Almost thirty years ago, associations representing funeral homes, casket suppliers, vault makers, monument builders and life insurers joined together to form the Funeral and Memorialization Information Council (FAMIC).  These industries were concerned about the future impact of cremation on the traditional funeral and burial.  FAMIC used Wirthlin Worldwide to conduct research studies every 5 years on consumer opinions about funerals and cremation.  We did not find any documentation to suggest that any cemetery association belonged to FAMIC in those formative years, or that cemetery associations actively participate in FAMIC today.  As a consequence, the research studies have failed to follow up on some key findings regarding consumers and grave ownership.

The Wirthlin reports found that from 1990 through 2004, most consumers began their funeral prearrangement process by purchasing grave spaces.   Most of that period was at a time when many funeral homes were discouraging preneed.  It was not until 2004 that Wirthlin first included a question about whether consumers had pre-paid for any of their prearrangements through a funeral home or cremation society.  Answers to that question reflect that selection of grave spaces was given a higher priority than pre-paying for the funeral.

The Wirthlin reports also reflected that more than half of those surveyed owned cemetery property.   After purchasing grave spaces, most families took no further action towards prearrangement such as purchasing a preneed contract from a funeral home or a cremation society.  The Wirthlin reports indicate that when the final arrangements were left to surviving children, cost became the overriding factor in completing funeral arrangements.

Wirthlin also found that almost half of the families opting for cremation took the cremains home or scattered the remains at a location other than the cemetery.  This would mean that families are not using the grave spaces purchased by their parents.  Independent of the Wirthlin studies, antidotal reports indicate that the burial costs (opening/closing services, vault and marker) are the reason families do not use their parents’ grave spaces.

Unlike funeral homes, very few cemeteries offer preneed programs that would allow the parents to prepay opening/closing services, a vault and a marker.  Despite the efforts of funeral homes to lower their own funeral costs through prearrangements, unfunded burial costs factor into consumer decisions in favor of cremation.  Cemeteries can initiate a preneed program very simply by meeting the needs of existing customers.  As many funeral homes do, cemeteries can send out questionnaires to lot owners about their personal disposition preferences and what steps they have taken towards those costs.  The cemetery’s top priority should be those families that have already purchased a traditional prearrangement at a funeral home.  These will be the families most likely to purchase a cemetery preneed contract for opening/closing services, a vault and a marker.

For revenues, most cemeteries are dependent upon grave sales, opening/closing services, and care fund distributions.  These revenue sources have been on the decline for a decade.  As cremation trends up, fewer families are purchasing burial lots.  Those families that already own burial lots frequently don’t use them.  COVID induced financial difficulties will only accelerate the cremation choice by families.

Bonds, the staple of cemetery care funds, bottomed out more than 12 years ago.  While the Federal Reserve was poised to raise interest rates a few years ago, COVID’s impact on the economy will preclude any interest rate increase for at least two years.

These factors are hurting private and public cemeteries alike.  COVID has also wrecked municipality budgets, causing cities and towns to further reduce their cemetery maintenance expenses.

All cemeteries, including city cemeteries, need to pivot.  In our upcoming posts we will make recommendations for that pivot, including preneed, restructuring care funds and adapting a cemetery’s governing instruments.

Prior to October 31st each year, Missouri preneed sellers must file a renewal/annual report that sets out each preneed contract issued or sold during the reporting period (September 1st through August 31st).  We recently had funeral home clients express confusion over when an arrangement with a family constitutes a preneed contract.  Some funeral homes have a practice of providing a family a completed contract to take home and study.  But some funeral homes go so far as dating the contract form, assigning a sequential contract number and signing the contract form.  This is a practice we strongly discourage.  Dating, numbering and signing the contract form should be done only after the consumer has brought back the contract with their payment.  Until the consumer provides payment to the funeral home, there is no consideration for a contract between the two parties.  If the consumer never returns with payment, the arrangement should not be included on the renewal/annual report.  Leaving a signed document in the consumer’s possession creates confusion for family members (and the State Board) whether an actual contract exists.  The funeral home could be placed in the difficult position of proving it did not receive consideration for the contract.

