteries that are either non-endowed (or exempt from Chapter 214 licensure) would be subject to Chapter 436 if they sell merchandise on a preneed basis.
 

• Email This
• Print
• Comments
• Trackbacks

The Missouri State Board of Embalmers and Funeral Directors meets August 25th to vote on emergency rules that are intended to keep the preneed industry functioning when SB1 goes into effect on August 28th. While numerous issues have been identified to the State Board as deserving of emergency status, four stand out above the rest: licenses, the new trusting of all payments, preneed contract requirements and the cemetery exemptions.

To sell preneed after Thursday, funeral homes must have a license. It doesn’t matter whether the funeral home is offering joint account contracts, trust-funded contracts or insurance-funded contracts, a seller license is required. The same is true if the funeral home intends to honor a preneed contract sold after Thursday. A preneed provider license is required. A preneed agent registration will also be needed for each individual that sells a preneed contract.

But, the State Board does not have the authority to issue a license until Friday. So, the State Board will vote on a special form called the Notice of Intent to Apply for Licensure/Registration that will be used for both licenses and the preneed agent registration.

Once the form is approved, the State Board will place it on their website for downloading. Applicants should consider executing the form in duplicate.

Completed copies of the form could be emailed (in a PDF format) or faxed to the State Board (save the transmission as evidence of the filing). An original copy will have to be mailed to the State Board. The other original copy should then be posted where the funeral home would normally display its establishment license.

It will be near to impossible for preneed sellers to establish new trusts in time for business written after Thursday. Accordingly, the State Board will consider whether to allow newly ‘licensed’ sellers to establish an account with a bank for use as a clearing account for purchaser payments on contracts sold after August 27th.

The new law also will require changes in the preneed contracts sold after Thursday. Most of the Missouri preneed industry utilizes printed contract forms that can take weeks to prepare. Consequently, the State Board is considering a rule to permit continued use of those old contract forms.

Finally, Missouri’s cemeteries are waiting to hear the State Board’s interpretation of the cemetery exemptions from licensing and Chapter 436 compliance. Cemeteries will have their own licensing and trusting requirements under Missouri’s Chapter 214.
 

• Email This
• Print
• Comments
• Trackbacks

Come August 28th, every Missouri funeral home that plans to sell or honor a preneed contract must file a Notice of Intent To Apply. The State Board of Embalmers and Funeral Directors has devised this form to ease the rush that will occur when hundreds of licenses must be obtained. However, many Missouri funeral homes are under the mistaken belief they already possess licenses as preneed sellers and providers.

There is a document hanging on many funeral homes’ wall that indicates the entity is authorized as a “Preneed Seller” or “Preneed Provider”. The document also references an “Original Certificate/License No.” However, those documents are verification of the entity’s compliance with ‘old’ Chapter 436’s registration requirements. The “new” Chapter 436 imposes a license requirement. Come August 28th, those registration certificates are only worth the paper they are printed on.

In contrast to the Mexican bandit in The Treasure of The Sierra Madre, Missouri funeral homes do need a filed Notice of Intent to sell/honor preneed after August 28th. The State Board has published its draft of an emergency rule addressing the Notice of Intent.
 

• Email This
• Print
• Comments
• Trackbacks

The wait for Ms. Garrett’s lawsuit against NPS, the Cassity family (and anyone remotely connected with the Cassity Consortium) ended on August 7th.

If half of the allegations made in the NPS Complaint are true, the misconduct perpetrated on funeral homes and consumers is shocking to say the least. The Complaint provides a bevy of reform issues to explore. However, NOLHIGA and state regulators must be careful in their zeal to recover assets and implement reform.

A search of the Complaint for the term “independent investment advisor” will produce ten hits, with most of the substantive issues addressed on Pages 52 through 57. Chapter 436 of the Missouri statutes authorizes a preneed seller to designate an independent investment advisor to make investment decisions for the trust when it has more than $250,000 of assets. In doing so, the trustee is relieved of all liability regarding the investment decisions by the investment advisor.

As many larger Missouri sellers did, NPS designated an ‘independent’ investment advisor. The Complaint alleges that the investment advisor gave NPS free reign over the various trusts to perpetrate various frauds, including the purchase of the Lincoln Memorial insurance policies.

With regard to the fiduciary duties of the independent investment advisor, Complaint Paragraph 179 hits the nail on the head:

As purportedly “independent” investment advisors, Defendants Wulf and Wulf
Bates owed fiduciary duties to NPS as the entity that settled and funded the NPS pre-need trust accounts, and to the funeral homes and consumers as the beneficiaries of the pre-need trusts. Those fiduciary duties include, without limitation, loyalty, care, good faith, candor, sound business judgment, forthrightness, and fairness, through their direction and control over the trust funds.

In rubberstamping the NPS instructions, this investment advisor neglected his duties to the funeral homes and consumers.

In an effort to hold the NPS trustees accountable under Section 436.031, the Complaint alleges the investment advisor was not ‘independent’. This begs more than one question, but the first one that comes to mind is: independent of whom?
 

• Email This
• Print
• Comments
• Trackbacks

Missouri’s Chapter 436 reform law goes into effect on August 28th, and the Missouri State Board of Embalmers and Funeral Directors will have the responsibility of implementing the new changes. However, the State Board is caught in a Catch 22 situation.

Many of the changes will have to be implemented through regulations, but the Board doesn’t have Chapter 436 rulemaking authority until August 28th. For example, preneed sellers and providers will have to be licensed on August 28th . Since this is a new requirement, every preneed seller in the state will have to file an application and fee to be licensed. There are hundreds of funeral homes that will seek a seller’s license, and not a one can sell a preneed contract until the license is in hand. But, the Board can’t begin passing regulations about the licenses until August 28th. To avoid a shutdown of the preneed industry, the State Board will have to improvise through the use of emergency regulations and temporary licenses.

Accordingly, the State Board will be meeting every week during the month of August to establish its priorities for Chapter 436 regulations. The Board’s agenda for those meetings are set out on its website.

The State Board is seeking input from funeral directors in the form of written questions or comments regarding the agenda issues. By seeking comments in advance of publishing proposed rules, the State Board is hoping to expedite the regulation approval process.

Historically, some Chapter 333 rules have taken up a year or more to pass. The rulemaking process requires a Board meeting to discuss the issue and direct the legal staff to draft a proposal. Then a few months later at the next meeting, the Board will consider the proposal, and if acceptable, submit the proposal to the Secretary of State’s office for the publication process. With the publication, there is a comment period. Then, the comments are discussed at the next scheduled Board meeting. Depending upon the comments, the proposal may be revised, and if so, there will be another publication and comment period. All in all, the rulemaking process can be lengthy.

In the meantime, the Missouri preneed industry is waiting on the Board for directions on such issues as contract disclosures and trust administration requirements.

Missouri is in for a long, painstaking period of change.
 

• Email This
• Print
• Comments
• Trackbacks

My kids hate August because it means its time to head back to school.  This year's student population in Missouri will be a little larger than last year's.  The Missouri State Board of Embalmers and Funeral Directors has released its meeting agenda, and the state's preneed industry will be given four crash courses beginning July 30th. 

Generally, freshman orientation is optional, but these classes may start defining a new business model for Missouri's preneed industry.

• Email This
• Print
• Comments
• Trackbacks

Governor Nixon signed Senate Bill No. 1 on July 16th, giving Missouri preneed sellers six weeks to prepare for Chapter 436’s new requirements. For trust-funded contracts, one of those requirements will be the deposit of all preneed payments to trust. Section 436.430.2 provides in part:

A seller must deposit all payments received on a preneed contract into the designated preneed trust within sixty days of receipt of the funds by the seller, the preneed sales agent or designee.

Under the current law, sellers could retain the first 20% of the purchaser’s payments before making a deposit to the trust. While the new law will permit the seller to recover an origination fee of 5% and another 10%, the seller must make a request from the trustee to receive such amounts. The purpose of this requirement is to establish an audit trail of all consumer payments. As reported recently by an Ohio newspaper, Missouri is not alone in its efforts to make operators more accountable.
 

• Email This
• Print
• Comments
• Trackbacks

The New York Department of Motor Vehicles warns its citizens to plan ahead when it comes to obtaining or renewing their driver’s license. The busiest days of the month are the first and last days of the month. The first day of the month is busy from those who want to beat the rush or who just realized their license expired during the prior month. Then there are the procrastinators who put off the renewal until the very last day.

The New York DMV also warns its licensed drivers to reconsider any plan of completing the renewal process over their lunch hour. The message to drivers (and hopeful 16 year-olds) is to plan ahead because the process will take as long as required to ensure the license is properly issued. It is easier for a licensing authority to say ‘no’ than it is to take the license away once it has been issued.

Missouri funeral homes will face a licensing bottleneck of their own when Senate Bill No. 1 becomes effective August 28th. For the first time, the State Board of Embalmers and Funeral Directors will be licensing hundreds of preneed sellers and providers.

Although Missouri funeral homes may be registered as preneed sellers or providers, the ground rules have changed drastically under Senate Bill No.1. Accordingly, an early decision the State Board will have to make under the new law will regard how to screen seller and provider license applications.

To avoid disruptions to operators’ preneed programs, the State Board may need to consider issuing provisional licenses that assure compliance with the fundamental requirements of Senate Bill No. 1.
 

• Email This
• Print
• Comments
• Trackbacks

For twenty-five years, Missouri funeral directors have had it easy with regard to accounting for consumers’ preneed payments. Chapter 436 required the preneed seller to maintain 80% of the preneed contract sales price in trust. The Missouri law also allowed the preneed seller to withdraw income so long as the 80% threshold was maintained. Consequently, the seller’s trust accounting was fairly simple. However, Senate Bill No.1 has rewritten Chapter 436, and in doing so, will impose a substantial change of accounting upon the Missouri preneed industry.

To establish an audit trail, SB1 requires every payment made on a trust-funded contract to be deposited with the fiduciary institution. The law will also require the preneed trust to accrue income, which the consumer may transfer to an alternative funeral provider. Consumers can also request account information. All of this will require the preneed fiduciary to make monthly allocations to the trust’s individual preneed accounts.

To an extent, the new accounting requirements will also be incorporated into annual regulatory reports required of preneed sellers.

A new era of accountability begins in Missouri.
 

• Email This
• Print
• Comments
• Trackbacks

A little more than a month has lapsed since the Missouri legislature passed a reform preneed bill, but the death care industry remains stuck in neutral until Governor Nixon signs SB1 into law. 

