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

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In enacting the Uniform Prudent Investor Act, states should have repealed legal list statutes, which specified permissible investments types.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.
 

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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.    

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Recent document disclosures are reflecting that several factors contributed to the WFDA’s master trust deficiency (and the appointment of a receiver). Certain of those factors relate to the fees paid to fund managers and the association’s sponsorship charges. Those factors are relevant to other association master trusts, and we will explore them in subsequent posts. However, the ‘straw’ that broke this camel’s back came straight from the National Prearranged Services’ playbook.

The Wisconsin State Journal reported that it was the formation of a life insurance company by the WFDA’s Wisconsin Funeral Trust that prompted a regulatory audit by the Office of the Commissioner of Insurance. In 2009, the WFDA used the master trust to set up an insurance company to provide its members a preneed funding alternative to the trust. Wisconsin law requires 100% of the consumer payments to be deposited to trust. In contrast, insurance funding provides funeral homes commissions to offset the costs of a preneed program. This same reality led National Prearranged Services to form a life insurance company. NPS needed an insurance program in order to expand into 100% trusting states. To jumpstart that insurance program, NPS tapped its Missouri and Texas preneed trusts.

NPS exploited a provision of the Missouri law that exculpated the trustee from investment oversight when an independent investment advisor was appointed by the seller. Held harmless by state law, NPS trustees may not have looked further than the statements the seller provided. NPS then appointed an investment advisor that directed the trusts into policies issued by the sister insurance company. In a similar fashion, the WFDA amended its master trust agreement in 2009 to remove the trustee’s investment responsibilities and authorities, and to vest investment control in the fund manager of the WFDA’s choice. And to top that move off, the amendment made information about the trust and parties confidential. If the trustee was unhappy with the situation, it could resign, but it could not make “any public communication that may be reasonably considered derogatory or disparaging to the Association, the Trust, the successor Trustee or any party relating to the Trust.”

There are indications the WFDA funeral trust had been struggling for years to keep up with promised return. But, over the course of three years, the WFDA made radical changes that culminated in the formation of the insurance company. Who was the driving force behind those changes? When advice was sought in 2007 to allow the trust to diversify its assets, the legal opinion was directed to the WFDA executive director Scott Peterson, not the corporate fiduciary.
 

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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.
 

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It is no secret that the larger funeral home operators have more preneed options than the industry’s mom and pops. The large operators have the volume of business that will attract insurance companies and banks, and their program incentives and discounts. Economies of scale provide the larger operator preneed advantages when going ‘toe to toe’ with the smaller operator. A completely different ‘have’ and ‘have not’ environment exists within the cemetery industry. One crucial fact distinguishes cemetery preneed from funeral preneed: a burial space, and certain merchandise and services, can be delivered prior to death. That fact is a problem for both insurance companies and banks, and accordingly, neither industry has courted the cemetery industry in the same manner as they have the funeral industry. And, there are other factors which complicate cemetery preneed. Consequently, cemeteries tend to be more ‘have nots’ than ‘haves’. The lack of preneed not only puts the cemetery at a disadvantage with funeral homes when competing for vault and marker sales, the cemetery also runs the risk of losing out completely to cremation.

Over the next months, this blog will examine the state of cemetery preneed, and its regulation. While the cemetery industry, as a whole, has been slower to embrace the preneed transaction than the funeral industry, some cemeteries have aggressive preneed programs. With such a distinct dichotomy within the cemetery industry, regulators must decide whether to spend resources on the few, or for the mass.
 

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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.

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

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

For the State Board examiners, the first look at a seller’s records includes all outstanding preneed contracts. Missouri’s first preneed law was written in 1965, and some funeral homes have contracts dating back that far. Consequently, the initial desk audit could be a lengthy process for Missouri’s larger funeral operators.
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A breakdown in communications between the CFDA and the Cemetery and Funeral Bureau has resulted in the California Attorney General filing a lawsuit that can be appropriately described as vitriolic. The “California lawsuit” could provide some valuable ‘what to avoid” lessons for regulators in other states.

In an unusual move, the Bureau went “public” last year by raising a number of issues with administration of the California Master Trust. Some of those issues did warrant an explanation. One issue involves the actions taken by the CFDA subsidiary in response to the 2000 market crash. The subsidiary implemented a plan to stabilize the master trust value after the collapse of a bond fund. Another issue regards the administration fees charged the master trust subsequent to the collapse of the bond fund. A third issue regards the subsidiary’s policy to pay a portion of the administration fees to participating funeral homes.