The risk of COVID to family members is causing some preneed contract holders to rethink the traditional funeral they have purchased.  During the early stages of the coronavirus spread, a handful of funerals were found to have been super spreader events.  Dozens of attendees were infected, and several deaths resulted.  Funeral homes have since implemented COVID safety precautions that include attendee restrictions, social distancing and mask wearing.  The Centers for Disease Control and Prevention also issued funeral guidance for individuals and families that recommend that they contact funeral homes to discuss changes to the traditional funeral plans.  For their preneed contract holders, funeral directors will generally be flexible in changing the purchased prearrangements.  We have heard where services were moved from a chapel to a cemetery’s outdoor facilities so that social distancing could be maintained.  Funeral homes are also re-scheduling life celebrations to dates that are months into the future.  Changing the purchased prearrangement requires cooperation between the contract holder and funeral home, and sufficient documentation evidencing agreements to changes, or deferrals to performance of memorial services.

In our third post on Missouri’s endowed care cemetery audits we look at the request for the cemetery’s legal documents.  The current audit notice  requests copies of the cemetery’s trust agreement, rules and regulations, contract forms, deed forms, brochures and any other materials making an endowed care representation.  In essence, the audit is going to review these materials for compliance with Chapter 214.  It has been suggested that this review is central to determining whether the cemetery’s documents include certain disclosures about its care fund.  While the Office of Endowed Care Cemeteries has statutory authority to approve endowed care trust agreement, it does not have authority to review the other documents sought in the audit notice.   In that the trust agreement must be submitted to the OECC, it is redundant to include that agreement in the audit process.

What is missing from the OECC audit process is the examination of non-endowed care cemeteries.  Chapter 214 does not require a cemetery to maintain a care fund trust for future maintenance of the cemetery.  However, Chapter 214 was passed to require the non-endowed care cemetery to make very specific disclosures to consumers if chose not to establish a regulated care fund trust.  RSMo. Section 214.370 requires non-endowed cemeteries to post signs and incorporate disclosures in their forms.   Rather than review endowed care cemetery forms, OECC audits should be visiting non-endowed cemeteries to ensure they are making the appropriate disclosures to consumers.

Our previous post discussed care fund audits and the tracking of a cemetery’s property sales and care fund liability.  The next step of the audit process is following the money to the care fund trust (and the back from the trust to the cemetery).  For these purposes, the Missouri audit notice requests trust statements from the bank or trust company that administers the trust.  The trust statements are critical to the auditor’s confirmation that the cemetery deposited the correct amounts in a timely manner.  The auditor also needs the trust statement to verify the trustee’s distributions comply with Missouri law.  We do not have a criticism of what is sought, but rather how much and when it is sought.

In the document request we linked to our prior post (and provided here) the auditor is seeking 7 years of trust statements.  Many fiduciaries archive trust records after two years.  Consequently, the trustee may not be able to produce trust statements from 5 or 6 years in the past.  Yes, cemeteries should archive trust statement on an annual basis.  But it would make more sense for the Missouri Office of Endowed Care Cemeteries to require a trust statement be included with the cemetery’s annual report.    When scheduling a cemetery for audit, the OECC could then provide copies of the trust statements and annual reports filed by the cemetery.   Having current trust statements would also enable the OECC to spot irregularities and prioritize audits.

Missouri is catching up on its auditing of licensed endowed care funds.  Within the past couple of months, most of our Missouri endowed cemeteries received the attached notice requesting reports and documents for audit.  In prior posts, we have suggested that the Office of Endowed Care Cemeteries (OECC) audit process should be revised.  Our next posts will explained how the audit process should change, but with this post we will highlight what the OECC audit is doing right: tracking grave sales and care fund deposits.

To determine if a cemetery is depositing the correct care fund amount on a timely basis, the OECC requests information about property sales and endowed care deposits:

    1. Property Sales

Please provide a list of grave space, lawn crypt, mausoleum, crypt and columbarium niche sales:

The list should include:

–        Contract Number (or other identifying number)

–        Customer Name

–        Contract Date

–        Retail Cost of the property sold

–        The number of property items sold

–        The endowed care liability

If it is possible to provide this information in an excel spreadsheet, this would be very helpful.

    1. Endowed Care Deposits

For deposits listed in the endowed trust statements provide an itemized listing of the contracts included in that deposit and the amount of the deposit that pertains to each contract.

We have highlighted language from the request that is a clue to expediting the audit.  An Excel spreadsheet can simplify the process of tracking sales and computing the correct EC deposit requirement, particularly for Missouri’s complex requirements (see RSMo Section 214.320.1 for 4 different trusting and flat amount rates).  In the attached copy, we provide clients an Excel spreadsheet that separates the four types of interment right sales, and calculates the EC deposit requirement.  There is a separate tab for each month of the year.  The sheet includes bank information so that it can be printed and used as a deposit record with the bank.  The sheet can then be used to also comply with the deposit tracking record.