With an effective date of August 28th looming two months away, regulators and funeral homes (and cemeteries) face licensing and document deadlines.  The State Board of Embalmers and Funeral Directors will have the task of licensing hundreds of preneed sellers and providers.  Preneed sellers will have the task of establishing new trusts and preneed contracts. 

This should make for a busy Show Me summer.

• Email This
• Print
• Comments
• Trackbacks

When Missouri’s Chapter 436/NPS reform legislation began to take shape last summer, the state’s cemetery industry sought to get out of the train’s way by incorporating new preneed provisions into a Chapter 214 bill. To clarify that cemeteries could establish preneed programs that would be regulated exclusively under Chapter 214, and not Chapter 436, statutory exceptions were drafted into Senate Bill 1 not once, but twice. To add a belt to those suspenders, a statutory exception for cemeteries was also drafted into the Chapter 214 bill. But alas, there has been a small slip between the cusp and the lips.

SB1’s two ‘cemetery exemptions’ are found at Section 333.310 and Section 436.410. Section 333.310 was intended to exempt cemeteries from the State Funeral Board jurisdiction and Section 436.410 was intended to exempt cemeteries from Chapter 436.

333.310 The provisions of sections 333.310 to 333.340 shall not apply to a cemetery operator who sells contracts or arrangements for services for which payments received by, or on behalf of, the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo; provided that a cemetery operator shall comply with sections 333.310 to 333.340 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

436.410. The provisions of sections 436.400 to 436.520 shall not apply to any contract or other arrangement sold by a cemetery operator for which payments received by or on behalf of the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo; provided that a cemetery operator shall comply with sections 436.400 to 436.520 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

Both exemptions define a cemetery preneed arrangement where the purchaser’s payments must be deposited to an endowed care fund or a segregated account. One problem with this is that endowed care trusts cannot be used for preneed payments. A second problem is that the segregated account arrangement was eliminated from the final version of SB296. The Missouri cemetery industry’s last chance for a statutory exemption, a new Section 214.320.5, fell victim to a last minute deletion from SB296.

Missouri cemeteries now face an uncertain future with a new Chapter 436, and an expanded Chapter 333.

• Email This
• Print
• Comments
• Trackbacks

At the risk of plagiarizing the Missouri Funeral Directors and Embalmers Association, Missouri preneed funeral sellers, providers, fiduciaries and insurers face a new ballgame that will begin August 29th without a complete set of rules and guidelines. Funeral directors have a general idea where the game will be played, but they’re not quite sure what rules the umpires will use or how closely the game will be called.

In contrast, Missouri’s cemetery industry has been left to guess where their game will be played. Through last minute changes, the cemetery bill was pared back to those essential provisions required to authorize trust-funded preneed sales and a fixed-distribution provision for endowed care trusts. The resulting provisions do not begin to tell the underlying issues.

Funeral directors get the first crack at learning their new ‘rules’ on May 28th when the MFDEA sponsors a session with the Chapter 436 umpires. Based on the success of that session, one of the 436 umpires (the State Board) will probably explore regional meetings with funeral homes.

In the meantime, Missouri’s cemeteries will need to regroup in an effort to work out a consensus on preneed and endowed care legislation.

For a copy of the changes to Chapter 436 click here, and for Chapter 214 changes click here.

• Email This
• Print
• Comments
• Trackbacks

Like the Swine Flu, a preneed virus has been spreading across the Midwest.   Looking for a cure, state legislators and regulators have been forming research teams.  It all started last summer, with Missouri’s Chapter 436 (funeral) working group and Chapter 214 (cemetery) working group.  Now, Illinois is establishing a preneed task force, and Kansas is forming a cemetery committee.  But, in contrast to the Missouri Chapter 436 working group, the forthcoming preneed research teams are limiting the industry’s involvement in the proceedings.  It’s not that the patient has a terminal condition that is contagious, but rather a reflection that organizing industry participation can be akin to herding cats.

Take the May edition of the American Funeral Director as an example. There are no less than six articles addressing preneed. As Mr. Creedy points out, everyone in the industry has an opinion and some can’t help but apply a general prescription for the preneed transaction. But, preneed is governed by more than 50 different state laws, making the transaction impervious to such generalizations. Boiling the issues down for the sake of an editor’s guidelines only contributes to the confusion of our industry members. While these types of articles often quote experts with opposing (and often, valid) opinions, death care operators tend to remember only the opinions that support their preneed program (or, supports their opposition to another form of preneed).

The preneed problem involves complex issues that require an in-depth analysis by our respective state legislators and regulators. For the sake of our consumers, we need to provide legislators and regulators objective and unbiased information about all aspects of preneed.

This patient is very ill, but not terminal. There are no easy cures or solutions.

• Email This
• Print
• Comments
• Trackbacks

Missouri’s preneed reform legislation will be amended on the House floor in the next day or so, and some of the Representatives have heard that old phrase about legislating morality. There is some truth to that phrase, and to some of the other objections raised against the reform legislation.

Preneed oversight will impose a substantial financial burden on a strapped state government and regulators lack the requisite experience to define the future course of preneed. However, these objections seem to wither when read in conjunction with the ‘excuses’ of the IFDA member funeral homes.

In a nutshell, Illinois funeral directors did not perform due diligence with regard to the management of their master trust. Instead, funeral directors placed their trust in their elected leadership, who then placed their trust in an investment advisor.

For those of us who work in this industry there is one given fact: funeral directors are caregivers by nature, and would rather spend their time with a family than the preneed trust’s accountant, attorney and investment manager. Well respected industry leaders are calling the current preneed situation “nuts”, and recommend that funeral directors focus on what they do best: serve the family. This advice resonates with most funeral directors, but they also know that families have come to expect the preneed option. But if preneed is to be offered, funeral directors must begin doing their homework.

Two years ago, Sue Simon wrote about Missouri’s triple-dipping trusts. One might have thought NPS’ demise brought this issue to an end, but that is not the case. A program utilizing a variable annuity product is being marketed to Missouri funeral directors. The promises made with regard to this product seem familiar to those made to the IFDA.

Depending on the final version of Missouri’s preneed reform legislation, funeral directors and fiduciaries may be forced to explain the condition of their preneed trusts. It would be best to put the Illinois Secretary of State’s questions to the investment advisor before the investment is made, rather than after.

• Email This
• Print
• Comments
• Trackbacks

While the settlement negotiated with the National Organization of Life and Health Insurance Guaranty Associations (“NOLHGA”) provides funding for the vast majority of NPS preneed contracts, there could be as many as 7,500 NPS preneed contracts that fall outside this coverage. For one of a couple of reasons, NPS never purchased an insurance policy for these preneed contracts. These are the NPS “orphan contracts” that regulators and the NPS Special Deputy must figure out what to do with.

NPS and its sister insurance companies were put into receivership by the Texas Department of Insurance. The special deputy receiver appointed to administer the NPS assets and liabilities negotiated coverage with the National Organization of Life and Health Guaranty Associations (NOLHGA). However, this coverage is dependent upon a policy (or sufficient evidence of the intent to purchase a policy) having been issued for the consumer’s preneed contract. In the absence of a policy, the guaranty association will not honor a claim, and the consumer will be forced to make a claim with the special deputy receiver.

The orphan contract is primarily a Missouri problem because NPS sold insurance funded preneed contracts in most states. For Missouri, NPS sold trust-funded contracts, or rolled a funeral home’s trust into a NPS trust (that subsequently purchased insurance). With regard to Missouri installment contracts, NPS apparently instructed the trustee to defer the insurance purchase until the contract was paid in full. Consequently, the consumers who are making payments on one of NPS’ Missouri contracts may have an orphaned contract.

The Missouri Insurance Guaranty Association is working with funeral homes to identify those NPS preneed contracts that are orphaned. Missouri consumers who are making installment payments on a NPS contract should contact their funeral director for assistance in determining whether their contract is orphaned or not.

With regard to these Missouri consumers, the Special Deputy Receiver and regulators need to consider that it was their recommendation that all consumers continue to pay on their NPS contracts in order to maintain coverage.

• Email This
• Print
• Comments
• Trackbacks

Officially, its called House Committee Substitute for Senate Substitute for Senate Committee Substitute for Senate Bill 1.   Some of the ‘unofficial’ titles given this bill are not fit for publication.

It doesn’t matter who you talk to about Missouri’s current preneed reform bill, everyone has a complaint.  Even the consumer advocates.  Under normal circumstances, this general mood of discontent would ensure the defeat of a legislative proposal.  But these are not normal times, and it is appropriate that the Columbia Daily Tribune would remind the state of that fact by speaking with former Senator Jerry Howard.

In the early 1990’s, Senator Howard took on the problems of Chapter 436 and Chapter 214. While Senator Howard had success in addressing Missouri’s perpetual care law, Chapter 436 reform proved a greater hurdle.  More than a dozen years ago, representatives from the funeral and cemetery industries met with regulators to draft revisions to Chapter 436.  Although National Prearranged Service representatives attended those meetings, and provided tacit approval of the draft amendments, NPS had its own lobbying agenda.

Senator Howard took those amendment proposals to legislature, but could not obtain the necessary support of his fellow legislators.  Key legislators had been prepped for the proposals’ weaknesses.

HCS SS SCS SB1 has some flaws that need to be worked out, but time is running out for the current legislative session.  If the choice comes down to this bill or no bill, this bill should be passed with an understanding that its flaws need to be addressed by regulations and technical corrections in the next legislative session.

• Email This
• Print
• Comments
• Trackbacks

Illinois and Missouri have more in common than they may realize. Consumers and funeral directors are blaming state regulators for their current preneed problems. Looking to avoid that hot seat, regulators have been stating their excuses/defenses. If legislators are to correct the flaws in their state’s preneed oversight, they need to put partisan politics aside and objectively assess those excuses.

In response to criticism about the IFDA master trust, the Illinois Comptroller’s office states: we don’t regulate trusts. With regard to preneed audits, the Comptroller follows the money from the consumer to the funeral home and into the IFDA trust. Once there, the Comptroller did not provide an extensive review of the trust’s activities. (Summary, it’s not my job to provide oversight once the funds make it to trust.)

The chink in the Comptroller’s IFDA armor is that the consumer funds never made it into a corporate trustee’s hands. The Comptroller’s excuse (we thought they had a corporate fiduciary) has funeral directors boiling. Rightfully so. While news reports and funeral homes have garbled the legal issues, the Comptroller’s function was to license preneed sellers, and for the IFDA, that meant the responsibility to ensure the organization had an appropriate fiduciary.

