For twenty-two years many Missouri funeral directors have deposited 80% of the preneed funeral contract purchase price into trust, and withdrawn all income in excess of that deposit. For a $5,000 contract sold in 1998, the funeral director has been required to maintain $4,000 in trust. When that contract is performed in 2008, the funeral director is authorized under Chapter 436 to withdraw an amount equal to that deposited to trust: $4,000. Today, and for the foreseeable future, that distribution will exceed that contract’s ‘value’ under the mark-to-market approach. Depending upon the facts of a particular trust, the difference between these two approaches could exceed the trust’s annual realized income. This puts the trust further into the hole and threatens the funeral director’s long-term viability.

Assume the funeral director has a $1,000,000 trust with a contract population that averages 10 years in duration. On the average, 10% of the trust’s contracts are serviced each year, or $100,000. Depending upon trust’s asset allocation, the current financial crisis could have trimmed a third of that trust’s value. If a 25% value decline is assumed, the funeral director’s trust is worth $750,000. If the trust’s value remains ‘flat’ over the next year and the funeral director services 10% of the trust’s contracts, he will withdraw $25,000 ‘excess’ value over the next year, or 2.5% of the trust’s value. For trusts invested exclusively in fixed income, the difference may exceed the trust’s actual return.

Switching to the mark-to-market approach will be painful for funeral directors. For that ten-year old, $5,000 preneed contract, the funeral director would receive $3,000. Today, that service might sell for $6,500. The cost to provide the service will vary from funeral home to funeral home, but many will find it difficult to do so for a profit when only paid $3,000. Of course, there has been income distributed from the trust over the past ten years, but not necessarily to the funeral director performing the contract.

Consequently, Missouri legislators need to consider two important Chapter 436 revisions: the mark-to-market approach and trust income accrual. If the Missouri funeral director had accrued the income and earned a net 3.5% over the past 10 years, the mark-to-market approach would have paid the funeral director $5,642 instead of $3,000.

The mark-to-market approach has proven a bitter pill for Illinois funeral directors, and legislators should expect a similar reaction from some Missouri funeral directors.  The legislature can not retroactively apply the mark-to-market approach, but funeral directors need to consider whether the approach is in the best interests of existing business.