Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

NY Times: But Mom said everything was taken care of

Posted in Prepaid Funeral Contract, Preplanning, Transition Documents

We’re back to that recent New York Times article about funeral planning.  The reporter offers spot on advice about the ‘gaps’ of preneed arrangements.  A surviving parent will frequently advise adult children that they need not worry about his (or her) funeral because they have purchased a preneed contract.  As the article suggests, adult children should sit down with their parent to discuss those funeral and burial plans, and then review the preneed contract.  If there is a single preneed contract, that would be the first red flag that the parent has left out a key component of a complete funeral arrangement.

Historically, funeral planning would begin with the purchase of a grave.  With the cremation rate now exceeding 50% in many parts of the country, this may no longer be accurate.  Regardless, the first question children should put to their parent(s) is what do you want done with your remains.  If the parent wants a traditional burial, a minimum of two preneed contracts will be needed: one for a funeral and one for the burial services and merchandise.  This should be true even when the funeral home and cemetery are owned by the same company.

Cemeteries no longer include the opening and closing of grave spaces with the purchase of the grave.  The parent should have a document that transfers interment rights in a specific grave.   Most cemeteries no longer issue deeds.   Rather they convey a right of interment.   But, that document will not likely address the services required to open the grave and then close it.

There are other services and merchandise that will be required to use the grave: a vault or grave liner; a monument or marker; an inscription on the marker or a bronze scroll with the name and dates.  If the parent has chosen cremation instead of a traditional burial, there are other items to be taken care at the cemetery: inurnment fees; an urn; bronze memorial plate; memorial services, etc.

If the parent does have a cemetery preneed contract, adult children should make an inquiry with the cemetery to discuss what might be left out.  Many cemeteries offer limited preneed options because the costs of granite and bronze rise too quickly.  It would be a good idea to take the contract to the cemetery to discuss the other costs they could expect.

There is also the possibility that the parent has purchased a preneed cremation contract and not made any arrangement for the disposition of their ashes.   My own mother’s plan was to sit on my fireplace mantle.  That did not fit well with my wife’s decorum for our family room.  Eventually, we obtained a second right of interment to my grandparents’ graves.

Even with a preneed funeral contract, there are frequently items that the funeral home does not provide.  Preneed funeral contracts frequently offer to set aside funds for cash advance items.  Most frequently, cash advance funds are used to pay for flowers, obituaries, minister fees and live music.  If the parent is contemplating a memorial at the church, there will be a separate expense to the church.  Again, adult children would be best advised to take the preneed contract into the issuing funeral home and discuss what is, and is not, covered by the contract.

New York Times: How to Plan Your Own Funeral

Posted in Guaranteed, Non-guaranteed, Preneed, Prepaid Funeral Contract, Transition Documents

Earlier this year, the New York Times ran a story that on funeral planning that raised several valid issues and recommendations.  We will use the next few blog posts to explore certain issues and recommendations in greater detail.   With this post we will start with the article’s discussion of prepaying for a preneed contract, and the differences between guaranteed and non-guaranteed plans.

The article references one side of the consumer protection argument against prepaying preneed arrangements.   That argument is that everyone should preplan their funeral, but an individual should not purchase a preneed contract until forced by Medicaid eligibility requirements.  (To qualify for public assistance, consumers often purchase an irrevocable preneed contract.  These arrangements are called spend downs.)  Until Medicaid is an issue, the article’s sources recommend that individuals establish an investment account or depository account that they can control.

The AARP offered another view of prepaying a preneed contract that the Times article does not discuss.  As the AARP explained in a 2010, a guaranteed preneed contract can protect families from rising funeral and burial costs.  Funeral costs have risen substantially over the past decade.  The rate of cost increase varies with funeral homes.   But the range of rates is estimated to be more than 3%.  Money placed in a depository account at the local bank is currently earning less than 1%.  So, costs are outpacing the savings account by at least 2%.  In ten years, a $10,000 funeral and burial package will cost $13,000.  The bank account has grown to $11,000, leaving survivors to pay for the balance.  That simple math makes the guaranteed preneed contract an attractive option for the individual who knows what type of funeral service they want, and what funeral home they want it from.

As the Times article explains, a guaranteed preneed contract is an arrangement where the funeral home uses today’s prices for a funeral to be provided at a future date.    In contrast, the non-guaranteed preneed contract makes no promises about the future costs of the funeral.  The non-guaranteed contract is more of a savings account that will be used at death.  From a funeral director’s perspective, the key difference between the two types of contracts is that the funeral home assumes the investment risk for the return paid on the consumer’s funds.

