The Memorial Business Journal’s July 10th story on the NFDA 2014 consumer survey included a commentator’s suggestion that preneed funding has declined because so few options are offered the consumer. The story’s commentators interpreted the decline in preneed funding as reflecting fewer consumers being motivated by price guarantees, and those that might be, need installment options. The commentator was alluding to a generation of funeral home operators having built their preneed programs around guaranteed contracts that required consumers to make single payment purchases. Unable to pay for the entire cost of a preneed contract, fewer consumers are funding their prearrangements.
For funeral homes that rely upon trust funded preneed, installment options and/or non-guaranteed options require administration that becomes too complex for the spreadsheet software that opened the door to self-administration. If your father’s preneed program required single pay contracts, investments in bonds (that were held to maturity) and grantor tax treatment to the funeral home, the program could easily be administered by the operator with spreadsheet software. Lotus 1-2-3, the early frontrunner in spreadsheet software, was introduced in 1983, about the same time many preneed laws were being written. While the earliest spreadsheets had their limitations, the software could easily handle the allocations required of a preneed program that sold guaranteed single pay contracts. With income reported to the funeral home, the frequency of income allocations to contracts was often at the operator’s discretion. For some states, the administrative standards were even lower.
When written in 1982, the Missouri law contemplated that all contracts would be guaranteed. That law allowed sellers to withdraw income to the extent the trust market value did not fall below trust deposits. Absent the income accrual requirement, Missouri sellers had no individual allocation requirements for income or values until 1988. With Rev. Rul. 87-127, Missouri preneed contracts faced new income and expenses reporting requirements. However, many trusts erroneously changed to tax exempt investments to avoid income reporting to consumers. Until Missouri law changed in 2009, preneed sellers had the means to avoid all forms of individual account allocations.
Nebraska is another state that has a trusting requirement that lends itself to spreadsheet allocations. That state allows a partial distribution of trust income (to the extent the trust income exceeds the consumer price index). The law was written in 1987, and contemplates the CPI increase being computed on the trust as a whole. The law does not have a market value requirement, and nor does it contemplate non-guaranteed contracts. As a consequence, the account increases could be allocated in conjunction with tax allocations. There was no need for periodic allocations, which makes for easy administration by an Excel spreadsheet.
Spreadsheet based administration becomes cumbersome when the preneed trust provides for periodic allocations of payments, income, expenses and values. Add non-guaranteed preneed to the mix, and the trustee must then consider whether the allocations are fair to the consumer. As witnessed in Illinois and Wisconsin, the preneed program cut corners on trust administration by resorting to fixed investment returns. Fixed returns avoided the complications of periodic allocations of income, expenses and value changes, and allowed the continued use of spreadsheet administration. Funeral homes in those two states will be paying for the administrative corner-cutting for years to come.
In future posts, we will take a closer look at the administrative burdens of installment payments, non-guaranteed, tax allocations and market value fluctuations.