Missouri’s Division of Professional Registration and State Board of Embalmers and Funeral Directors have received the same type of criticism with regard to the NPS collapse. Those regulators have appropriately countered with explanations about how Chapter 436 tied their hands. Legislators and state agencies sponsored meetings last summer to obtain recommendations for improving Missouri’s preneed oversight. Those recommendations included the decision to continue the State Board’s jurisdiction over the preneed and to provide that entity greater licensing and oversight authorities.

Preneed regulation should begin with the licensing/registration of who may sell preneed. (I beg to differ with Ill. State Rep. Dan Brady, and those who assert preneed should only be sold by licensed funeral directors.) But that issue aside, who should provide oversight once the consumer’s funds are deposited to trust? I tend to agree with the Comptroller’s office that a state’s financial regulator is better suited for this job. However, there are ‘gaps’ to that recommendation. (State banking regulators do not have express jurisdiction over fiduciary institutions that derive their powers from a charter granted by the Office of Thrift Supervision or the Office of Comptroller of the Currency.)

While preneed licensing and payment administration oversight should be placed with a state’s agency charged with establishing minimum competency standards, oversight of the preneed trust should be with the state’s banking regulator. Federal preemption issues could be eliminated by statutory provisions that require the seller’s trustee to consent to limited jurisdiction as a condition to accepting the account. Preneed is too complex, too big, for a single state agency.

• Email This
• Print
• Comments
• Trackbacks

It’s a fact that the NPS collapse threatens the viability of many Missouri funeral homes. It’s also a fact the Missouri State Board of Embalmers and Funeral Directors had jurisdiction over NPS and did not shut the company down in time to prevent the current crisis. In a response, a group of the injured funeral homes are calling for the transfer of preneed oversight to a new “commission” comprised of nine funeral directors and a consumer advocate. If this proposal constitutes the sum total of changes to be made to Chapter 436, it represents nothing more than putting lipstick on a pig.

Missouri’s State Board was never provided the tools it needed to effectively regulate the preneed transaction. Chapter 436 was intended to keep the preneed door open by establishing minimal contract and trusting requirements, without providing an effective mechanism for oversight. The State Board was never granted rulemaking authority to even address the transaction as it evolved over the years. Understanding the limitations of a state budget, the State Board’s funding for oversight was also restricted by a $2 per preneed contract fee. Restrictions were also placed on the Attorney General’s office regarding attorneys assigned to the State Board.

To suggest Missouri’s problems are simply a “governance issue” is an insult to the funeral directors who have given up their time to serve on the State Board. From time to time, there have been valid criticisms about whether the State Board members have been influenced by self-interests. But, the overriding goal of the State Board member has been the advancement of the industry’s professional standards. Current State Board members may not understand the economic nuances of all variations of the preneed transaction, but how will an expansion of preneed oversight from 5 funeral directors to 9 funeral directors ensure that objective?

The Chapter 436 review process opened last summer with the question of whether preneed oversight should be moved to an independent state authority. There are advantages and disadvantages to putting preneed oversight under an industry board. The major advantage is that the industry board should be more familiar with a complex transaction. While independent preneed regulators can be very competent (Iowa for example), more often than not, the independent preneed regulator finds the transaction as confusing as any other person. The spokeswoman for the Illinois Comptroller’s Office has acknowledged as much.

Missouri’s legislature should leave preneed oversight with the State Board and focus its attentions on providing that entity the authorities needed for effective oversight.

• Email This
• Print
• Comments
• Trackbacks

Consumers and funeral directors are asking their state regulators how they let the National Prearranged Services collapse to happen. With the exception of Missouri and Iowa, the NPS preneed contract was generally an insurance-funded transaction, and state insurance regulators are taking most of the heat. It is a very different story in Missouri, as witnessed by two competing reform bills: Senate Bill 1 and House Bill 853. For Missouri, NPS used a trust-funded preneed contact (that was subsequently invested with Lincoln Memorial policies). As a consequence, Missouri legislators have made higher trusting requirements and heightened fiduciary responsibilities their top priorities for both bills.

Missouri’s Chapter 436 was written before Rev. Rul. 87-127, when trusts were king. The law also reflects the historic perception of the guaranteed preneed contract (one that is shared by the Internal Revenue Service and the Securities Exchange Commission): the transaction is a sale of goods and services by the death care company.

Chapter 436 allows the preneed seller to retain the purchaser’s first payments until 20% of the sales price has been collected. A 20% sales expense retention provides smaller funeral homes the funds required to maintain a program to compete with larger operations, including the national companies. All subsequent payments must then be deposited to trust. The law was intended ensure there were sufficient trust funds for the funeral home’s “costs” at the time of performance (in contrast to the amount the consumer would have to pay for the funeral at a future date). Consequently, Chapter 436 allows the seller to also withdraw realized income to the extent the trust’s market value equaled the deposits made to trust.

What distinguishes Chapter 436 from most other permissive preneed state laws (such as Iowa) is the public policy decision to require income accrual. By requiring the trust to accrue income, these states have placed a ‘cap’ on the seller’s recovery of preneed program costs. Their message is that the seller must make do with the front-end retention of payments. These states still view the preneed transaction as a sale of goods and services (allowing the recovery of the sales expense costs), but they will not allow the preneed seller to recover other operating expenses from trust funds intended for future performances. In this respect, SB 1 and HB 853 are similar. While both would require the accrual of trust income, only the Senate bill recognizes the preneed contract as a sale of goods and services.

In an attempt to enhance consumer protection and preserve the funeral home’s ability to offer a trust-funded preneed program, SB 1 would raise Missouri’s trusting percentage from 80% to a hybrid 85%. This trusting change will have the greatest impact on small funeral homes with dedicated salesmen and the larger, proactive independent funeral home/cemetery operations.

As the retention percentage is reduced, economies of scale will make it more difficult for small operators to maintain a separate program. While the larger proactive preneed program may have the volume of sales to offset the loss of 5%, they must contend with SB 1’s ‘pro rata’ recovery of sales expense.

The retention of the sales expense from the first payments simplifies the procedures for compensating a program’s salesmen. Missouri’s SB 1 recognizes this issue in that it authorizes the first 5% of the sales price to be retained. While SB 1 allows the seller to collect an additional 10% of the contract sales price, it must do so pro ratably from each subsequent payment. This pro rata approach imposes a greater administrative burden on the seller, contributing to the costs of the preneed program.

In contrast to SB 1, HB 853 requires 100% of a purchaser’s payments to be trusted. The bill’s advocates claim the preneed funds belong to the purchaser, not the funeral home, and consumer protection will be enhanced. Essentially, the bill’s supporters are re-defining the trust-funded preneed contract as a transaction of accommodation to the preneed purchaser. Funeral homes will be required to provide program administration and tax advantages that the consumer cannot otherwise obtain from a bank.

Deprived of a source of funds to offset preneed program expenses, proactive sellers will be forced to utilize insurance funded programs. While insurance offers cost advantages to the younger consumer, many typical preneed purchasers may not qualify for insurance, or may not be able to afford the required premiums. In the end, HB 853 will reduce the preneed options available to consumers and the industry.

• Email This
• Print
• Comments
• Trackbacks

The Missouri Legislature has reform of Chapter 436, the preneed funeral law, on the fast track. With the speed that Senate Bill 1 has been amended and perfected, it may be more appropriate to label this reform as being in the express lane. However, Missouri legislators must not lose track of the cemetery industry’s efforts to effect its own reforms for Chapter 214.

As with most states, Missouri regulates cemeteries under a separate law and a separate regulator. For the most part, Missouri’s cemeteries have been spared from the NPS abuses. Regardless, the state’s cemetery industry has been pursuing needed changes to Chapter 214. Appropriately, Senate Substitute for the SCS SB1, attempts to carve out cemetery exemptions from preneed funeral regulation, but misses the mark.

Chapter 333 vests regulation of funeral directors and funeral establishments in the State Board of Embalmers and Funeral Directors. SB1 will expand the State Board’s authorities to regulate the preneed transaction, and the revisions to Chapter 333 include new definitions of “funeral merchandise” and “preneed contract”. Those definitions overlap with the property, merchandise and services sold by cemeteries. To exclude cemeteries from the State Board’s jurisdiction, SB1 includes a new Section 333.310:

333.310. The provisions of sections 333.300 to 333.340 shall not apply to a cemetery operator who sells contracts or arrangements for services for which payments received by, or on behalf of, the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo, provided that a cemetery operator shall comply with sections 333.300 to 333.340 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

With Chapter 333 now defining funeral merchandise to include grave spaces, markers and vaults, cemeteries that sell these items on a preneed basis will be subject to the State Board’s licensing jurisdiction. Section 333.310 exempts cemeteries from the State Board’s jurisdiction to the extent that the cemetery sells only preneed burial services such as opening and closings (and then one has to question the exemption’s reference to endowed care fund or segregated account). If the cemetery sells property or merchandise, the State Board would have jurisdiction for requiring preneed licensing.

In contrast, the cemetery exemption from Chapter 436 does not reference services (and consequently, has a broader affect):

436.410. The provisions of sections 436.400 to 436.520 shall not apply to any contract or other arrangement sold by a cemetery operator for which payments received by or on behalf of the purchaser are required to be placed in an endowed care fund or for which a deposit into a segregated account is required under chapter 214, RSMo, provided that a cemetery operator shall comply with sections 436.400 to 436.520 if the contract or arrangement sold by the operator includes services that may only be provided by a licensed funeral director or embalmer.

However, the Chapter 436 exemption is also problematic for cemeteries. This provision would exempt contracts sold by cemeteries where the purchaser payments are deposited to an endowed care fund or to a segregated account required under Chapter 214. This provision is rather confusing because endowed care trusts cannot be used for preneed payments, but rather for the care and maintenance of the cemetery. The reference to “segregated accounts” contemplates Section 214.387, a provision that authorizes cemetery operators a procedure for deferring the delivery of markers pursuant to a purchaser’s instructions. The segregated account does not provide adequate consumer protections, and should not be the basis for an exemption from Chapter 436.

If would be preferable to address Chapter 436 and Chapter 214 at the same time so that the exemptions can be dovetailed, but if Chapter 436 continues on its current pace, the cemetery exemption must contemplate future trusting/escrow arrangements under Chapter 214, or provide the Director of the Division of Professional Registration the authority to exempt cemeteries based on their individual preneed programs.

• Email This
• Print
• Comments
• Trackbacks

The Missouri Senate Committee assigned the task of preneed funeral reform posted a substitute bill to the Legislature’s website on February 6th: SCS SB1. For those who participated in the Chapter 436 Working Group meetings last summer, this bill may seem vaguely familiar. During those meetings, the Division of Professional Registration circulated a 41-page draft proposal for discussion with industry representatives. However, discussions regarding the proposal bogged down when industry members could not agree over several issues. Eventually, the Working Group issued a “Recommendations” statement.

