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

The U.S. Government Accountability Office (GAO) released its latest report on the state of state regulation of the death care industry.  As it did in 2003, the GAO selected a handful of states to review in depth, and Illinois was one of those states for 2011 report.  The Illinois review is set out as Appendix IV of the GAO report, and paints a bleak picture of preneed oversight in the Land of Lincoln. 

The Illinois review advises that the Office of the Comptroller has 10 staff positions and 10 field audit positions to provide supervision of preneed and crematories.  While it is the Comptroller’s intent to audit each preneed seller at least once every five years, budget constraints have limited audits to those businesses with the most preneed.  Otherwise, the Comptroller will target sellers based on annual reports that either reflects ‘abnormal fluctuations’ or the lack of a corporate trustee. 

And when the Comptroller does find problems, her staff complains that the law provides them little power to address the situation.  The GAO was advised that the disciplinary process is extremely slow and costly.  That latter comment should raise some eyebrows in Illinois.  It was the Comptroller’s office (albeit a prior officeholder) that pushed through amendments to the Funeral or Burial Funds Act just a short two years ago, and now the staff claims the law has no teeth.

The Illinois review ends with the Comptroller’s office on the defense.  Industry representatives challenged whether the Comptroller’s 2010 legislation provided any additional protections.  The Comptroller responds that “there is no way to be sure if the changes to the laws would have prevented these kinds of incidents, but that there may have been the ability them earlier”.  (Obviously someone left out a few words, but they also failed to confer across the hall with that other someone who was more honest about the law’s lack of teeth.)

The review concludes with the statement “[F]urther, state regulators in Illinois stress the importance of consumer education and whistleblower protections to help prevent and detect future problems.”  If the Comptroller lacks funding and enforcement powers under the current law, who is fooling who?  Can additional legislation be too far away?

• Email This
• Print
• Comments
• Trackbacks

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.
 

• 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

The Topeka Capital-Journal has identified the essence of the Secretary of State’s plan for Kansas cemetery regulation: addressing cemetery problems before the trusts go upside down.

There are two types of cemetery trusts: perpetual care trusts and preneed trusts. Perpetual care trusts (or permanent maintenance trusts) provide the cemetery crucial funding for mowing, and the other expenses related to care of graves, markers, roads and trees. Preneed trusts are required when cemeteries sell services and merchandise (such as vaults and markers) where delivery is deferred to a later date.

Both types of cemetery trusts have a funding liability that serves as its waterline. It is fairly common for a trust to ‘take on water’ when the value of its assets falls below the required deposit balance. As the trust takes on water, the operator’s liability will become so great that it will flip the boat, and take all aboard down.

A cemetery trust going ‘upside down’ can be an indicator the operator has used the consumers’ payments to pay bills instead of making the required deposits. These are challenging times for cemeteries, and some operators may find it easier to ‘borrow’ from the consumer than to go to the bank for a loan or to implement difficult business changes.

The Kansas Secretary of State has taken the position that it only has the tools to spot those cemetery operations that are listing dangerously to one side or the other. To avoid the expense of salvaging a shipwreck, the Secretary wants the ability to intervene earlier. To identify troubled vessels, the Secretary of State’s legislative agenda would have required monthly reporting from the cemetery operator and the trustee. However, the Secretary’s plan ran afoul of the industry’s supertanker: SCI.

At a legislative hearing, SCI took the position that the burden of monthly reporting “would greatly overshadow any benefit which could otherwise be obtained through the more practical option of annual reporting.” For the large, public companies subjected to regular reviews by the Securities Exchange Commission and the Internal Revenue Services, a state mandate requiring monthly reporting might be redundant and burdensome. However, the industry continues to be dominated by the independent operator, for whom the Secretary is the principal regulator.

In the next Kansas legislative session, certain compromises need to be struck for the benefit of the consumer. More frequent reporting should help flag irregularities that are symptomatic of the troubled operator. Independent fiduciary reporting is also needed as a cross check to what the operator is filing. And, if this is redundant to an operator’s existing reporting systems, the law could provide the flexibility to allow an operator to ‘clep out’ of monthly reporting.

• Email This
• Print
• Comments
• Trackbacks

Mortuary Management’s July/August Colleague Wisdom column underscores how difficult it can be to run a trade association. I can empathize with the funeral home operators who took the time to provide their thoughts. As an attorney who specializes in the death care industry, I have to weigh the costs and benefits of membership in trade associations from two industries.

Every so often, the American Bar Association calls to solicit my renewal to the ABA. I was an ABA member back in 1986, the first year out of law school. After that first year membership, I never renewed again. Yet, they continue to call. And I will continue to decline, because the ABA is not a resource that is worth the cost (to me).   

In contrast, I do belong to the Missouri Bar Association.   The MBA provides services and programs that justify its membership costs to me. The MBA is not only a good source for forms and information, it provides some reasonable discounts for continuing education classes. However, I have not found that to be same for the Kansas Bar Association. The KBA seems to be marketing primarily to the trial attorney bar (a reflection of an economic reality).

If comments published in The Colleague Wisdom are representative of the funeral industry, the article reflects that funeral directors also tend to look more to their state association for the services and programs they need. It should come as no surprise but the level of satisfaction among funeral directors varies greatly. It is difficult to compare state associations because each has its own unique set of factors or hurdles. However, there seems to be certain common standards.

The Colleague Wisdom comments provide some insight to what industry members expect from an association, and why some do not participate. The comments also touch upon the revenues that subsidize the association. As Mr. Wigger so succinctly states: membership in a state association is a matter of weighing the costs vs. the benefits. One reality is that an association must impose costs in order to have the funds needed for programs and services that will attract membership. It is also a reality that some industry members will complain no matter what the cost. 

Some of the Colleague Wisdom comments have been highlighted in yellow, green and pink. The yellow comments seem to reflect an association’s perceived values. The green comments make note of a source of revenue, and the pink comments reflect criticisms. Associations need to be sensitive to criticism, and adapt to the membership’s needs. In order to do so, the association must seek input (even if it is done so by a coded survey). 

Now for the obligatory preneed comments:

Funeral directors who are opposed to preneed will need to appreciate that master trusts are an important source of revenue for association programs and organizational expenses. The master trust is an even more important revenue source for associations in states where continuing education is not required. But as one Colleague Wisdom commentator points out, association leadership must be careful with regard to the master trust becoming a competitor to its own members. In a sense, the master trust cannot help but be a competitor to larger independents that have their own preneed administration. The master trust may be the only way for the small operator to effectively compete for the preneed sale. Accordingly, it will become incumbent for association leadership to diffuse these situations through cooperation and attempts to find mutual benefits. 

Association leadership must also be careful that the master trust does not become a source of dissatisfaction when earnings and/or expense expectations are not met. Disclosures, accountability, frequent communications, innovation and leadership will be crucial to retaining membership satisfaction. 

With the NPS failure, associations may have an opportunity to expand their master trusts. But to do so, some state associations need to assess why funeral homes turned to NPS in the first place. Some funeral homes did succumb to the promises of profit, or looked forward to the Rep visit, but many did so out of dissatisfaction with their master trust. For some funeral directors (like those in Illinois), the state association may have a difficult task in regaining the membership’s faith.

• Email This
• Print
• Comments
• Trackbacks