The Springfield Journal-Register recently reported that Illinois’ Cemetery Oversight Task Force made a recommendation to restrict preneed trusts to investing in government-backed securities. While its difficult to actually find that recommendation in the Task Force’s report, it is not a bad idea for the consumers who purchased a non-guaranteed preneed contract. However, that type of restriction would hinder funeral homes that offer guaranteed contracts.
The safety provided by government-backed securities comes at a premium: a lower investment return. Funeral homes and cemeteries are encountering cost increases that recently have outpaced the returns seen from insurance and trusts. With regard to preneed trusts, investment return has often lagged behind cost increases because tax issues have been allowed to dictate investment policies.
In the case of the IFDA, the trust resorted to insurance. It is also very common to find preneed trusts invested exclusively in tax exempt bonds.
If funeral homes and cemeteries are to offer guaranteed preneed contracts, applicable law should require trusts to adhere to the prudent investor rule. While these trusts will always favor an asset allocation heavy with fixed income securities, a diversification is needed to provide protection and reasonable returns.