The CFDA countered with arguments of how its actions were within California law. Those arguments have merit, and were covered by this blog in July 2010. (See California Master Trust: serious missteps, but not another IFDA.) The CFDA proposed that the issues be reviewed in the context of relevant facts, having the Bureau apply thirty year old laws and regulations to the CMT’s circumstances. Instead, the California Attorney General adopted a “quick kill” strategy that employs a two prong attack: involve the consumer and apply the law strictly.

In taking the controversy to the consumer, the California AG has been disingenuous when using such terms as “conspiracy”, “concocted”, and “kickbacks”. In doing so, the AG may end up galvanizing the CMT membership, and getting anything but a quick kill.

The AG’s legal arguments are also somewhat disingenuous. As the title suggests, this blog entry will focus on the AG’s call for a truly independent trustee. In future entries, we will look at some of the AG’s other legal arguments.

In the “First Cause of Action” of the petition, the AG makes the argument for how the CFDA’s administrative subsidiary has assumed unlawful control over the preneed funeral trust. Granted, the CFDA may have gone too far in assuming control over the trustee’s appointment of agents (and discounted the interests of consumers with non-guaranteed contracts), but the AG ignores the fact the master trust consists of thousands of preneed contracts that originates in hundreds of funeral homes. This fact makes the fiduciary dependent upon the funeral home in a number of ways.

The trustee needs preneed contract data for accounting (much in the same way the regulator’s auditor is dependent on the same records to perform his job). As with other states’ master trusts, the association performed a vital role in providing crucial contract administration. Contrary to the AG’s citation to the California probate code, these are administrative functions the corporate fiduciary must delegate. The trustee cannot account for the preneed contract as a depository account.

The trustee also needs input when setting investment policies. The AG would suggest that the preneed trustee cannot look to the funeral home. This ignores that the vast majority of the preneed contracts are guaranteed, where the funeral home has assumed the risk of investment. It also flies in the face of the numerous “No Action Letters” issued by the Securities Exchange Commission.

The manner in which the trustee prepares trust tax returns impacts both the funeral home and consumer. The most efficient approach (Federal Form 1041QFT) has a cost to the funeral home. Consequently, the preneed fiduciary will want the funeral home’s approval.

The ‘independent preneed trustee’ may seem to be a quick and easy answer to regulators, but only if the courts ignore the facts and realities of administering a preneed trust.
 

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When news of the indictment of 6 National Prearranged Service officers was reported last November, many newspapers picked up the AP version that included a quote from the Internal Revenue Service criminal investigator. The fact is that the Federal investigation of NPS involves investigators from the IRS, the FBI and the U.S. Postal Inspection Service. An FBI press release regarding the NPS indictments includes comments from investigators with the three Federal agencies. To understand how NPS’ actions triggered the jurisdiction of the three agencies, a 2009 FBI press release concerning the indictment of Randall Sutton provides an explanation of the underlying facts.

The main thrust of the IRS investigation will be to determine whether the NPS officers committed income tax evasion with regard to what they individually received, or with regard to what the company received. The investigation will need to determine how the distributions from insurance, and from trusts, should have been reported by NPS. The investigation will also need to examine how NPS’ sister corporation, Lincoln Memorial Life, reported its income. And, the investigation will look at how the preneed trusts controlled by NPS reported their income.

Shortly after the Federal investigation of NPS was initiated, the Springfield Journal-Register reported that a Federal investigation of the Illinois Funeral Directors Association master trust had been initiated. As with NPS, Federal investigators will look closely at whether the reports mailed to funeral homes, and the statements mailed to consumers, were fraudulent, and thereby, violated mail fraud statutes. However, another line of investigation will be whether the master trust violated the Federal tax code.

What does the IRS’ role in these investigations mean to funeral homes and consumers? If these entities failed to accurately report income, the IRS (and state authorities) will view the unreported income as lost revenue to government. Preneed trust income must either be reported to the consumer or taxed by the trust. NPS trusts may have had annual tax liabilities in the tens of millions of dollars. No small potatoes considering the plight state coffers currently face.

Consequently, consumers and funeral homes may see taxing authorities become more aggressive in the enforcement of preneed income reporting requirements. With fewer agents due to budget constraints, the IRS may begin promoting its whistleblower program. If the situation reported this past weekend is an indicator of the future, non-compliant preneed companies may have more to fear from the disgruntled employee than being selected for a random audit by the IRS or state department of revenue.
 