Turning back to the Division staff, the Senate committee has dusted off that earlier draft proposal and added provisions based on the Chapter 436 Working Group Recommendations. This approach is sure to revive the disagreements that derailed last summer’s meetings.

With the NPS failure as a backdrop, the Missouri legislature will have little patience for the internal bickering that has marred prior reform efforts. While SCS SB1 has some legitimate flaws, the status quo is no longer an option.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

For twenty-two years many Missouri funeral directors have deposited 80% of the preneed funeral contract purchase price into trust, and withdrawn all income in excess of that deposit. For a $5,000 contract sold in 1998, the funeral director has been required to maintain $4,000 in trust. When that contract is performed in 2008, the funeral director is authorized under Chapter 436 to withdraw an amount equal to that deposited to trust: $4,000. Today, and for the foreseeable future, that distribution will exceed that contract’s ‘value’ under the mark-to-market approach. Depending upon the facts of a particular trust, the difference between these two approaches could exceed the trust’s annual realized income. This puts the trust further into the hole and threatens the funeral director’s long-term viability.

Assume the funeral director has a $1,000,000 trust with a contract population that averages 10 years in duration. On the average, 10% of the trust’s contracts are serviced each year, or $100,000. Depending upon trust’s asset allocation, the current financial crisis could have trimmed a third of that trust’s value. If a 25% value decline is assumed, the funeral director’s trust is worth $750,000. If the trust’s value remains ‘flat’ over the next year and the funeral director services 10% of the trust’s contracts, he will withdraw $25,000 ‘excess’ value over the next year, or 2.5% of the trust’s value. For trusts invested exclusively in fixed income, the difference may exceed the trust’s actual return.

Switching to the mark-to-market approach will be painful for funeral directors. For that ten-year old, $5,000 preneed contract, the funeral director would receive $3,000. Today, that service might sell for $6,500. The cost to provide the service will vary from funeral home to funeral home, but many will find it difficult to do so for a profit when only paid $3,000. Of course, there has been income distributed from the trust over the past ten years, but not necessarily to the funeral director performing the contract.

Consequently, Missouri legislators need to consider two important Chapter 436 revisions: the mark-to-market approach and trust income accrual. If the Missouri funeral director had accrued the income and earned a net 3.5% over the past 10 years, the mark-to-market approach would have paid the funeral director $5,642 instead of $3,000.

The mark-to-market approach has proven a bitter pill for Illinois funeral directors, and legislators should expect a similar reaction from some Missouri funeral directors.  The legislature can not retroactively apply the mark-to-market approach, but funeral directors need to consider whether the approach is in the best interests of existing business.
 

• Email This
• Print
• Comments
• Trackbacks

Part of the bad rap against preneed stems from the salesman who is prepared to say anything to close the sale. While, reputable companies build safeguards into their programs to check this behavior, there will be individuals who are prepared to bend the rules. Who should be held accountable when the agent intentionally violates the company’s safeguards? That question was raised, but not answered, during Missouri’s Chapter 436 Review Committee hearings. For some Missouri funeral directors, the issue is being presented in a context that they do not yet appreciate.

NPS’ sudden demise left an aggressive sales force scrambling to find new jobs. Some of the NPS salesmen joined established insurance companies, and others established their own insurance agencies. While some of the former NPS employees were also victims of the company’s misrepresentations, funeral directors need to appreciate that NPS did not think enough of compliance to teach it to its employees. Consequently, funeral directors should be asking whether these salesmen are receiving proper oversight from their new insurance companies.

Some of the former NPS salesmen signed on with a national insurance company that offers a ‘funeral expense trust’. That trust represents a product the insurance company can offer to consumers who cannot purchase the company’s insurance product directly through a licensed agent.

Some preneed sales entities have taken the concept a step further, and are marketing the trust in states where the insurance can be purchased as a preneed product that is independent of the funeral home. Innovative NPS salesmen now seem to have taken the concept even further, marketing the concept as a vehicle available to funeral directors who are not licensed insurance agents. It is not clear whether the sponsoring insurance company has approved of either of these modifications to the funeral expense trust.

One of the persistent rumors regarding NPS’ business practices in 100% trust states, was that the company circumvented insurance licensing requirements by effecting insurance purchases through a trust. The rumors also suggested that NPS found ways to split commissions with the funeral directors even though they are not licensed insurance agents. Funeral directors are beginning to relay similar stories, but with new insurance company names.

So, if these salesmen have formed preneed marketing programs that violate applicable preneed laws, is the insurance company responsible to the funeral director if disciplinary actions are brought against the funeral establishment license? Most state regulators will likely find the funeral director has a duty to understand the licensing requirements and commission restrictions imposed by applicable state insurance laws. Funeral directors are putting their livelihood at stake when they do not question a salesman’s explanation about how ‘we have a way around that problem’.
 

• Email This
• Print
• Comments
• Trackbacks

Dear Donna,

Once the liquidation plan is finalized, and the procedures for paying claims are implemented, could we please revisit the issue of the Missouri installment contracts?

Yes, you have been patient and polite regarding my inquiries.  But, until this past Monday, I did not know how significant an issue these contracts were.  If I am interpreting Note 3 from the Statement of Assets - Explanatory Notes correctly, Missouri consumers owe $23 million on outstanding NPS preneed contracts.  As I explained in my May letter, these consumers are paying too much. 

Thanks, again.

Bill

• Email This
• Print
• Comments
• Trackbacks

Why did you agree to that?

That's the question I have been getting to the Chapter 436 Working Group recommendations regarding i) the deposit of all purchaser payments to trust, and ii) some form of periodic statement to the consumer.   One answer would be that we see too many news reports like this one.  

The primary objective for these two recommendations is the establishment of an audit trail.  Require all payments to go through the fiduciary's hands, and require the fiduciary to give the consumer some form of notice.  If the regulator does not have the resources to monitor the transaction, give the consumer the opportunity to do so.  The recommendation does not deny the seller the right to recover sales expenses.

Yes, the procedure is burdensome, will add cost to the transaction, and will require change.   What are the alternatives?

• Email This
• Print
• Comments
• Trackbacks

Concurrent with the hearing held on her Liquidation Plan, the Special Deputy Receiver posted a financial report to the Lincoln Memorial Life/NPS website. As with most financial statements, explanatory notes at the end of the report provide some insights to the failed NPS empire. While prior documents have disclosed that the companies have a deficient of nearly one billion dollars, the SDR report breaks that number down in terms of trust funded contracts and insurance funded contracts. 

Insurance funded preneed contracts account for almost $600 million of the unfunded deficit, twice the number of that for trust-funded contracts ($289 million).   The explanatory notes identify six trusts maintained by NPS. The notes identify Trust VI as that of Iowa, and the size of Trust IV would suggest that it was for Missouri. One of the other trusts may be a special account, and if one were to assume the other three are other ‘state trusts’, that would leave the other 15 NPS states as exclusive insurance funded states. There is no doubt that NPS exploited Missouri’s laws regarding trust funded contracts, but a greater harm was done to consumers through NPS' exploitation of state laws governing insurance funded contracts.

Of the NPS trusts, the Missouri deficit is the largest by far ($248 million). This number has been isolated to Missouri regulators as justification for raising the state’s trusting requirement to 100%. That argument ignores the fact that Iowa also has an 80% trusting requirement, yet only has a deficit of $23.5 million (a tenth of Missouri’s). The difference can be attributed to the difference in oversight and regulatory requirements. The argument also ignores the fact that Kansas, a state with a 100% trusting requirement, has a deficit of approximately $22 million (all of which is based on insurance-funded contracts).

Another explanatory note that may suggest that Missouri’s oversight is lacking is a note payable of $10 million owed by NPS to the Missouri preneed trust.  

Missouri’s Chapter 436 problems will not be fixed by going to a 100% trusting requirement. Oversight should be the state legislature’s top priority, and Missouri preneed sellers need to begin providing ideas and answers.  

• Email This
• Print
• Comments
• Trackbacks

 While the completion of the document may have felt like a birthing process to the staff of Missouri's Division of Professional Registration, the Chapter 436 Working Group Recommendations more accurately reflects an industry position paper that has yet to be completed.   Faced with a deadline imposed by the Missouri legislature, the Division 'finalized' the Recommendations in an 11th hour meeting of the State Board of Embalmers and Funeral Directors.  The State Board meeting underscored that many industry members have yet to grasp how the preneed transaction is structured and administered by competitors.  This is best demonstrated by the State Board vote to revise the Recommendations to include the following:

·         The board recommended a 100% trusting requirement with no administrative or trustee expenses by a vote of 4-2.

 During various meetings, the issues of preneed sales expenses and trustee administration expenses having been erroneously interchanged by Committee members.  This confusion is due in part from Chapter 436 allowing all income to be distributed currently.  If the trust does not accrue income, the law requires the seller to assume responsibility for trust expenses.  Trustees normally look to trust income for administrative expenses.  If the trust has no income, the trustee is dependent upon the seller for reimbursement.  This aspect  compromises the fiduciary's duty to the trust. By its action, the State Board would perpetuate a major flaw in Chapter 436 (if trust funding is to survive at all). 

The State Board's objective is to protect the consumer, and to do so it must think comprehensively about the three forms of funding: insurance, joint accounts and trusts.   Is the consumer better served if trust funding is effectively precluded?   Of course not. 

• Email This
• Print
• Comments
• Trackbacks

An important revision to Missouri's personal preference law goes into effect on August 28th.  The original law (R.S.Mo. Section 194.119) was confusing to funeral directors about whether an individual could override the preferences of his/her next-of-kin.  With the revision, funeral directors can more comfortably rely upon the individual's durable power of attorney when following the instructions of someone other than the individual's next-of-kin.  A recent article cited the law change as an important victory for gay rights, and the rights of those who have end of life preferences that are not shared by their family members.  While the law is an important development to elders and gays, they must take steps subsequent to the execution of a durable power of attorney to ensure the performance of their end of life plans.

 With the durable power of attorney, an individual (the principal) authorizes his/her partner (attorney-in-fact) to act on the principal's behalf with regard to legal or business matters.  Depending upon how the durable power of attorney is drafted, businesses can then rely upon the document for their protection.   While most businesses will accept the durable power of attorney, they are not required to, and may decline the transaction. 

