The Funeral Director Daily recently wrote about the Evergreen Cemetery Association in Brainerd, Minnesota.  Like so many cemeteries, Evergreen is running a deficit and its board is worried about the future.  The Funeral Director Daily suggests the situation cries out for a relaxation of government restrictions over the Association’s care fund.  If the cemetery could withdraw more from the care fund, the Association would not need to seek support for the county.  We too have posted about the need for more states to pass legislation allowing cemeteries to take the unitrust option for their care funds.  But, Minnesota laws may already provide a solution for cemeteries like Evergreen.

Our focus has been on statutes that primarily target for-profit cemeteries.  These cemeteries are subject to restrictive laws that limit care fund distributions to net income.  But most states’ cemetery laws exempt certain classes of cemeteries from regulation or distribution restriction.  Accordingly, cemeteries owned and operated by churches, municipalities/counties and non-profit associations are typically subject to lower standards than for-profit cemeteries.

Minnesota law makes such distinctions between the different types of cemeteries.  Evergreen appears to be a non-profit cemetery association, with a care and improvement fund established under Minn. Stat. 306.37.  Investment of Evegreen’s care fund would likely be governed by Minn. Stat. 306.38.  The FDD article references a restrictive investment standard that incorporates from the savings bank law.  That particular statute actually governs municipal and county cemeteries.  But if you were to drill down into the savings bank law, you will find the ability to hold equity securities.  (Interestingly, the Minnesota Commerce Department website indicates the state does not currently have any savings banks.)  In summary, cemeteries operated by non-profits and municipalities/counties do seem to have the authority to invest their care funds in the equities that will produce a higher yield.

To get to those higher yields, a non-profit association or municipality could have their care fund trustee explore Minnesota law that authorizes the power of adjustment between principal and income.  Over the past two decades, most states have passed a form of trust law that enables trustees to redefine income for purposes of distributions.  These laws generally fall into one of two camps: the power to adjust or the power to convert to a unitrust.  Some states have passed both types of laws.  Minnesota appears to be in the power to adjust camp.   Some say that this camp provides the trustee the greatest flexibility in meeting the needs of income beneficiaries.  Where the unitrust statute generally caps fixed distributions at 5%, the power of adjustment could justify a higher level of distribution.

With Evergreen, the 5% unitrust could provide an annual $30,000 distribution that exceeds the current deficient (and the county’s $20,000 contribution).   Where the power to adjust could authorize the trustee to make an even higher distribution, the Minnesota statute requires justification.  Because of that requirement, cemeteries like Evergreen should anticipate push back from their care fund trustee when queried about the power to adjust.

Exercising the power to adjust most frequently occurs with estate planning situations where the bank and its attorneys are more comfortable.  Bank compliance attorneys do not typically have experience with states’ fragmented cemetery laws.  Cemetery laws are confusing, and frequently archaic.

Cemetery trusts also tend to be smaller than the more lucrative estate planning trust.  The estate planning trust may hold millions of dollars, and generate the fees that warrant the risk and expense of making adjustments between principal and income.  With non-profit cemetery associations and municipalities, the care fund may only be a fee hundred thousand dollars.   Those funds may be too small for the risk perceived by the bank.

But there are arguments to be made on behalf of the cemetery.  A care fund does not have the classic competing interests of the principal and income beneficiaries of an estate planning trust.   In contrast to the estate planning situation, the beneficiary interests of the cemetery and the lot owner are more closely aligned.  Both seek to provide care for the cemetery.  If current care cannot be sufficiently addressed, and the cemetery falls into disrepair, future maintenance costs will be even higher.

Banks may also push back because the care fund is too small to adequately diversify.  To achieve long term returns in excess of 5%, the care fund must be diversified.  Many banks may feel that a $600,000 care fund may be too small to adequately diversify.  However there are fiduciaries and fund managers with death care experience that can help small care funds achieve these types of returns.

Cemetery operators are conservative by nature, and would always prefer a statute that expressly authorizes fixed distributions.  But these are times that require operators to seek solutions from what applicable law allows.  In the case of many ‘exempt’ cemeteries, the broader state trust code may authorize the necessary change to how the care fund is administered.

In our next post on cemetery preneed, we want to revisit a post from June 2012 (Cemetery Preneed Challenges: bucket accounting).  As discussed in that post, the cemetery prearrangement differs from its funeral counterpart because the cemetery can deliver property and merchandise prior to the purchaser’s death.  When establishing a preneed program, a cemetery will want to avoid a common mistake where individual contracts are required for each item of property, merchandise or service.  Multiple contracts are confusing to consumers and tend to end with missed payments and lapsed contracts.

When a single preneed contract is offered, the form should include an application of payments provision where interment rights are paid before merchandise and services.  Interment rights should be transferred to the consumer upon the payment of that part of the purchase price.  Do not defer the transfer until the entire purchase price is paid.

After the interment purchase price, the application of payments should then prioritize payment of the memorialization merchandise.  These items increase in cost at a rate that exceeds returns on the prearrangement funding.  Cemetery prearrangements are most likely funded by a trust.  Where a trust may net 3 or 4%, granite and bronze costs are climbing much faster.  To retain more profit from the prearrangement, the memorialization merchandise must be delivered as soon as the price is paid.

