The Missouri law governing means testing for public assistance (RSMo. Section 214.010) was amended this past August to allow an individual to set up an ‘irrevocable funeral trust account’ and exclude $9,999 of funds for funeral and burial expenses. This legislation was sought by a funeral director that wanted to offer families an alternative to regulated preneed contracts. Like many states’ public assistance laws, Missouri law excludes irrevocable preneed contracts from the individual’s resources. [Many states impose limitations on the size of the preneed contract.] But with the costs of complying with Missouri’s Chapter 436 (and with limited preneed funding options for rural funeral homes), the bill’s sponsor felt consumers needed additional funding options. But, when Missouri’s State Board of Embalmers and Funeral Directors discussed the bill last June, the Board’s consumer representative member was very critical of this option because of the following provisions:
No person or entity may charge more than 10% of trust assets for creation of the trust and no more than 3% for maintenance of the trust.
The consumer representative’s concerns were that between set up and annual fees, the ‘irrevocable funeral trust account’ could be depleted in a matter of years.
When the State Board met in September (subsequent to law’s passage), a public attendee to the meeting reiterated the same concerns and recommended that the Board take action. But in reality, the new law is consistent with the actual costs of establishing and maintaining a trust with a corporate fiduciary.
The Missouri law requires that the new funeral trust account have a trustee that is “a state or federally chartered financial institution authorized to exercise trust powers in the state of Missouri”. What seems to be lost on consumers (and funeral directors) is that a bank must have a separate trust charter to provide fiduciary services, and many smaller banks do not have a trust charter (and cannot serve as a trustee). Early state preneed laws often borrowed from the Totten trust doctrine by allowing the funeral home to set up a depository account at the local bank. (Nebraska law goes so far as to refer to such accounts as trusts.) While, the simplicity of the Totten trust appeals to consumer groups such as the Funeral Consumer Alliance, the Missouri law requires a fiduciary that will assume responsibility for paying excess funds to the State. Such responsibilities come at a cost.
We Googled for Missouri corporate fiduciaries that posted their fee schedules on the Internet, and found Comerica and Edward Jones Trust. Neither disclosed a setup fee, but each had minimum annual fees that exceeded $1,000. We expanded our search and found little Yellowstone Trust Company, which charges $200 for setup and a minimum $600 annual fee. We have fiduciary clients which charge similar amounts for trust setup, which is used to cover the expenses of performing due diligence and establishing accounts on the bank’s administrative platforms (monthly accounting, tax accounting, on line platforms, etc).
The drafters of the new Missouri law must have had some appreciation for the expenses that accompany a corporate trust account because the provisions authorize the trustee to commingle accounts for investment purposes. Commingling accounts for investing provides the necessary economies of scale to reduce costs and thereby make the irrevocable funeral trust account economically feasible. But, the break points for such economies of scale are often in the tens of millions of dollars. And, pooled funds maintained by banks are subject to the Office of the Comptroller of the Currency (the OCC) and 12 CFR Part 9. If a pooled fund strays outside of 12 CFR Part 9, the fund will trigger the SEC’s jurisdiction under the Investment Company Act and its registration requirements.
We believe there is a need (and a demand) for a ‘final expense’ trust product (other than the one hawked by insurance companies). But, the viability of such a product will depend on whether it can be structured to comply with the OCC and SEC exceptions made for regulated preneed trusts. Without those exceptions, accounts like the Missouri funeral trust account will be forced to invest in depository accounts, leaving the arrangement too expensive to be an option to consumers.