As evidenced by a recent trade journal article, funeral homes and cemeteries are often counseled against taking sides in family disputes.   As reported in a prior post (Who's Funeral is it), some funeral directors are reluctant to accept a written disposition instruction that contradicts what other family members prefer. 

While it would be advisable to bring family members into the plan, that is not always possible.   If a couple anticipates familes will contest their end of life plans, it would be prudent to find a death care facility that will honor the durable power of attorney with knowledge of the potential for a family dispute.   I have been using the durable power of attorney for my gay clients for several years, and have always recommended that they coordinate with clergy and a death care company. 

• Email This
• Print
• Comments
• Trackbacks

The Special Deputy Receiver for NPS recently reported the company’s “negative net worth” to be just short of one billion dollars. Rightfully, regulators are looking at the NPS fiduciaries for culpability in the losses that will be sustained by consumers and funeral homes in the years to come. In the meantime, Missouri state officials are working with industry representatives to reform Chapter 436. As they consider how to better safeguard consumers’ funds, regulators and legislators need to appreciate that preneed sellers and fiduciaries have overlapping responsibilities that are affected by a state’s trusting requirements. 

In states with lower trusting requirements, the preneed seller typically assumes responsibility for individual preneed contract accounting. Besides the ability to report to consumers, this function is also crucial to the fiduciary’s income tax reporting. In states with higher trusting percentages, the trust often assumes greater responsibilities for the accounting and reporting functions. 

Historically, preneed laws have restricted preneed trust expenses to the fee that was typically charged by banks or trust companies for estate planning business. Some state laws also restrict the trustee’s ability contract with the preneed seller for administrative services.   While restrictions are needed to avoid a circumvention of the trusting requirements, more latitude should be afforded the fiduciary. In exchange, preneed sellers and fiduciaries should be required to make disclosures about those who provide the trust services, and the fees paid for the various services. 

The Texas Department of Banking and the Texas Funeral Directors Association broached these issues ten years ago.    In Opinion 98-15, the TDOB found that the preneed trustee fees could be used to pay for marketing expenses, outside recordkeeping for preneed contracts, and investment advice. (It is generally recognized that the trustee can incur expenses for trust accounting, legal expenses and tax reporting on behalf of the trust.)

 Eventually, Texas may review its preneed law in light of the fraud committed on its consumers and funeral directors by NPS. I suspect NPS exploited the Texas provisions allowing for a depository.   Before eliminating the authority to use the depository arrangement, the Texas legislature needs to appreciate the difficulty the industry has in attracting quality fiduciary services.   

Allowing the trust to bear the expense of compliance does not come without the risk of abuse. Services must be necessary to the trust, and reasonable in cost. One check against such abuse would be the requirement that services must be performed pursuant to a contract with the fiduciary. Transparency of the relationships among the parties, and the fees paid could serve as another check.   The IRS will likely require such transparency within the next few years as fiduciaries are required to ‘unbundle’ their fees for income tax reporting purposes.

Eventually, we may see death care fiduciary fees being broken down by the following services:

Asset management (investment)

Sub account administration

Tax reporting

Legal (contracts/compliance)

Legal (liability/litigation)

Custodial services

Regulatory and consumer reporting

Marketing

Ten years later, the TDOB opinion may be dated in terms of what constitutes a reasonable fee. Sub account administration can run as high as 85 basis points. Asset management fees will differ on the manager’s expertise, and 50 basis points is a fairly common fee. Tax reporting expenses can differ substantially based on the diversification of the trust assets.   Distribution oversight may require periodic examinations, and the expense that accompanies on-site reviews. Periodic statements to consumers and regulators will require administrative enhancements. However, economies of scale are crucial to minimizing these costs, and pooled administration will be key to providing the requisite economies of scale. Several years ago, the Office of the Comptroller of Currency recognized the role national banks could play in meeting the needs of the death care industry.

The death care trust is a different breed of animal from a bank’s staple trust business of estate planning.   Consequently, legislators need to allow fiduciaries to contract for those services crucial to enhancing the compliance that the preneed transaction so desperately needs.

• Email This
• Print
• Comments
• Trackbacks

It is encouraging when funeral directors and consumer advocates engage in meaningful debate about the future of Missouri's preneed industry.  And, there seems to be some consensus that the non-guaranteed contract should have a greater presence in the state. 

In the third of six scheduled meetings, industry and consumers were faced with those prickly issues of the trusting percentage, income accrual and portability.   While there were no resolutions, progress is being made.

There will be consumers who want to lock in a prearranged service, whether it is for price or because the individual has made a decision.   But what about the consumer who wants to start the prearrangement process and is not quite sure. 

The Missouri Funeral Directors and Embalmers Association broached the issue with a proposal that may have flaws, but provides a starting point for discussion.   In the discussion that ensued at the July 24th Review Committee meeting, it was suggested that the non-guaranteed account could be used as a hybrid form of preneed: where the prearrangement would not be finalized until 'everyone' was ready.  

Amen, Rev. Stroud.

• Email This
• Print
• Comments
• Trackbacks

Regulators and preneed sellers squared off recently over the subject of who owns the preneed trust fund: the funeral home or the consumer. Hearings to reform Missouri’s preneed law hit a wall when the issues of trusting requirements, income accrual and portability was taken up by a review committee comprised of regulators, industry representatives and consumers.  

In a debate that has been waged in countless other venues, several Missouri funeral directors asserted that the trust fund is theirs because they have guaranteed the prices and assumed the risk of the trust's performance.   The regulators argue that the trust fund represents the consumer’s funds, and the consumer should have the right to change their minds about funeral homes and type of service they want, and to do so they must be able to transfer the funds or receive a refund without penalty. 

This all begs the question: what do consumers want?  We cannot answer that question in Missouri because the law only contemplates the guaranteed contract. 

Mortuary Management asked the question whether the guaranteed contract is necessary to attract preneed customers.  As was the case at the Missouri meeting, the responses were divided. 

As Missouri re-writes its preneed law, consumers should be afforded a meaningful choice between the guaranteed contract or the non-guaranteed, 100% funded contract.  As I wrote in one of the first blog entries, the non-guaranteed contract faces certain hurdles.  

Under Missouri's current trusting requirements, preneed sellers have little incentive to offer a non-guaranteed contract.   If the funds are deemed to be entirely the consumers', who will assume the burden of establishing a program that provides the requisite documents, administration and oversight?   

• Email This
• Print
• Comments
• Trackbacks

It was once fairly common for a funeral director to take a preneed purchaser's funds and establish a joint account at a local bank.  Missouri's preneed law contemplates the transaction and requires that the funeral home and the purchaser have joint control over the account.  Prior to 9/11, banks would freely provide account forms, allowing the funeral director to obtain the purchaser's information and signature at the funeral home.  However, the security requirements imposed on banks by the USA Patriot Act have probably made the joint account an impractical method to funding a preneed contract. 

A few years ago, banks were required to implement programs to collect more information about their customers and to verify their identities.  The purpose of these new requirements was to prevent money laundering that could involve the financing of terrorism. 

What this means to the funeral director is that he/she can no longer prepare bank account applications at the funeral home.  All parties to the account must be present at the bank when the account is opened.  I have encountered one bank that interpreted the Patriot Act to prohibit the joint account arrangement contemplated by Missouri law.  

While the joint account provided a funding mechanism to funeral directors who did not have the volume of preneed business to warrant the expense of trusting or insurance, there are ample indications the arrangement has been abused and may need to be discontinued.  An unknown number of funeral homes have rolled joint account contracts to NPS.  Unwittingly, some funeral homes have combined multiple contracts in a single certificate of deposit, exposing the consumers' funds to the claims of the funeral home's creditors.  

As states seek to respond to the NPS failure by tightening preneed laws regarding trusting and insurance, consideration must be given to how a safe and affordable preneed arrangement can be offered to the rural consumer.  

• Email This
• Print
• Comments
• Trackbacks

So why is it so tough to provide preneed portability?   Because the transaction has been defined by state law as a contract between a consumer and a death care company, and federal regulators tend to agree.   When the issue has arisen in the context of federal preemption, the interests of the state regulator have prevailed on the grounds the transaction is ‘local’ in nature, and the state has an overriding interest in policing the transaction. This perception permeates federal oversight of the preneed transaction, including that provided by the Internal Revenue Service and the Securities Exchange Commission. So long as preneed is defined as a guaranteed contract for goods and services, complete portability will be difficult to achieve.

Consumer advocates view the preneed transaction as a savings account to be safeguarded until the death, and some state laws accommodate that perception. Kansas requires 100% trusting, an accrual of income and assures portability by granting the purchaser the right to designate a different funeral home to perform the contract.

However, if the Kansas contract was written by a funeral home with its own preneed trust, there has to be a trust agreement between the original funeral home and the fiduciary. Despite what the law states, the new funeral home is not bound to that trust agreement. In the absence of a trust agreement, the fiduciary does not want the responsibility of ensuring the new funeral home performs the preneed contract according to its terms. If the new funeral home seeks to have the funds transferred to its own bank, what responsibilities does the trustee have to ensure the receiving institution will accept the funds in a fiduciary capacity? (Is anyone familiar with Bremen Bank?) 

So long as the new funeral home is within the state of Kansas, the state’s preneed law could be revised to afford the fiduciary some protections. However, state law will not remedy the situation where the consumer has moved to another state. 

When faced with this situation, insurance companies protect themselves by adopting policies that restrict policy assignments. It is not that uncommon to encounter insurance companies that prohibit policy ownership by funeral homes. Insurance companies will be more lenient with funeral homes with whom they have an agency relationship.

For states like Missouri, portability faces the challenges of the seller/provider distinction and lower trusting requirements. Missouri allows preneed sold by third party entities, and requires the seller to have a contract with the funeral home or cemetery prior to marketing to consumers. In keeping with this requirement, regulators recently looked at language to improve portability. However, that result was confusing, and did not consider the fiduciary issues. The Pennsylvania State Board of Funeral Directors had similar experiences with a recent effort to address portability. 

If a Missouri contract has been trusted using the minimum requirements, the contract becomes less attractive to other funeral homes as time passes from its sales date. There may come a time when the contract becomes a liability.  Under that circumstance, the consumer will have difficulty finding a funeral home willing to accept the contract. 

The irony of the NPS failure is that the company’s program offered the consumer interstate portability that only the national death care companies could match.   But the NPS customers have not only lost the portability of their contracts, some face the prospect of their named provider going out of business. 

Steps can be taken to improve portability, but it will not be as simple as mandating a result. Increasing funding requirements and assuring insurance assignment rights will help. To overcome resistance by funeral directors, protections against ‘twisting’ could be offered. 

