Because, that is our Policy.

The death care industry is hearing that more frequently these days.   Last July, an Illinois client was advised by the Department of Healthcare and Family Services that his preneed contract would have to be revised to comply with the Department’s new policy about excess preneed funds.  A few clients in other parts of Illinois began to report the same.  I asked that the clients request a copy of the policy.  The Department did not respond to the funeral directors, and so, my office began to make written requests to the Department.  The Department finally replied after 4 months with a contact number to the Department (that proved to be disconnected).  The Department also provided us contact information to the Illinois Funeral Directors Association (an individual who left the association two years ago).  We continued to press the request to the Department, and finally this week, the Department provided hyperlinks to the policy that has been cited to the funeral directors.

What we wanted to determine from the Department policy was the duty owed with regard to excess trust funds, who owed the duty, and the statutory authority for the policy.  If the Department policy was that the trustee had a duty to determine if excess funds existed, and that such funds must be paid to a specific State office, new fiduciary procedures would have to be implemented, and a decision would have to be made with regard to the expense of the handful of accounts affected.  (The policy would likely be triggered only when a family downgraded from a tradition funeral to a cremation.  Even with non-guaranteed contracts, the family tends to spend the entire trust.)

As support of their position that trust funded preneed contracts must pay excess funds to the state, the Department cited my office to the Policy section addressing insurance funded preneed contracts.  Illinois law was amended to require insurance contracts be transferred to trust when a family wants to exclude the insurance cash value from their assets.  Neither that law, nor the Department Policy, was intended to apply to the trust funded preneed contracts used by our Illinois funeral homes.  The Department has atrust funded burial contract section, but no mention is made of excess preneed funds.

Two years ago, the Missouri Division of Professional Registration took the position that it had been State Board of Embalmers and Funeral Directors policy that insurance beneficiary designations were preneed contracts long before the new law passed.  In support of that position, the Division referenced an internal legal memorandum.  As we have explained in prior posts, this “Policy” is motivated in part by the State needing the ‘preneed contract’ definition so that excess insurance funds must be paid over to the State.  (We pressed this issue in the blog and to the Division because we anticipated that the Division will make similar legal reaches to impose “policy decisions” on preneed trustees.)   Nebraska made such a leap last month.

In an email to preneed sellers, the Nebraska Department of Insurance notified funeral homes of the following policy:

Irrevocable Trusts

The Department has found that some Trustees have allowed Pre-Need Purchasers to cash irrevocable trusts without the Pre-Need Seller’s authorization and/or knowledge. Any pre-need contract cancellation request must come from the Pre-Need Seller (in writing), as outlined in the Pre-Need Burial Sales Act. We are working with these Trustees to help them understand their fiduciary responsibilities and the ramifications of cashing irrevocable trusts. Accurate and timely reporting helps reduce the instance of Trustee errors.

What is troubling about the Nebraska “policy” is that most of the banks that will receive the Department’s attention are not fiduciaries.  Those institutions have issued a depository account in conjunction with a Totten trust arrangement.

So, what does this all have to do with the rulemaking process and due diligence?  Not to pick on the Nebraska Department of Insurance, but their introduction of a short, and insignificant, bill (and then issuing a new Irrevocable Trust policy) helps to underscore that regulators are skewing the formal rulemaking process in favor the more expedient policy position that has a higher probability of being erroneous.

Section 12-1109 of the Nebraska Burial Pre-Need Sales Act states that the Department director shall adopt and promulgate rules and regulations necessary to carry out and enforce the act.  In seeking to substitute the word “may” for “shall”, the statement of intent for LB926 advises that the director has not needed to adopt regulations for any purpose.  Industry members maintaining master preneed trusts take issue with the fact the director implemented substantial changes to the annual report form without using the rulemaking process.   While the Director would be advancing legitimate State interests, adherence to the rulemaking procedures would have afforded the industry the opportunity to raise valid objections.   With regard to the master trust users, the Department lacked statutory authority to introduce a market value element to the annual report.  With regard to individual accounts, the depository accounts do not owe fiduciary duties to the State.

These agencies have made known their reasons for avoiding the rulemaking process.  In response, this author would offer the following in support of the rulemaking process.

The preneed transaction has evolved more in the past 3 years than it had in the thirty years preceding 2010.  Experts are debating the virtues of guaranteed versus non-guaranteed, we have witnessed more than one major preneed insurance company partnering with a trust company to offer new forms of hybrid funding, and death care operators are receiving an increasing number of final expense policies sold independent of their facility.  While change to the preneed transaction is long overdue, the pace of developments exposes ‘regulatory gaps’ in even the newest of preneed reform laws.  Missouri is a case in point.  SB1 is less than five years old, and  the Division must stretch that law to address preneed structures and issues that the legislature did not contemplate.  Some of these preneed developments will benefit both consumers and the industry, and some may not.   The rulemaking process provides a forum to obtain information on the issues.   Policies are made in a closed room where there is a higher probability of error.  When an erroneous policy is struck down as invalid rulemaking, the regulator loses credibility with the industry.