Within the past few years, state legislatures have significantly expanded the fiduciary duties of banks and trust companies that service death care trusts. Michigan, Indiana and Tennessee responded to cemetery trust frauds (including the Clayton Smart affair). The trend continued in Missouri and Illinois with laws aimed at funeral trusts (in response to NPS and the IFDA master trust). And, Kansas joined the movement with bills that are in response to cemetery trust failures.

At hearing for Kansas HB2712, the Kansas Bankers Association endorsed a provision that would require Kansas cemeteries to use fiduciaries that maintain a physical location within the state. The KBA reasoning is very simple: Kansas jobs. While the Kansas Secretary of State will accept the KBA’s support, the regulator wants the domicile requirement because the local fiduciary will be more responsive to the auditor’s inquiries and demands.

Regulators are not alone in their preference for the local bank. Funeral homes and cemeteries also take comfort in dealing with the bank that also handles their commercial accounts and their loans. Many funeral directors report that consumers also take comfort knowing their preneed funds are being supervised by the same banker who provides them checking services. Even consumer advocates recommend that individuals use the local bank to set up Totten trusts or POD accounts in lieu of preneed contracts.

However, the preneed trust and the cemetery perpetual care trust are not the type of accounts that most banks (or trust companies) handle with sufficient frequency to develop expertise. There is very little in the way of guidance to banks other than a 2000 memorandum issued by the Office of The Comptroller of the Currency to national banks.

Buried in the details of the OCC memo is the devil that trips up many preneed fiduciaries: the bank will be required to administer and invest the trust pursuant to the controlling instrument and applicable law. Applicable law would include the Internal Revenue Code, 12 CFR Part 9 and state death care laws.

The OCC memo warns national banks that:

Many banks serving as trustee in a preneed trust have only limited contact with the purchaser of the funeral contract and provider of the trust funds. The bank’s contact and business relationship is primarily with the funeral company. The consumer’s primary contract is with the funeral company or funeral director. Upon the death of the consumer, the bank remits the proceeds of the trust to the funeral company in accordance with the terms of the trust and contract, not to the individual’s family or heirs as is common in most trust relationships.

What makes this complicated and sensitive is that preneed funeral trusts are usually accounts established by funeral homes on behalf of individuals who are elderly or have limited financial resources. In addition, trustees manage these funds for a particularly sensitive and emotional event. Absent appropriate policies, procedures, controls and monitoring systems, this business line can create increased transaction, compliance and reputation risks.

Poor management of preneed funeral trusts, including weak internal controls over account acceptance and disbursements, noncompliance with trust agreements and applicable law, and inadequate due diligence on funeral homes and directors, can negatively affect a bank’s reputation. Banks that align themselves, or are affiliated, with funeral companies that have or subsequently develop reputation problems may themselves be tarnished, even if their internal practices are appropriate.

Preneed funeral trusts require the same level of supervisory oversight and risk management systems as other fiduciary activities in national banks. We expect banks that are active in this line of business to have appropriate strategic plans, policies and procedures, internal controls, MIS, and monitoring systems for this product. The administration of these accounts must comply with 12 CFR 9, Fiduciary Activities of National Banks, particularly the pre-acceptance, post-acceptance and annual review processes. It may be appropriate to have policies and procedures specific to this business line, and, if the business is significant for a bank, a separate administrative and investment review committee should be established.

It is imperative that national banks perform due diligence reviews on a funeral company before they enter a business arrangement with it. Bankers should also perform annual reviews of companies with which a bank has established a business relationship. Bankers should administer the use of third party service providers, such as investment advisors or managers, with appropriate controls and monitoring systems. National banks should also include preneed funeral trusts in internal compliance and audit programs.

While everyone from the consumer to the state death care regulator may take comfort in the local banker, few small institutions will have the revenues sufficient to warrant the costs associated with the compliance procedures recommended by the OCC.