However, if the consumer wants complete portability, he or she will need to consider the non-guaranteed preneed contract. 

• Email This
• Print
• Comments
• Trackbacks

Before the guaranteed preneed contract, funeral directors accepted pre-payment on funeral arrangements as an accommodation to their families. Funds were typically placed in a joint account or POD account at the local bank. As this practice became more common, “preneed’ laws were passed to establish requirements regarding the deposit and withdraw of funds. These laws were fairly simple, and some can still be found in many states’ preneed laws as a separate section within the more complex provisions intended for the guaranteed contract.

The guaranteed funeral contract was created about 50 years ago, and preneed took on a predatory characteristic. Promoted primarily by third party preneed programs, the guaranteed funeral contract became a tool for the funeral home that sought to compete with the more established funeral home across town. To overcome the ‘heritage’ established over years of service to a community, a funeral home offered the guaranteed contract to families to reduce expense and emotional distress. 

The third party preneed programs introduced concepts that early preneed laws did not contemplate: master trusts, diversified investments, commissions and grantor tax treatment. Over time, preneed was defined by the guaranteed contract, and the transaction proved very divisive for the funeral industry. A majority of funeral directors felt preneed was harmful to the profession and sought to deter the transaction. Realizing that this form of preneed was dependent upon salesmen, the trusting requirement became a pivotal issue. (Investment restrictions became another.)

With regard to trusting, preneed sellers took the position that the transaction represented a sale of goods and services and the trusting requirement should be set to cover the costs of providing the contracted goods and services. Many funeral directors countered that preneed was an accommodation and that joint account/POD funding requirements should apply to master trusts as well. Funeral directors adverse to preneed understood that if all consumer payments had to be trusted, preneed sellers would be deprived the revenue needed to compensate salesmen. Legislative battles were waged from state to state during the 1970s and 1980s (at a time when insurance funding did not play a major factor). The result was a mixed bag of state laws that vary greatly as to preneed trusting requirements. 

Generally, the 100% trusting issue surfaces in states such as Missouri, Nevada and Texas when consumer advocates pushed reform by seeking increased trusting requirements. However, the issue took on a different light recently when legislation was introduced in Tennessee to reduce its trusting requirement from 100% to 90%. While the bill eventually failed, the Tennessee Funeral Directors Association has good reason for pursuing the change even in light of the NPS failure.

NPS’ climb to become the nation’s largest third party preneed seller was fueled to a great extent by Missouri preneed sales. Missouri’s law allowed NPS to keep the first 20% of the consumer’s payments, and to withdraw income earned by the trust. Consequently, the NPS failure will lead to a call for Missouri to raise its trusting to 100%. Consumer advocates are recommending that Missouri legislators use New York’s preneed law as a guideline. New York not only requires 100% trusting, it also prohibits insurance funded preneed. While these restrictions have worked to the benefit of New York’s consumers and funeral directors, it is too late to implement such restrictions in Missouri (and the other states affected by NPS).

The New York Funeral Directors Association has an excellent record with consumers, and provides innovative programs to both consumers and funeral directors.   The Association’s preneed master trust provides crucial funding for those programs and services. While the state’s size would be sufficient to guarantee a large master trust, the Association also benefits from a legal environment that precludes competition from insurance companies and most outside third party sellers. (It should also be noted that the NYFDA master trust, like so many other state association master trusts, is also a third party preneed seller.) 

Through services provided to its master trust, the NYFDA generates revenues that underwrite educational materials, contracts, marketing, legal expenses and individual account administration. As the primary obligor of its preneed contracts, the association is also in a position of authority to its funeral homes.   The freedom from meaningful competition has allowed the NYFDA to make the consumer and compliance its top priorities. Funeral homes that do not agree with the Association’s policies have few preneed alternatives. In a sense, restraint of trade has worked well for the New York consumer. 

While preneed will always have its detractors, a majority of funeral directors now understand that preneed is more than an accommodation. However, the expense of establishing a preneed program is too great for many funeral homes. Consequently, the state master trust provides the necessary economies of scale to make preneed affordable for the smallest establishments. But, establishing a New York style preneed program requires commitment, time and resources. Without a substantive trust to fund program features, state master trusts must look to current sales for revenues to underwrite education, contracts, compliance, administration, and taxes. But as the Tennessee Funeral Directors Association found out a few weeks ago, it is very difficult to overcome the point of view that preneed is an accommodation and that 100% trusting constitutes a ‘good’ preneed law.

Beyond the 100% trusting requirement, the NYFDA is the only association that does not also have to contend with insurance company competitors. Even though insurance provides the consumer an important alternative to trust funded contracts, this competition impacts an association’s ability to effect policies that may be unpopular with some funeral directors.   If the cost of participation in the master trust must be borne in part by the member funeral homes, some mechanism must be afforded the funeral home to recover those costs when the contract is canceled or transferred to a non-member funeral home. This may be a consideration in the pending Ohio legislation. 

It is unfair to compare the New York master trust to those in states such as Missouri and Iowa. Missouri’s state association had to compete with 3 preneed sellers and several insurance companies. As a consequence, the MFDEA cannot dictate issues to its members as the NYFDA can. Any attempt to implement New York styled restrictions in states such as Missouri will likely be challenged by insurance companies and proactive preneed funeral homes to the FTC as unreasonable restraints of trade. 

Clearly the 1980’s argument advanced by preneed sellers about trusting has been proven wrong by the NPS failure. It is not enough to simply trust that amount needed to cover the ‘cost’ of the prearranged funeral.   Rather, legislators must find a way to protect consumers’ interests while providing the death care industry the means to pay the costs of a preneed program that provides education, performance, compliance and safety.

• Email This
• Print
• Comments
• Trackbacks

Although it may not be apparent from the press release or the final Decision And Order, the FTC proceeding against the Missouri State Board of Embalmers and Funeral Directors has restraint of trade implications for future efforts to regulate the preneed transaction. 

The focus of the FTC inquiry was on the State Board’s lawsuit against an individual who sold caskets. The State Board’s proceedings indicate that the individual did more than sell caskets. While it was never the State Board’s intent to preclude non-licensed entities from selling caskets, the strategy taken by the Board’s attorneys relied upon Chapter 333, the law that governs the licensing of embalmers, funeral directors and funeral establishments. Eventually, the matter came to the attention of the FTC, and its focus was on Chapter 333 and the regulations promulgated there under. In Missouri, preneed is regulated under Chapter 436, and the FTC documents made only passing reference to Chapter 436.

Concurrent with the FTC investigation, a cemetery client was struggling with how to comply with the section of Chapter 436 that restricts the entities or individuals that can contract to perform a preneed contract in Missouri (Section 436.015.1):

No person shall perform or agree to perform the obligations of, or be designated as, the provider under a preneed contract unless, at the time of such performance, agreement or designation:

(1) Such person is licensed by the state board as a funeral establishment pursuant to the provisions of section 333.061, RSMo, but such person need not be licensed as a funeral establishment if he is the owner of real estate situated in Missouri which has been formally dedicated for the burial of dead human bodies and the contract only provides for the delivery of one or more grave vaults at a future time and is in compliance with the provisions of chapter 214, RSMo; and

(2) Such person is registered with the state board and files with the state board a written consent authorizing the state board to order an examination and if necessary an audit by the staff of the division of professional registration who are not connected with the board of its books and records which contain information concerning preneed contracts sold for, in behalf of, or in which he is named as provider of the described funeral merchandise or services.

In essence, R.S.Mo. §436.015.1(1) states that no person shall agree to perform the obligations of a preneed contract provider unless such person is licensed by the State Board as a funeral establishment pursuant to the provisions of section 333.061, RSMo. An exception is allowed for cemeteries to provide vaults.

Prior to filing a comment with the FTC, clarification was sought from the State Board that the law was unenforceable. Knowledge that Chapter 436’s ambiguities were already being exploited by preneed sellers, the State Board eventually declined to make an exception for the law.  

In finalizing the proceeding against the State Board, the FTC issued a letter in lieu of revising the Decision and Order.   Though directed at the State Board, the message conveyed is that state law cannot restrict who may sell or deliver a casket, whether it is at-need or preneed. 

One approach to providing better control over the preneed transaction is to license the seller. Preneed abuses warrant tighter control over the transaction, but caution must be exercised with regard to: 1) the restrictions imposed on who can sell preneed (or obtain a preneed license), 2) the definition of the preneed contract, 3) recovery of cost restrictions and 4) contract and/or advertising restrictions. (I will get to the latter  restrictions in upcoming blog entries.)

Ohio walks a fine line with regard to restraint of trade issues through its restrictions on preneed sales. Ohio has claimed that preneed should be limited to licensed funeral directors, and proposed legislation attempts to salvage this approach by limiting the restriction to preneed contracts that include funeral services:

 Sec. 4717.31. (A) Only a funeral director licensed pursuant to this chapter may sell a preneed funeral contract that includes funeral services. Sections 4717.31 to 4717.38 of the Revised Code do not prohibit a person who is not a licensed funeral director from selling funeral goods pursuant to a preneed funeral contract; however, when a seller sells funeral goods pursuant to a preneed funeral contract, that seller shall comply with those sections unless the seller is specifically exempt from compliance under section 4717.38 of the Revised Code.

(The Ohio legislation provisions that relate to preneed and insurance agents warrant discussion in a separate blog entry.)

Restricting the preneed sale to licensed funeral directors has merit, and the support of some consumer advocates. However, this approach has problems other than the restraint of trade issues. 

Beyond the explanation of funeral, cremation and burial issues, preneed involves financial, legal and tax considerations. For states that do not require continuing education, the funeral director has little exposure to the ‘business’ aspects of the transaction.  

The restriction is also difficult to reconcile with the weekly report of funeral directors who have failed to properly handle consumer funds. 

• Email This
• Print
• Comments
• Trackbacks

A year ago, the Dayton JournalNews ran a series of articles about the regulation of the death care industry in Ohio.   The reporting was comprehensive, with articles about preneed.  Earlier this year, legislation was introduced in Ohio to further restrict who could sell preneed.  However, the legislation does not address the trusting issues that rankle consumer advocates.  That bill was approved by the Ohio Senate, and will be considered next by the House.

Some of those same issues will be brought front and center in Jefferson City, Missouri when hearings are commenced on the reform of Missouri's preneed law on July 8th.  A full discussion of all the issues would benefit consumer advocates, regulators and the death care industry.

• Email This
• Print
• Comments
• Trackbacks

The class action lawsuit brought against the NPS affiliates on Friday, June 20^th reflects the despair that some funeral directors are experiencing over the situation. Although litigation to recover assets from the Cassity Empire was inevitable, this lawsuit has flaws that need to be corrected through an organized effort brought by the states’ regulators.