Funeral homes use one of three types of preneed investment vehicles: insurance, trusts and depository accounts.  With insurance funding or depository accounts, the funeral home is challenged to find any investment efficiencies.  Funeral homes that use depository accounts are receiving the same rates that individuals can get, less than 1%.   Individual CDs are typically required by state law, and funeral homes are often restricted to short term CDs.   So, no jumbo rates are available.   Preneed insurance companies are paying a slightly higher rate, but often with various limitations.  The death benefit is often limited during the first few years of coverage.   Most preneed insurers are currently paying under 2%.

Trusts have the opportunity to provide higher returns when investments are properly diversified and the trustee expenses are reasonable.   But, many funeral homes are opposed to pooling their trusts for investment, and as consequence, do not see a return that will cover cost increases.    So regardless of the investment vehicle, funeral homes experience an investment shortfall when servicing a guaranteed preneed contract.

For the consumer that knows the funeral they want, and what funeral home to use, the guaranteed preneed contract can have a cost saving benefit that justifies prepayment.  For the consumer that appreciates the need to begin planning but has not committed to a specific service or to a particular funeral home, the guaranteed contract has disadvantages.   When transferring to a different funeral home, the new funeral home may not be obligated to honor the prices in the contract.  Some state laws allow the funeral home to retain termination fees.

Many funeral homes are shying away from guaranteed preneed contracts because of investment losses, and are offering non-guaranteed contracts.   When offered a non-guaranteed contract, the consumer should ask certain questions to determine whether to prepay for that contract, or to establish the type of depository account described in the Times article.

  • What form of funding does the funeral home use?
  • Will the funeral home waive any termination fees or transfer fees?
  • What type of return has the funeral home received on its preneed funding over the past 5 years?
  • Using the funeral home’s most popular package, how much does it cost today and how much 10 years ago?

If a funeral home offers depository accounts as the funding option, any fees charged by the funeral home would probably dictate that the consumer follow the advice in the article and set up their own POD account.   If the funeral home offers insurance funding, limitations such as return of premium and a low death benefit increase would also suggest a POD account might be better.   If the funeral home uses a trust, determine whether the investment return covers funeral home costs.  It would also be beneficial if the funeral home waived all fees so that the non-guaranteed preneed contract would be completely portable.

Another consideration is whether the consumer will be funding the non-guaranteed contract over time.  Funeral homes that offer only insurance funded contracts may not be able to accept multiple payments.  This could also prove a problem for funeral homes that use certificates of deposit.

The Division: Regaining that 2008 Mojo

Posted in Missouri - SB1

During the summer following NPS’ collapse, the Missouri Division of Professional Registration provided crucial leadership to building the consensus required for Senate Bill No. 1.  Rushed efforts to re-write the Missouri preneed law had failed, and the Legislature then turned to the Division.  Represented by Connie Clarkson, Becky Dunn and Kim Grinston, the Division prepared a draft bill, formed a committee of regulators and industry representatives and coordinated a series of meetings.  Led primarily by Ms. Grinston, the Division promoted a frank discussion among the members of the working group committee.  One of the Division’s top priorities was to fix the law’s failure to address insurance funded contracts.  For years, the State Board had relied upon an attorney’s opinion, and the Division was puzzled by the trust requirement being imposed on sellers who only sold insurance.

Within two years of the passage of Chapter 436, the IRS issued Rev. Rul. 87-127, and several large preneed sellers switched to insurance funding to avoid onerous tax reporting requirements.  Some of those sellers saw the gap in the Missouri law, and a way to avoid paying the $2 contract fee.  The attorney assigned to the Board wrote an opinion that was the used to threaten sellers into paying the $2 fee on insurance funded contracts.  We may never know why the opinion required a trust.  The opinion was not formally issued by the Attorney General’s Office and the State Board would not release the opinion.

The Division went into the 2008 meetings seeking a very broad definition of insurance funded preneed contracts:

  1. No preneed seller or provider shall accept an assignment of insurance proceeds or knowingly allow the preneed seller or provider to be designated as the beneficiary in an insurance policy unless a preneed contract has also been issued by a licensed seller. A preneed contract shall only be required by this section if the insurance proceeds are to be used for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required and the price of such services, facilities or merchandise are guaranteed by the provider or seller.  A preneed contract written pursuant to this subsection shall be deemed an insurance-funded preneed contract and shall comply with this section and all applicable provisions of sections 333.700 to 333.900.

