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

It's always an ugly scene when a party to a fiduciary relationship gets caught with his/her hand in the cookie jar.  Unfortunately, this has been happening with alarming frequency in the death care community, and Indiana has had enough.  In a relationship that requires mutual cooperation, the death care industry has taken the position that "someone should have stopped us by saying no", and the Indiana legislators have agreed.   With the legislation signed into law last week, Indiana has initiated a major shift in the responsibilities of the death care fiduciary.  Like the tree falling in the forest, was there anyone from the banking/fiduciary community around to here it?

The Indiana legislature moved quickly in response to the trust frauds committed at Grandview Memorial Gardens and at the cemeteries owned by Robert and Debra Nelms, and Governor Daniels followed suit by signing HB 1026.  The new law will go into effect July 1, authorizing the Indiana State Board of Funeral and Cemetery Service to promulgate regulations that will determine the distribution documentation that must be reviewed and approved by death care fiduciaries.  Failure to comply with these new requirements will expose the fiduciary to criminal charges and liability to cemetery customers. 

 To understand the gravity of the issue, fiduciaries need not go any further than their clients for input.  The general counsel for the Indiana Cemetery Association put it this way:

The people who own the trusts could do almost what they wanted. We've given the trust companies the incentive not to pull the wool over their eyes.

Cemetery association members were aghast to learn of the case because they did not understand the extent that the current law left cemetery trusts vulnerable. People really weren't aware. 

It would be safe to say that most death care fiduciaries are still unaware how vulnerable these trusts are.

What should death care fiduciaries do?  The knee-jerk reaction would be to terminate such accounts and run as far away as possible.  However, the fraudulent character of the charges leveled in recent class-action suits bring into question whether the statute of limitations has even begun to run.  The class-action lawsuit brought on behalf of Grandview Memorial Gardens lot owners will likely turn on whether preneed contracts were performed pursuant to their terms, and that will require the distasteful act of opening gravespaces.  The trust frauds committed by the Nelms have already snared one fiduciary and a major brokerage firm when a $20 million class-action lawsuit was filed in late January on behalf of cemetery lot owners. 

Fiduciaries with a federal charter may be tempted to play the federal preemption card that has been used to keep state regulators at bay with regard to the sub prime mortgage crisis, but history is not on the national fiduciary's side with regard to death care regulation.  State death care regulators in Florida and Texas have taken OTS preemption opinions, rolled them up and slapped thrift chartered fiduciaries into submission.  Frankly, the legal arguments advanced by the state regulators were on point.

Indiana chartered fiduciaries need to become engaged in the procedures that will be unfolding before the Indiana State Board of Funeral and Cemetery Service later this Summer.  The death care industry will be there in force providing their comments about the forms and procedures to be covered by the regulations authorized by the new law.  Fiduciaries will have no one but themselves to blame if they miss this dance. 

Federally chartered fiduciaries will need to determine how significant a block of business Indiana represents to their death care business.  These fiduciaries will also need to monitor other states to see whether the Indiana law represents a trend that other state legislatures will follow. 

Death care companies and consumers will need to anticipate an increase in the cost of fiduciary services.   The old adage "you get what you pay for" has a double-edged application to the death care fiduciary environment.  The security sought by consumers and cemeteries/funeral homes will come at a cost.  To minimize the cost of the new obligation to provide distribution oversight, death care companies and fiduciaries will need to explore standardized examination procedures or the reliance on established audit procedures.   Death care companies will also have to be more receptive to trust instrument provisions intended to provide fiduciaries the power to say no, and protections when they do.

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It must be spring: preneed reform bills are sprouting like crocus. 

The direction taken by the Maryland and Tennessee legislatures in proposing protection funds drew recent criticism from the Funeral Consumers Alliance. While consumer advocates have some valid points regarding these legislative efforts, the obstacles facing states are far more complex than what most outsiders understand. For purposes of this blog entry, lets focus on Maryland and put Tennessee off to another day.

