The Special Deputy Receiver for NPS recently reported the company’s “negative net worth” to be just short of one billion dollars. Rightfully, regulators are looking at the NPS fiduciaries for culpability in the losses that will be sustained by consumers and funeral homes in the years to come. In the meantime, Missouri state officials are working with industry representatives to reform Chapter 436. As they consider how to better safeguard consumers’ funds, regulators and legislators need to appreciate that preneed sellers and fiduciaries have overlapping responsibilities that are affected by a state’s trusting requirements.
In states with lower trusting requirements, the preneed seller typically assumes responsibility for individual preneed contract accounting. Besides the ability to report to consumers, this function is also crucial to the fiduciary’s income tax reporting. In states with higher trusting percentages, the trust often assumes greater responsibilities for the accounting and reporting functions.
Historically, preneed laws have restricted preneed trust expenses to the fee that was typically charged by banks or trust companies for estate planning business. Some state laws also restrict the trustee’s ability contract with the preneed seller for administrative services. While restrictions are needed to avoid a circumvention of the trusting requirements, more latitude should be afforded the fiduciary. In exchange, preneed sellers and fiduciaries should be required to make disclosures about those who provide the trust services, and the fees paid for the various services.
The Texas Department of Banking and the Texas Funeral Directors Association broached these issues ten years ago. In Opinion 98-15, the TDOB found that the preneed trustee fees could be used to pay for marketing expenses, outside recordkeeping for preneed contracts, and investment advice. (It is generally recognized that the trustee can incur expenses for trust accounting, legal expenses and tax reporting on behalf of the trust.)
Eventually, Texas may review its preneed law in light of the fraud committed on its consumers and funeral directors by NPS. I suspect NPS exploited the Texas provisions allowing for a depository. Before eliminating the authority to use the depository arrangement, the Texas legislature needs to appreciate the difficulty the industry has in attracting quality fiduciary services.
Allowing the trust to bear the expense of compliance does not come without the risk of abuse. Services must be necessary to the trust, and reasonable in cost. One check against such abuse would be the requirement that services must be performed pursuant to a contract with the fiduciary. Transparency of the relationships among the parties, and the fees paid could serve as another check. The IRS will likely require such transparency within the next few years as fiduciaries are required to ‘unbundle’ their fees for income tax reporting purposes.
Eventually, we may see death care fiduciary fees being broken down by the following services:
Asset management (investment)
Sub account administration
Regulatory and consumer reporting
Ten years later, the TDOB opinion may be dated in terms of what constitutes a reasonable fee. Sub account administration can run as high as 85 basis points. Asset management fees will differ on the manager’s expertise, and 50 basis points is a fairly common fee. Tax reporting expenses can differ substantially based on the diversification of the trust assets. Distribution oversight may require periodic examinations, and the expense that accompanies on-site reviews. Periodic statements to consumers and regulators will require administrative enhancements. However, economies of scale are crucial to minimizing these costs, and pooled administration will be key to providing the requisite economies of scale. Several years ago, the Office of the Comptroller of Currency recognized the role national banks could play in meeting the needs of the death care industry.
The death care trust is a different breed of animal from a bank’s staple trust business of estate planning. Consequently, legislators need to allow fiduciaries to contract for those services crucial to enhancing the compliance that the preneed transaction so desperately needs.