The working committee agreed with the need to regulate the sale of insurance funded preneed contracts, but objected to the Division’s draft bill.  The Division dropped the draft bill and shifted gears to work out a consensus on the issues.  The insurance assignment issue was kicked down the road until the September 4, 2008 State Board meeting.   The agenda for that meeting included the working group draft recommendations where certain  “Insurance Restrictions” were included.  Those restrictions drew comments from working group members who sought clarification on the Division’s intent.  The insurance assignment discussion begins on page 50 of the September 4th transcript, and the Division stated early that “if someone walked into your funeral establishment with a term-life policy that was already sold and said I want to sign these proceeds over to the funeral home, that wouldn’t be prohibited, but I would be prohibited from selling  you the term-life policy and the preneed policy together…”.  The Division’s main concern was over the sale of term life policies, not the assignment of insurance that consumers purchased from third parties.  As one working group member phrased it, the assignment of an insurance policy to the funeral home as beneficiary was more in the nature of preplanning, not prepayment.   To avoid any confusion on the issue, the Division agreed to remove the “Insurance Restrictions” recommendation from the working group’s final recommendations to the Legislature.

The Division’s handling of those 2008 meetings earned respect and trust from the Missouri funeral industry.  But that respect and trust began to erode a few years later when a different Board staff proposed a regulation to ‘re-define’ insurance funded preneed contracts to include insurance assignments.  The relationship worsened as the Division staff adopted an adversarial style with licensees and implemented policies that exceeded the Board’s authority.  The Division now has an opportunity to rebuild the industry’s trust by returning to the same honest approach taken in 2008.   No more overreaching with licensees or manipulating the State Board.

The Missouri State Board: But Will the Division Change its Ways?

Posted in Exams/audits, Missouri - SB1

The rift between the Missouri State Board of Embalmers and Funeral Directors and their Executive Director culminated in her resignation effective June 30th.    Over the course of the past several years, the State Board drew the ire of the industry in a number of ways.   The staff implemented regulation proposals before they were officially promulgated, and continued to do so even after the Board subsequently rescinded some of those rules.  The staff screened communications directed to the State Board, including seller responses to examination reports.  Missouri’s preneed annual report form was expanded beyond Missouri law requirements not once but twice.  Funeral establishments seeking license renewals were required to provide business licenses, or proof that business licenses were not required.   A priority was given to the enforcement of DBA requirements that threatened discipline to hundreds of licensees.  Discipline was sought on a seller over the adequacy of records before the adequacy of records was defined.  The ability to amend license applications was restricted, forcing funeral homes to incur the expense of new licenses.  Funeral homes seeking advice on the Board’s unwritten policy changes were instructed to hire an attorney.  And then there were the Chapter 436 complaints initiated by the staff before the Board had promulgated the procedures rule required by statute.

The inclination of many Missouri funeral directors will be to lay all blame at the feet of the outgoing Executive Director.  But, the scope of the staff’s actions could not have flown completely under the radar screen of the Division of Professional Registration.  Through administrative and legal support, the Division assists the State Board to enforce licensing standards set out in statute and regulations.  But since the 1986 amendment of Chapter 436, the Division has, from time to time, pushed the Board beyond its statutory authorities.  Rather than seek legislation to address gaps in the law, the Division has relied upon internal legal memorandums when providing the Board direction.  By not adhering to a strict construction of Chapter 436, the Division opened a path that the outgoing Executive Director followed.  When the Executive Director got ahead of advice from counsel, she increased the Board’s exposure to litigation.

With the financial examination process now dialed back to zero, the Division has an opportunity to regain the trust of the State Board and the trust of the industry.  No more overreaching to find statutory authority.  If a gap in SB1 poses a genuine threat to consumers, then disclose the need for remedial legislation.  As we will discuss in our next post, the Division was truthful with legislators in 2008 about a critical gap in the 1986 law.  Be as truthful with the State Board and the industry about gaps in SB1.

Missouri Preneed Exam Procedures: Industry Expertise

Posted in Exams/audits, Missouri - SB1, Uncategorized

Our first recommendation to the Missouri State Board of Embalmers and Funeral Directors is that they assume, and maintain, control over the preneed examination procedures.    The exam procedures implemented two years ago were never submitted to the Board for review and approval.  Accordingly, the examination procedures handbook should remind the staff that any change made to the procedures must be approved by the Board.  (From Page 3 of our Handbook comments, see Comment [A1])

Through Paragraph 6 of the handbook, the staff gave themselves independent authority to interpret Chapter 436 regarding the techniques that could be used to request, and confirm, information received from sellers.  Rather, we recommend that the State Board require the permissible techniques be set out in the handbook.  (See Comment [A2]).

