As cemeteries struggle with harsh economic conditions, regulators are bound to look at their ‘problem cemeteries’ and weigh whether legal proceedings are necessary to preserve the care funds mandated by state law. To the extent such proceedings are premised in part on how capital gains are defined and whether distributions from capital gains are an invasion of principal, cemeteries will appropriately ask why they are responsible for the administration performed by the care fund trustee. Eighteen months ago, legal proceedings brought by regulators against a Kansas cemetery prompted our post titled: Perpetual Care and Capital Gains: the government’s rainy day fund? This author provided expert testimony in those proceedings, and a decision was recently issued in the matter by the Kansas Court of Appeals. While the decision will be hailed by the cemetery as a win, the ruling leaves several trust administration issues unresolved, including whether a new law can be applied retroactively to existing care fund trusts.
In response to the howling cemetery operator, the regulator’s pat, but unconvincing, answer is that care fund laws provide me jurisdiction over you, not the trustee. Pulling the cemetery’s license (or cemetery charter in Kansas) is the regulator’s greatest weapon. But, as the Kansas decisions reflect, courts are reluctant to ‘close down’ a cemetery over trust administrative issues. Who will bury the dead if we pad lock the gate? In any event, isn’t the distribution of capital gains consistent with the legislative intent of the cemetery care fund laws? (Ultimately, the goal of the care fund requirement is to keep these ‘private’ cemeteries off the ‘public charge’. At least the Kansas Attorney General opined to issues once or twice that support such a conclusion )
While the cemetery regulators may not have jurisdiction over the trustee, the laws often provide jurisdiction over the trust instrument to which the trustee is a party. To the extent the law affords the regulator the authority to issue orders to the trustee to cease distributions, trust agreements can be required to expressly reflect such authority. If trust administration fails to comply with applicable law, then the regulator has an avenue to ‘turn off the tap’ until the dispute can be resolved or litigated.