Tracking property sales and EC deposits is the most important function of any care fund audit.  We had one cemetery complain that documenting property sales to the OECC is burdensome.  While there are some burdensome elements to the audit, this is not one of them.   But, cemetery operators should anticipate the auditor comparing the Excel sheet to the cemetery’s lot book to ensure a month or two reconcile.

A Google search of “state funeral association master trust” will return hyperlinks to dozens of state funeral director associations.  In the 1970’s, funeral associations began establishing master preneed trusts as an alternative to passbook savings accounts.  As preneed gained acceptance with funeral directors, the associations saw the opportunity to provide administration and create a revenue source that would help sustain the association.  The master trust also provided substantial benefits to member funeral homes.  These programs relieved funeral homes from most compliance requirements, reduced administrative expenses and provided ‘critical mass’ required to diversify investments.   Almost fifty years later, most of the country’s independently owned funeral homes have access to a master preneed trust.   However, the same is not true for cemeteries.

When that same Google search is edited by substituting “cemetery” for “funeral”, the result does not find any state cemetery associations.  We know of only one state association sponsoring a cemetery master care trust, and that association is a hybrid funeral/cemetery association in Illinois.  With most states now mandating cemetery care funds, why haven’t cemetery associations formed a master trust as a resource to offer members?   Until the bond market cratered twelve years ago, there wasn’t much demand to diversify endowed care trusts.  Most care funds were invested exclusively in bonds.  Bonds had been safe and reliable for care funds.  Trustees could purchase bonds and park them until maturity.  Income, comprised solely of interest, could be swept and paid to the cemetery.  Cemetery care funds were relatively simple to administer.

When the mortgage crisis drove interest rates to near zero rates in 2008, care fund trustees rode their bond portfolios to maturity in hopes that higher bond yields would eventually return.  Twelve years of low interest rates have forced care fund trustees to diversify care funds into dividend producing equity investments.  But such diversification can be difficult for small trust funds.  Volatility in equity markets requires active management and supervision by the trustee.  Diversification is further complicated by the fact that many equity funds require large minimum investments.  Many banks have responded to these asset management responsibilities by establishing minimum size requirements for care fund trusts.  It is common to see minimum requirements of $500,000, and even at $1 million.

Regulatory compliance for cemetery care funds has also changed dramatically over the past 12 years.  An Oklahoma oilman named Clayton Smart stole millions of dollars of care funds from cemeteries in Michigan, Tennessee and Indiana.  Several states have passed new cemetery laws that expanded state supervision of care fund trusts.  These changes are imposing greater reporting requirements on cemeteries and trustees.

Following the lead set by state funeral associations, cemetery associations can also utilize the master trust to overcome lagging interest rates and comply with increased state supervision.  With the master trust, the care fund trustee can consolidate asset management from dozens of accounts to two or three investment portfolios.  This provides a significant efficiency to asset management.  The pooling of care fund assets also allows the fund manager to access equity investment options that have minimum requirements.  The combination of efficiencies and access to additional investment options means higher returns for care funds that are otherwise too small to diversify.

Another major efficiency is the trustee’s ability to file a single Federal and state tax return in lieu of individual returns for each care fund trust.  When managed individually, small cemetery care funds can be eaten up by fees and expenses.  Tax returns are frequently outsourced to CPAs that charge hundreds of dollars.  Some banks also assess an additional fee for the tax reporting required by the CPA.  These individual trust expenses can be minimized or eliminated by the master trust structure.

State regulatory filings can often be consolidated, providing further efficiencies to the trustee and the cemeteries.  The master trust approach also enables the trustee to utilize standardized trust agreements, forms and procedures.  This type of standardization simplifies the trustee’s oversight of distribution requests.

For cemetery associations struggling to attract or retain cemetery members, the master trust provides a valuable resource to smaller cemeteries.

It has been three years since we last posted about those states that have passed laws allowing cemetery trusts to take a unitrust election.  Since then, Arizona, California and Indiana have joined the list.  The movement towards fixed care fund distributions has not caught on as quickly as some thought when the concept was introduced about 10 years ago.  This seems true not only on the state level but also with regard to individual trusts.

While the unitrust election has been available in Missouri for more than ten years, we understand that a small minority of endowed care cemeteries have made the election.  We can think of three possible reasons for the reluctance on the part of cemeteries.  First, small care fund trusts can be difficult to diversify and the trustee will be reluctant to agree to the election.  Second, the election is irrevocable, and cemeteries with large care fund trusts are reluctant to be limited to a 3% fixed distribution.  Third, cemetery operators may not understand the unitrust concept.