But, the most important issue we want to stress concerns the State Board’s interpretation of Section 436.425.  While it is important to confirm that seller contracts are complying with the law, the staff has misapplied Section 436.425 over the course of the past two years.   We believe these mistakes could have been avoided if the Board’s experience had been sought by the staff before drafting the handbook.  If the Board were to have questions about contract requirements, we trust they would seek industry input before finalizing the examination procedures.  (See Comment [A3])

Dialing It Back to Zero: Missouri Reboots it’s Exam Process

Posted in Exams/audits, Missouri - SB1

With an action that caught some by surprise, the Missouri State Board of Embalmers and Funeral Directors voted to suspend future preneed examinations and accept recommendations on a new process.  We have made several posts on the faults of the Missouri examination process, and now commend the Board on taking a bold action.  The Missouri Legislature passed Senate Bill No. 1 to provide the State Board exam and enforcement powers to avoid another National Prearranged Services debacle.  NPS operated years on the argument that consumer funds were not required to be deposited to trust until a preneed contract was paid in full.  Then when forced to fund its trusts, NPS siphoned out consumer funds through insurance loans and policy surrenders.  But, ten years after NPS’ collapse, the Board’s staff had not yet developed procedures for tracking consumer funds.  With our next posts, we will explain our exam recommendations in detail.

A Call for Comments: Missouri’s Preneed Exam Handbook

Posted in Exams/audits, Missouri - SB1

To begin reform of its preneed exam process, the Missouri State Board of Embalmers and Funeral Directors is seeking input from the industry by this Friday, June 8th.  Specifically, the State Board is requesting comments to the Exam Procedures Handbook prepared by its staff.   We have made edits to that handbook, and will provide more detailed explanations in subsequent posts to our blog.  Our first comment would be to address the staff’s error in implementing their handbook without the Board’s approval.  It is incumbent to rely upon the Board’s preneed experiences in establishing the examination procedures.  The exam procedures will also need to be adapted from time to time, but all such revisions should be approved by the Board before implemented.

Missouri’s Adequate Preneed Records: Performance and Cancellation Records

Posted in Exams/audits, Missouri - SB1, Recordkeeping

When the State Board approved a new “adequate seller records” rule on April 25th, there wasn’t much discussion of the documents or reports to be maintained for performed and canceled preneed contracts.  In a sense, the Board may not need to expand beyond the FTC’s statement of goods and services requirement.  If a funeral home services a preneed contract and completes the statement of goods and services without reflecting payment, the statement could be evidence that the consumer’s preneed funds were never deposited to trust or with the insurance company.  But finding such fraud through an examination of a sampling of performed contracts would be similar to searching for a needle in a haystack.  If the Board had reason to suspect a funeral home has not been depositing funds, the examiner would need to review all serviced records for a pattern of ‘unfunded’ services.

In seeking disbursement records from banks and insurance companies, and selecting a sampling of serviced contracts, the Board staff’s agenda may have been to confirm whether funeral homes were honoring their preneed contracts.  Funeral directors have good grounds for challenging the staff.  First, there is nothing in SB1 to suggest this was a priority for the Legislature.  Second, performance records are not sufficient to explain why or when families decide to change the funeral arrangements.  When discrepancies are found between the preneed contract and the statement of goods and services, someone will be required to provide an explanation.  Pursuing such issues would be time consuming, and an inefficient use of the consumer’s $25 contract fee.

Missouri’s Adequate Preneed Records: Receipt and Transmittal Records

Posted in Exams/audits, Missouri - SB1

The Missouri funeral industry has haggled with the State Board for two years over preneed record requirements.  But on April 25th, the State Board scrapped the staff’s adequate record proposal, and instead, adopted a brief definition of ‘seller records’.   The State Board’s approach will afford funeral homes more flexibility in documenting the receipt of consumer funds, and the transmittal of those funds to the preneed funding agent.  To outline what could be required of funeral homes, the State Board has scheduled a two day June meeting.  The Board is seeking comments on the scope of preneed exams and the current exam procedure handbook.   If the Board is serious about providing consumer protection, the June meeting will need to include a discussion of periodic receipt and transmittal records.   While the State Board is likely to endorse a review that uses samplings, examiners will still need some form of a receipt and transmittal record that will enable them to follow consumer funds.    The following hyperlink can be used to download an example of a deposit/transmittal record that can be used by funeral homes.

Missouri Preneed Fees: Making Guaranteed Contracts Affordable to the Funeral Home

Posted in Price Protection, Uncategorized

It only took 15 months, but the Missouri State Board finally approved a rule to clarify what fees a preneed seller may charge when offering a guaranteed price contract to consumers.   Low investment returns from insurance and trusts forced many funeral homes to stop offering guaranteed price contracts to consumers.  Funeral homes’ cost increases were outpacing what they would receive on a preneed contract.  Consequently, funeral homes were limiting consumers to non-guaranteed plans or to single premium insurance contracts.  We first sought to have the Missouri State Board clarify by rule when a preneed seller could charge a fee to price protect a funeral, or to charge a fee when allowing the consumer to pay for a preneed contract by installments.  A draft rule was approved by representatives from the State Board, but the Board lost its quorum before the rule could be approved.   Finally, on April 25th, the State Board approved 20 CSR 2120-3.530, and now Missouri preneed sellers may include such fees without fear of a challenge from the State Board.