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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.
 

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

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

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

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

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

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

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

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

 

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 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?
 

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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.
 

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It has to be bad when your main source tells you its time for the Methadone clinic. With the worst financial crisis in our lifetime, and spiraling costs, what funeral director isn’t already battling a case of the sweats and shakes when reviewing his/her preneed program?   And now you’re being told to go cold turkey on the only preneed transaction that you offer.   

With Forethought having joined the bandwagon against the guaranteed preneed contract, funeral directors are being forced to reexamine the transaction.  It is an examination that is long over due. However, dropping the guaranteed contract will not be as simple as Forethought suggests. 

For fifty years, the US funeral industry has defined preneed as a cost saving transaction that will provide peace of mind to the "consumer".  As many funeral directors recall, Forethought/Batesville taught them how to structure this transaction around the casket sale. And, now they tell the funeral director it’s a mistake. No wonder some funeral directors are a bit miffed with their insurer. Funeral directors that embrace Forethought’s prescribed medicine could suffer sharp withdrawal pains that have long-lasting side effects.   

Preneed insurers are crucial to most preneed programs, but funeral directors need to appreciate that their insurers are responding to changing market forces. Insurers are looking for alternative markets, and consequently, we are hearing more about ‘final expense policies’ and ‘funeral expense trusts’. These products can be marketed independently of the funeral home, relegating the funeral director to an end provider.   For the funeral home that maintains an insurance agency, the final expense product offers a larger commission. But, the final expense product also targets a more affluent consumer. How many of your consumers are candidates for a $20,000 policy that provides a 2% return, and requires a $200+ monthly premium?

Rather than go cold turkey on the guaranteed contract, the industry will begin to explore hybrid contracts that provide partial cost protections. For the older, and less affluent, consumers, the industry needs to look at cooperative trust arrangements similar to those offered in England, Canada, New Zealand and Australia.   With regard to these alternative trusts, we face a 'minor' hurdle: our preneed exemption from certain securities regulations is based on the guaranteed contract being a sale of goods and services. 

To facilitate the administration of preneed contracts and trusts, the Securities and Exchange Commission has issued a series of “No Action Letters” regarding the preneed contract or the preneed master trust. See, e.g., Fleet National Bank (Sept. 5, 1990); Funeral Services of Iowa, Inc. (September 28, 1987); Michigan Funeral Directors Association (August 27, 1987); Associated Funeral Directors Service, Inc. (September 5, 1986); Drexel Trust Company (September 12, 1983).

For purposes of collective investment, the trust-funded, non-guaranteed preneed contract will need to utilize an alternative exemption from the SEC regulations. 

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During the long and tedious Chapter 436 hearings, some Missouri funeral directors joined consumer advocates in using the NPS failure as reason for recommending that legislators impose 100% trusting on the preneed transaction.  Those funeral directors generally advocated the use of insurance or joint accounts as safer methods of preneed funding.  During regulatory meetings, comments were also made about how the insurance policies or joint accounts were 'guaranteed'.   The realities are that each of these forms of funding has its advantages and disadvantages, and that there are no absolute guarantees.

The AIG failure underscores that even the largest of insurers may be vulnerable to the current financial crisis.   While most life insurers are safe, the only guarantees offered by insurance are the rates of return promised by the policy terms.  As witnessed by the Texas insolvency proceedings for Lincoln Memorial life, the insurer's promises are only as good as the assets held in its reserve accounts.  After that, the policyholder must look to guaranty funds for assistance.  Consequently, funeral directors should periodically review the financial statements of the insurance companies they use for preneed funding.

With regard to keeping those preneed funds at the local bank, the funeral director is assuming risk (and liability?) when he exceeds the FDIC insurance coverage.   By holding the consumer's payments in a joint capacity, the funeral director is also exposing the funds to the claims of the funeral home's creditors.   Losing a lawsuit for damages that exceed the firm's casualty insurance put the consumers at risk. 

In contrast, the funds placed in a preneed trust are not the assets of the bank or the funeral home.   By virtue of the terms of the preneed contract, the funeral director usually has the risk of investment performance (and under the current circumstances, that's more risk than what some funeral directors want).  But in contrast to insurance and joint account contracts, the trust provides the death care operator some say in how investment risk should be handled.

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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?   

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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.  

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