A pooled master trust would be the solution to the small trust hurdle, but unlike the Missouri Funeral Trust, there is no state association master care trust.  State funeral director associations have been in the master trust business for decades.  Oddly, only a few state cemetery associations have ventured into the master trust business.  We have always found this perplexing.  For state funeral director associations, their master trust may be the most attractive resource offered to members.  Through the pooling of cemetery trust assets, operators could have the critical mass to obtain investment returns exceeding 3%.

Missouri cemetery operators with large care funds hesitate to bind themselves to a fixed 3% distribution.  While Missouri’s law allows a fixed distribution range of 3% to 5%, both operators and trustees are reluctant to take the 5% election out of a concern that the trust’s return may not cover the 5% year in and year out.  But if a smaller percentage is elected, the state regulator (with the support of the state cemetery association) has taken the position the election is irrevocable and cannot be changed.  In advocating for the unitrust election, Missouri’s cemetery association included language that negated a trustee’s power to adjust principal (and thereby increase the income distribution to the cemetery).  The unitrust election is intended to protect the trustee when balancing the interests of the trust’s income beneficiary and principal beneficiary.  But the Missouri law ignored the fact the cemetery is beneficiary of both the principal and the income.  State regulators advocate for the preservation of principal so that income will be available for future years.  With interest rates near zero, a trust must look to capital gains for income distributions to the cemetery.  If the trust can produce returns in excess of 5%, why not allow the trustee to adjust principal from time to time and make larger distributions.  If a portion of those gains are being accrued, everyone benefits.

We have advised several cemetery clients on the advantage of taking Missouri’s unitrust election.  Almost all were confused by that section of Chapter 214.  Rather than take a straight forward approach, Section 214.330 incorporates from other sections of Missouri trust code with caveats.  As a result, no one seems to agree on how the Missouri unitrust election works.  With that ambiguity, cemetery operators and trustees both tend to avoid the election.

We anticipate that some of these same hurdles exist in the other states that have adopted the unitrust election for cemeteries.  Small trusts are not capable of getting a sufficient return.  The law isn’t sufficiently flexible for swings in investment returns.  (We also once thought that the Virginia law provided the flexibility to address operators’ concerns about missing out on large trust returns.  But, that flexibility was negated when subsequent to the law’s passage the Virginia Cemetery Board defined trust income to exclude capital gains. )  And, operators and regulators need to find a common voice in recommending the election to cemeteries.

In contrast to Missouri’s Chapter 214, most states’ cemetery laws do not exempt all cemetery associations from care fund requirements.  We do find that some states exempt small non-profit cemeteries (typically based on acreage).  Some states limit non-profit cemetery exemptions to grandfathered situations (a cemetery established prior to 1940).  These small cemetery associations are more akin to a family cemetery and are dependent upon volunteer services for maintenance and care.  As discussed in the Exception that is the Rule, more than 95% of Missouri cemeteries are exempt, and cemetery associations comprise the second largest segment of “exempt” cemeteries.  Missouri’s exemption makes no distinctions on the size of an association’s cemetery.

Unlike the church cemetery, the association cemetery must be self-sufficient when generating revenues to provide care and maintenance to graves.  When Chapter 214 was amended to provide supervision of endowed care funds, preneed was not a major source of revenues for Missouri cemeteries.  Two and a half decades later, cremation has cut into the burial ritual.  To battle the decline in burials, cemeteries have turned to preneed, which has become an important revenue stream for many of our cemetery clients.  Through preneed, cemeteries can make burial plans more affordable to their customers.  But obviously, the vast majority of Missouri’s cemetery associations have cut themselves off from preneed revenues because of the fear of state regulation of their endowed care funds.

That fear is not without some merit.  The Chapter 214 audit process has a reputation for poorly defined and time consuming.  Rather than focusing on whether the cemetery is timely depositing the correct amounts to trust, the audit assumes the broader scope of general compliance with Chapter 214.  And then there are the limitations upon what the association can withdraw from the care fund.  When net income is defined to exclude capital gains, the association may not view interest and dividends as sufficient to meet their maintenance expenses.   Some have told us that Missouri’s unitrust election is not enough.

In our next couple of posts we will look at Missouri’s unitrust election and then a revamping of the Chapter 214 audit process.