Funeral homes have a legal claim for damages against NPS to the extent they have serviced NPS contracts and failed to receive the compensation promised them by NPS. Consequently, I anticipated finding this provider’s associate agreement as an exhibit to the pleading. However, the filing omitted documentation that would evidence the funeral home’s rights and obligations with regard to the performed contracts and the contracts that remain to be performed. As evidenced by the June 9^th Funeral Service Insider, NPS played by fast and loose rules when it came to their relationships with provider funeral homes. So, what are funeral homes entitled to?

The lawsuit also fails to include the consumer as a member of the plaintiff class. With regard to executory preneed contracts, the consumer has superior rights to the funeral home. Ignoring the rollover contracts, the funeral home has an expectation of performing the preneed contract when the death occurs. However, the consumer could always move to another state, or cancel the contract. Until the funeral is provided, it is the consumer who has the greater claim of damages from NPS. His/her NPS contract has no cancellation value or portability. 

The lawsuit is also troubling in the sense it presumes that whole life insurance policies were appropriate trust investments under Missouri’s preneed law. Chapter 436 is a bit ambiguous about insurance funded contracts, but with regard to trust funding, the law permits the preneed seller to retain 20% of the contract’s purchase price, and to trust the remaining 80%. Unless the purchaser makes the contract irrevocable to qualify for public assistance, the contract can be cancelled and the seller must refund the amount that went into trust. So, if the seller trusts only 80%, how can the trustee purchase a whole life policy and have the liquidity required for Chapter 436 compliance?  

This funeral home points an accusing finger at the fiduciaries, but the pleading reflects the funeral home’s acceptance of the trust holding whole life insurance. A question regulators might ask is whether the funeral home received any compensation for the insurance purchased by the trust. 

Regulators have valid excuses for distancing themselves from this lawsuit, but consumers need an independent authority pursuing their (and funeral directors’) claims against NPS.   If regulators do not recover sufficient assets, funeral homes will fail and consumers will lose their funeral promises.  

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

On June 11^th, Senator Delbert Scott met with a number of death care industry members and regulators to begin mapping out the direction for preneed reform in Missouri.  From that meeting, it was decided that the state’s death care regulators would form review committees that would facilitate a dialog on the issues, and help formulate recommendations for the Missouri Legislature’s Joint Committee on Preneed Funeral Contracts. The Joint Committee is expected to begin hearings in September.  

The State Board of Embalmers and Funeral Directors has formed its Chapter 436 Review Committee, with the first meeting scheduled for July 8th. The Office of Endowed Care will defer formation of its review committee until later in July. The Chapter 214 Review Committee will not meet until August, after the Chapter 436 review committee meetings are concluded. 

To provide some structure for the Chapter 436 meetings, the State Board is circulating a survey on 67 issues. The review committee meetings will have to maintain tight schedules in order to adequately address those issues. The review committee meetings will provide public attendees an opportunity to provide comments. 

• Email This
• Print
• Comments
• Trackbacks

In what may prove to be a lengthy legal proceeding, Missouri Attorney General Jay Nixon filed suit against Forever Network, Inc., an affiliate of National Prearranged Services (NPS).  While the suit may duplicate the injunctions effected by the Agreed Order obtained by the Texas Department of Insurance, consumers should take comfort by the fact Mr. Nixon has begun taking action.  

While it may be days before a copy of the petition can be obtained for review, I anticipate the pleading may share some of the same assertions and requests made by Texas.  While this duplication may be confusing to funeral directors, the difficulty regulators face in bringing proceedings against NPS is that each regulator must establish the requisite authority for the remedies sought.   For Jay Nixon and the Missouri State Board of Embalmers and Funeral Directors, Chapter 436 is full of ambiguities, making their case against NPS challenging (but not impossible). 

The Missouri regulators have a stated goal of ensuring that consumers receive the services they have paid for.  While Chapter 436 has its many faults, regulators should keep in mind Section 436.007.2, which provides:

If a preneed contract does not comply with the provisions of sections 436.005 to 436.071, all payments made under such contract shall be recoverable by the purchaser, his heirs, or legal representative, from the contract seller or other payee thereof, together with interest at the rate of ten percent per annum and all reasonable costs of collection, including attorneys' fees.

NPS aggressively marketed preneed contracts on an installment basis that incorporated vague finance charges and “premature death discount fees”.  These charges often drove the price of the preneed contract up by thousands of dollars.  Justice would taste sweet if the Cassitys' had to give it all back.   

• Email This
• Print
• Comments
• Trackbacks

Funeral directors will attempt to leverage the Funeral Service Insider’s report about the NPS contributions to state politicians, but they should do so with caution.

The story does not paint the entire picture of NPS’ efforts to influence the politics that controlled Missouri’s preneed industry. The amount attributed to the Missouri efforts ($168,000) seems low. Granted it does not reflect contributions made during the past two years, or those made prior to 1999, but the seven years in question cover the period when NPS’ sales seemed to have leaped (within Missouri and to other states). 

If NPS providers are going to point an accusing finger at Jay Nixon, they need to consider two issues: their need for Nixon’s help and cooperation, and the complicity of some funeral directors in the NPS impropriety. 

NPS made political contributions for a number of reasons, including the opportunity to have NPS providers appointed to the Missouri State Board of Embalmers and Funeral Directors. The funeral homes demanding action from the regulators may, for the most part, be innocent.  But when a group is found to have one or more pots calling the kettle black, the credibility of the group as a whole is undermined.

If it is not apparent, there is some finger pointing being done within the regulators’ closed circle. A potential issue in the rift among the regulators maybe the political dispute between Missouri Governor Matt Blunt and Missouri Attorney General Jay Nixon that prompted the AG’s Office to pull its staff attorneys from their day to day representation of the various state boards and agencies. This forced the Missouri State Board of Embalmers and Funeral Directors to look to the legal staff of the Division of Professional Registration, a staff that was already stretched. In reality, the NPS situation existed long before the AG pulled its attorneys, and the posturing has already begun for that issue.  

The NPS meltdown has regulators scrambling for their respective excuses. Some of those excuses will appropriately lay the blame back on the death care industry. However, NPS was an equal opportunist when it came to exploiting politicians and funeral directors. Eventually many individuals may be called upon to provide an explanation, but funeral directors and regulators would be better served channeling their current energies towards the recovery of consumers’ funds and the formulation of a program to administer those funds.  

In five months, consumers will be voting.  Will they be more receptive to excuses or explanations about the efforts already implemented to provide their funerals?

Everyone has an excuse. Write them down and put them away for another day.  

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

As news of the NPS meltdown began to leak last month, several proposals to reform Missouri's preneed law were hastily drafted.  Not knowing the extent of NPS' problems, some reform advocates felt the need to strike while the iron was hot. 

Even as the legislative session ended on May 16th, it was not clear whether any reform would be enacted.  However, when the dust settled in Jefferson City, the only preneed reform enacted will prove the most prudent.

By virtue of an amendment made to Senate Bill 788 on the Senate Floor, the "Joint Committee on Preneed Funeral Contracts" was given birth.  The committee will be formed with seven members from each of the House and the Senate. 

The Joint Committee's tasks are to:

(1) Make a comprehensive study and analysis of the consumer and economic impact on the preneed funeral contract industry in the state of Missouri;

(2) Determine from its study and analysis the need for changes in statutory law; and

(3) Make any other recommendation to the general assembly relating to its findings.

By the time the Committee members are appointed, and hearings are scheduled in September, a great deal more will be known about NPS' business practices.  However, the hearings are bound to put Missouri's entire preneed industry under the microscope.  The death care industry has the summer to prepare.

• Email This
• Print
• Comments
• Trackbacks

Yesterday, the St. Louis Post-Dispatch ran an article that examined the history of NPS, and raised some of the questions that need to be explored in depth in the months to come.   The system failed in several states, for both consumers and funeral homes.   While most funeral homes will try to make good on the NPS promises to consumers, regulators must share in the responsibilities for what went wrong and what has to be done.

• Email This
• Print
• Comments
• Trackbacks

The Missouri preneed industry faces a long and stormy summer. 

The Missouri legislature seems to be listening to regulators' requests for much needed authorities for examinations, audits and rulemaking.  A draft bill providing emergency powers to the Division of Professional Registration has emerged as legislation that may be signed into law before the current session ends next week.  In contrast to most bills enacted into law, this one is rumored to have an immediate effective date.

If the bill is signed into law, the Missouri State Board of Embalmers and Funeral Directors will begin to study methods for implementing the preneed inspection powers to determine whether the state's preneed problems extend beyond the NPS failure.  Though meant to demonstrate the industry's overall compliance with Chapter 436, recent testimony at legislative hearings may have undermined regulators' confidence in the industry's past efforts to comply with current law.

One approach the State Board will consider is a comprehensive desk top examination of each seller's fundamental compliance with Chapter 436.   Approximately 12 years ago, the State Board contemplated a broad based review process that  would have sought basic information about the three methods of funding: trust, insurance and joint accounts.   However, the initiative could not be pursued because the State Board lacked the authority to require compliance by licensees. 

I could not attend recent  a hearing where industry members testified before legislators to provide assurances that most funeral directors do comply with Chapter 436.  If the description provided to me about the testimony of one well intended funeral director was accurate,  funeral homes need to take a refresher on the requirements of Chapter 436.  I have heard similar misstatements by funeral directors at recent State Board meetings.

I anticipate that The Missouri Funeral Directors and Embalmers Association is already working on Chapter 436 compliance courses to provide its members.  Association members would be well advised to take such a course before assuming their funeral home is in compliance.

• Email This
• Print
• Comments
• Trackbacks

On Wednesday, April 30^th, the Missouri Department of Insurance fired off the first salvo in the legal proceedings to recover funds from Lincoln Memorial Life Insurance Company. In an effort to prepare those affected by the NPS meltdown, the Missouri State Board of Embalmers and Funeral Directors and the Division of Professional Registration have issued press releases that explain critical issues related to this situation. The tenor of these press releases is substantially different from those previously released by other states’ regulators. Consumers and funeral directors need to review these releases carefully.   

If it hasn’t been apparent to funeral directors before now, Missouri’s filings against Lincoln Memorial Life reflect that the NPS trusts are full of term insurance policies. Some reports indicate that the policies may be lapsing soon. While Missouri Department of Insurance has filed its actions against Lincoln Memorial Life, the eventual target will be the NPS/Lincoln corporate officers and directors. Because regulators must pursue their claims through the authorities granted by the statutes governing insurance and preneed, funeral homes need to consider banding together in an action that focuses on the authorities granted to the replacement management team installed by the Texas regulators. 