The prearrangement contract must also get consumer approval for delivery of memorialization merchandise.  Consumers do not like to be reminded of their mortality, and a marker on their grave space tends to do just that.  The consumer preference is to defer delivery until after death.  Accordingly, the prearrangement contract provisions must include a default that provides for delivery.  The consumer will have to assume the costs of storage if delivery to the gravesite is deferred.

Burial prearrangements also tend to be paid by installments over multiple years.  Consequently, these arrangements frequently include finance or installment fees.  These fees represent an offset to reduced trust earnings.

While preserving traditional burials should be a cemetery’s top preneed priority, a priority should also be placed on the surviving lot owner that is opting for cremation.  The Wirthlin studies that we’ve been referencing in prior posts suggest that most grave spaces sold by cemeteries during the past 20 years will never be used.  One Wirthlin finding indicated that only 16 percent of those surveyed planned to have their cremains buried in a grave space.  With a certain frequency, we see clients’ preneed funeral contracts being flipped from traditional burial to cremation by a surviving widow.  In arranging the burial of her husband, the widow was surprised to learn that the preneed funeral contract did not cover significant cemetery charges such as opening/closing services, a vault and a marker.  Not wanting to burden her children with those costs for her own burial, the widow frequently goes back to the funeral to change her prearrangement to cremation.

When the widow responds to cemetery marketing by expressing preference for cremation, the cemetery can attempt to make the traditional burial more affordable by offering installment funded prearrangement.  But if the widow has made up her mind about cremation, the cemetery needs to have options for inurnment of her cremains in her grave space, or with her husband’s remains in his grave space.  The latter is a popular choice for many widows, but cemetery rules and regulations may prohibit this option.

It is very common for a cemetery’s rules and regulations limit a standard grave space to the interment of a single human remain.  During a meeting of a state cemetery association, we asked the attendees how many allowed for a second interment of cremains to a lawn grave space.  Only about half answered yes.  By implication, that meant that most of those cemeteries had rules that would not allow multiple sets of cremains to be interred in a grave space.  Even though grave deeds may recite the single remains restriction, cemeteries can eliminate this type of restriction by an amendment to the rules and regulations.  The amendment could be limited to the situation were the first spouse had a traditional burial, and the surviving spouse desires cremation and to have his/her ashes buried with their mate.

When the rules and regulations are amended to allow for a second right of interment, the cemetery should also give thought to the remaining grave space.  When the surviving spouse transfers the grave space to children for their use, the cemetery rules could permit multiple cremains interments (below ground) or a family columbarium. Some cemeteries seek to preclude family columbariums because of additional maintenance costs.  Locating a columbarium or bench in the center of a lawn grave space requires more work from the mowing crew.  But to offset that, the cemetery can require a larger endowed care contribution.

In offering preneed burial plans to the prospective cremation client, cemeteries first need to revise their rules and regulations to address three cremation scenarios:  a combo traditional/cremation burial to one grave space,  multiple interments within one or paired spaces, and the above ground cremorial.

When selling interment rights on a preneed basis, it was once very common for cemeteries to include a forfeiture clause in the sales agreement.  If the consumer used installment payments to pay for a grave space and defaulted on that payment plan, the terms of the contract would declare all payments applied to the contract to have been forfeited.  The cemetery retained all payments and the consumer received nothing in exchange.  The forfeiture clause has long been a source of criticism against the cemetery industry, and it should be ditched.  Instead, cemeteries should allow defaulting consumers a credit that may be used against a future purchase of interment rights or at-need services.  The credit will serve as an inducement to the consumer to eventually return to the cemetery, even if for cremation scattering services.

In continuing with our last post about a cemetery preneed pivot, the cemetery operator seeking to improve its burial revenues can initiate a preneed program that first focuses on its existing lot owners.   To efficiently market to existing lot owners, the cemetery should use a questionnaire to reach out and learn the owners’ current preferences and whether steps have been taken towards funding a prearrangement.  As suggested in our previous post, the cemetery’s first priority should be owners that have already purchased a traditional funeral prearrangement from a funeral home.  Those owners have taken concrete steps towards their funeral plan, and now need to address the costs of the burial.

Running a close second in marketing priorities would be those lot owners who still want a traditional burial service but have not taken any steps towards funding their plan.  Following the lead set by the funeral industry, cemetery preneed marketing needs to educate the lot owners on the costs of the burial options.  Lot owners frequently assume that the opening/closing service is included with ownership of the grave.  Most consumers seriously underestimate the costs of a vault and a marker.

Cemeteries will also need a plan for working with funeral homes.  The cemetery’s questionnaire should seek the lot owner’s funeral home preference and whether he/she had had any discussions with that entity.  Lot owners that have not funded any type of funeral prearrangement contract pose a challenge because the lot owner will eventually need to address funding of the funeral costs.  If the cemetery costs are funded, but the funeral costs are unfunded, the Wirthlin reports suggest that any unfunded cost could play a major factor in a child’s decision on whether to cancel the burial funding and use the refund to pay for cremation services.  As funeral homes have found out, leaving one side of the prearrangement unfunded causes many families to unwind the funded side to pay for a cremation.  In that situation, the cemetery typically comes out on the short end of the stick.

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.