First, a distinction needs to be made between a state’s industry board and a state trade association. Some times the two cooperate to get legislation introduced and passed, and then sometimes the two are on very different pages. Most state industry boards are understaffed and under funded. A casual survey of the website for the Maryland State Board of Morticians & Funeral Directors reflects the Board has one inspector, excuse me, had one inspector, for all of the state’s funeral homes.   While the Board’s principal purpose is the “protection of the public's health and welfare through proper credentialing, examination, licensure, and discipline of morticians, funeral directors, surviving spouses, apprentices and funeral establishments in Maryland”, its newsletter suggests preneed has become its pressing problem.

Preneed accounts for most of the Board’s complaints, and the number of funeral homes that are late in filing their reports to the Board are substantial. Yet any thoughts the Board may have regarding enforcement actions must be tempered with the realities of its budget. As a self-supported entity, the Board’s resources are those fees it charges the state’s funeral homes and morticians, and there lies the first rub with the state’s trade association. What businessman doesn’t complain about the fees charged for licenses? Those complaints are invariably directed to the trade association, which in turn applies pressure on the board. 

But the fact something is broken with regard to preneed is not lost on either the Board or Maryland’s funeral director association. The association position for scrapping the CPA certification in favor of a protection fund probably signals the industry’s acknowledgment that this oversight approach is ineffective and a waste of resources. I have experienced the same frustration working with CPAs and auditors who held themselves as having experience with the death care industry. If each funeral home has to find a CPA to certify compliance with a state law like Maryland’s, HB 1090 may well represent a better application of the funeral home’s funds. However, the real problem with Maryland preneed is its preneed law and the lack of effective oversight. 

The dynamics of preneed reform are complicated, but there certain generalities that apply from state to state. No matter how bad your state law is, no one wants to open the law for the donnybrook that is sure to follow if all bars are removed. It doesn’t matter if the trusting is 100% or 80%. If you work in a 100% state, there will be a strident element that argues a lower percentage will open the floodgate to the unsavory characters of preneed (and the criticism of FCA). If you work in state such as Missouri, there is the position that opening the preneed law will invite restrictions that cut into the revenue streams that funeral homes have become dependent upon. However, these arguments are beginning to pale in the face of growing frauds and abuse. Most funeral directors understand that oversight is needed, but the challenge is how to achieve it efficiently on the limited resources available. Shifting the responsibility, as Indiana’s legislature is considering, to the fiduciary will not work. 

With regard to Maryland’s preneed law, I would offer the following recommendations:

1. Require an independent, corporate trustee that can invest pursuant to the Prudent Investor Rule. Scrap the concept of letting a funeral home serve as a trustee (or escrow agent).   (And what is a trust that is insured by the FDIC?)
2. Require a combination of flat fees and per preneed contract fees that are divided between a protection fund and the Board’s costs to monitor annual reports and to take enforcement actions. The per contract fees should be assessed equally from the funeral home and the consumer (perhaps $10 each). 
3. Each preneed seller should be required to file an annual report that sets out new contract information, deposits to trust, distributions from trust, the trust’s market value and the trust liability. 
4. Each preneed seller should be subject to a tri-annual inspection that may last between 1 to 3 days. The inspection reviews the funeral home’s records, accounting controls, a sampling of transactions (deposits, distributions) and the annual reports filed with the Board. The inspection should be conducted by a CPA firm pursuant to agreed upon procedures developed by the Board, with the cost of the inspection being assessed against the funeral home. The better the funeral home’s records and procedures, the more likely the inspection can be completed in a day (and the lower the fee). With a fixed number of inspections per year, the Board should be able to negotiate a fee that is substantially less than the CPA certification required by the current law.
5. Inspections that reflect violations or deficiencies can be the basis for full audits (which are assessed against the funeral home).
6. Final inspection reports should be a matter of public record so that consumers can investigate funeral homes before making a preneed contract purchase.
7. Preneed sellers should have to obtain trustee certifications of new contract deposits, and then provide documentation to the new contract holders of the deposit of their funds to trust.
8. Preneed trustees should provide annual summary statements (transactions and asset listings) directly to the Board. 
9. Trust transfers should be documented to the Board.

Protection funds have merit, and should not be discounted as a ploy. However, preneed oversight is becoming a national issue. Documentation and disclosure will be fundamental to providing an adequate audit trail for regulators. Maryland funeral directors may have legitimate complaints for dropping their current oversight, but they should not opt for a protection fund in lieu of oversight. 

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