The Missouri regulators and their legal staffs have been overwhelmed by the situation.   These offices were understaffed to begin with, and the magnitude of the investigation, legal proceedings and inquiries has stretched their resources to the limits. This all may make for good campaign rhetoric in the upcoming fall elections, but the industry needs to take actions to help recover improperly diverted funds. 

The rumors of law firms offering to initiate class action lawsuits have already begun to circulate. But, most funeral directors probably appreciate that building a coalition to preserve the NPS assets and working towards an equitable division of the proceeds would better serve their interests.   To be fair, consumers need an explanation about the third party preneed transaction and their exposure for the NPS failure. 

The majority of preneed contracts are between the funeral home/cemetery and the purchaser, wherein the funeral home/cemetery is the primary obligor. The essence of the contract is two promises: the purchaser to pay a specific amount of money and the funeral home/cemetery to provide certain described services and goods when the purchaser (beneficiary) dies.   

NPS is (was) a third party preneed seller. Funeral homes and cemeteries use third party sellers for a handful of valid purposes. Often, smaller death care companies may not have the volume of preneed sales to justify the expense of contracts, administration and compliance and so they contract with third party preneed sellers. Some states require the death care company to be the obligor of the preneed contract, but many do not. In states where law requires the death care company to be the obligor, the third party seller acts in an agency capacity to the funeral home and cemetery. It that situation, the death care company has an obligation to honor the contract regardless of most circumstances (like the failure of the trust). 

However, states such as Missouri and Texas, allow the third party seller to be the obligor of the preneed contract. In these types of preneed transactions, there are four sets of promises: the purchaser to pay money to the third party seller, the third party seller to cause the funeral home to provide a funeral by paying it money, the funeral home to provide the funeral, and the third party seller to pay money to the funeral home. However, the terms of the payment between the third party seller and the funeral home are not generally disclosed in the preneed contract, but rather in a separate agreement between the third party seller and the funeral home/cemetery (called an associate agreement or provider agreement). 

NPS used a multitude of different preneed contract forms and associate agreements (most of which were infamous for their ambiguity or brevity). NPS relied upon these ambiguities to transfer preneed contracts from one funeral home to another funeral home if the circumstances benefited NPS. Consequently, the agreements were intended to be difficult to enforce, which cuts two ways.

Regulators did not seem to appreciate this fact when early press releases were issued to calm consumers. Those press releases suggested that funeral homes would have to honor their NPS contract “pursuant to their terms”.   While funeral directors cannot afford to walk away from their families, regulators need to follow the lead taken by Missouri’s State Board of Embalmers and Funeral Directors by being more forthright with consumers.   If the NPS/Lincoln proceedings take years to resolve (instead of months), the parties will need an understanding of their respective rights and obligations in reaching fair and equitable settlements.

• Email This
• Print
• Comments
• Trackbacks

With two reform bills (HB 2469 and HB 2594) already introduced into the legislature, and two substitute proposals in the works, Missouri legislators and regulators are committed to fixing a law that allowed NPS to exploit consumers and funeral homes. However, consumers and the death care industry are both having difficulty analyzing the specifics of the various proposals. The haste with which legislation is being pressed suggests that regulators know more about the gravity of the NPS situation than what has been disclosed to the public.

Chapter 436 has some obvious problems:

• The combination of a low trusting percentage (the last 80% of payments) and the right to withdraw income currently

• Restrictions on the state board to order inspections or audits

• Minimal reporting requirements

• Ambiguity regarding deposit requirements

• Ambiguity regarding insurance funded preneed

• A lack of rulemaking authority

• An underlying assumption that all preneed contracts will be price guaranteed, and most would be trust funded

• Inadequate provisions for consumer protections when sellers or providers go out of business or are sold

• A general lack of independent oversight

What may not be apparent to legislators, and to consumers, are the many competing economic interests that exist under the “death care” umbrella. There is little doubt that legislators are getting a crash course on those interests. The various proposals already reflect certain interests of regulators, funeral homes and preneed sellers. But if legislators are only now learning the issues, how will they know which proposals are in the best interests of the consumer?

If it were not for the NPS meltdown, Chapter 436 would not be a topic of discussion in Jefferson City. Last year, Representative Meadows proposed a reform bill that was blocked before it could even be discussed. The year before, the State Board of Embalmers and Funeral Directors put preneed reform on its agenda, but the chairman, Ken McGhee, received very little support, or interest.  The sudden interest to fix Chapter 436 is being driven by the NPS failure.

Preneed is a complex issue, and Chapter 436 has more faults than most states’ preneed laws. But, the NPS situation cannot be fixed if we do not know the extent of the damage. It is too late to close this barn door. Rather, the legislature must bring structure to a situation that has many competing interests. The NPS meltdown is unprecedented, and a public forum is needed so that all can understand what went wrong, and where should we go from here. 

With regard to drafting preneed reform, the Missouri death care industry has historically relied upon representatives from the State Board, the funeral directors association, the cemetery association, preneed sellers and the consolidators to forge a consensus bill to submit to the legislature. This group has been referred to as the Allied Council. It has been 13 years since the Allied Council forwarded a Chapter 436 proposal to legislators. Ironically, that Allied Council effort was subverted by NPS. 

Chapter 436 will be revised. However it should be done with the input of an Allied Council that includes consumers, insurance companies and the attorney general’s office. 

• Email This
• Print
• Comments
• Trackbacks

While Missouri has had a right of sepulcher law for five years, there has been disagreement whether the law allowed an individual to override the preferences of his/her next-of-kin. The ambiguities of the original law left funeral directors in a quandary about following the instructions of designated agents. This led to confusion for many Missourians who thought they had a right to control their disposition.

Credit should be given the Missouri Funeral Directors and Embalmers Association for pressing legislation that will clarify Missouri residents can use a durable power of attorney to ensure their funeral or cremation preferences are carried out through a designated agent. HB 1871 has been recommended for passage, and its fate for becoming law will be decided in the next few weeks. 

• Email This
• Print
• Comments
• Trackbacks

Certainty? In this world nothing is certain but death and taxes.

Benjamin Franklin

The “collapse” of National Prearrangement Services comes as a shock to both the company’s clients and competitors. For the seventeen states in which NPS transacted business, regulators are scrambling to get their arms around the magnitude of the problem. NPS’ adversarial reputation will cause many regulators to move cautiously. However the capitulation by NPS to the termination of its marketing operations should cause regulators to consider whether the individuals that control NPS and its related sibling corporations have employed a rearguard strategy.

Missouri and Texas will figure prominently in regulators’ efforts to protect consumers. NPS maintains its corporate headquarters in St. Louis, Missouri.   The insurance company to which NPS funnels its preneed sales, Lincoln Memorial Life, is a Texas company located in Austin. Accordingly, records of NPS’ preneed sales should be in St. Louis and the funds received by NPS should (hopefully) have made their way to Austin, and subject to the jurisdiction of the Texas Department of Insurance (TDI).  

However, the news from TDI has been a bit confusing. On April 9^th, TDI issued a press release that disclosed that an Agreed Order had been entered into with NPS. The press release states:

The TDI-issued Hazardous Financial Condition Order requires the companies to establish a plan to pay policyholder claims and to address existing contracts.

"While every effort was made to secure the companies and return them to normal operations, the decision was made to take this regulatory action," said Texas Insurance Commissioner Mike Geeslin. "As we move forward, our goal is to use every law on the books to protect consumers, coordinate with other regulators and states and - most importantly - keep all parties informed as issues develop."

"It is imperative that we work closely with NPS and the funeral providers to ensure all Texas consumers receive their prepaid funeral goods and services as originally promised," said Texas Banking Commissioner Randall James.

For years, these companies have been dependent upon new sales (and trust transfers) for revenues to meet promises made to funeral homes. Consequently, TDI’s assurances about returning these companies to ‘normal operations’ rang hollow when news of NPS’ termination of its sales personnel was leaked. A day later, the Kansas City Star reported that a Kansas lawyer had taken “control of the company Tuesday as action manager of behalf of Texas,…”    So, what is going on? 

The lawyer referenced by the Kansas City Star article has experience with insolvent insurance companies, and so one explanation could be that Texas is preparing to take control of Lincoln Memorial Life. 

With NPS being deprived future sales, the Lincoln Memorial assets may be the only source of payment for hundreds of thousands of consumers. Texas reported 39,000 policyholders, and Missouri reported 46,000, and while these two states may account for a substantial portion of NPS’ business, there are 15 other states with NPS sales.

 With information in such short supply, one must be careful not to read too much into these press releases. But each seems to place emphasis on “Policies” and “Policyholders”. There seems to be an assumption (or at least a hope) that each NPS sale ended in a Lincoln Memorial policy. Yet, many of us know that NPS aggressively pursued trust rollovers that included questionable records for the preneed contracts involved. With regard to those transactions, it is unlikely that purchasers were ever contacted. The question then becomes what NPS/Lincoln did with the funds from their trust rollovers? 

To know just how deep the NPS waters are, Missouri is key to obtaining NPS and its corporate records. On April 9^th, the Division of Professional Registration issued a press release that advised:

Funeral directors are cautioned to ensure they maintain adequate records and evaluate any preneed arrangement sold on behalf of their funeral establishment.

On April 11^th, The Kansas City Star reported the following comments:

“We want people to know we are working to safeguard their interest,” ……….. “We’ve stopped the flow of business to look at what’s going on. Our concern is that they get what they paid for.”

While terminating NPS’ authority to enter new transactions had to be its first priority, Missouri must now determine how it can best protect all consumers, not just those from Missouri. If there is any doubt about the trust rollover transactions, Missouri needs to take prompt action to secure NPS’ corporate records. 

Which brings this post back to its introductory muse: has NPS been sacrificed as some sort of rearguard maneuver?  

We can hope that NPS will take all actions necessary to provide assurances to its policyholders, including cooperation with Missouri’s regulators. But if push comes to shove over records that document the company’s money trails, NPS may resort to its true colors when responding to Missouri’s requests. Funeral directors must prepare for that potential conflict.

All funeral homes that have NPS contracts should begin an inventory of their paperwork.   For funeral directors that participated in an NPS trust rollover, the inventory should include documentation regarding the application of the trust funds. If their records do not include such documentation, funeral directors need to consider making an immediate written request to NPS. An even tougher (but necessary) decision may be whether to copy that request to your state preneed regulator. 

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