There are three scenarios for administration of preneed installment payments: the funeral operator collects payments, the trustee collects payments or a third party administrator collects payments.  The entity collecting installment payments must be able to apply each payment to the correct preneed account, and provide the other party (or parties) current payment balances.  If the payment administration is performed by the fiduciary or a TPA, the funeral operator must be informed of any outstanding payment balances.  If a death occurs before the contract is paid in full, the operator must be able to include the amount owed in the final statement of goods and services.   Families also call on the funeral home for payment balances when they desire to pay off a contract.  The trustee must also know how much can be distributed on performance of the contract.

The legal authority for a funeral home to administer consumer payments is based on the preneed contract constituting a sale of goods and services.  The trusting requirement is a safeguard for future performance of the contract.  For decades, it has been appropriate for the funeral home to handle the payments, and to book those payments to its accounting records.  However, smaller operators often lack the accounting resources required to administer significant numbers of consumer payments.  Seeing the need for administration, state associations obtained SEC No Action letters premised on the guaranteed preneed contract.  The SEC No Action letters enabled the master trust programs to limit their liability exposures when providing administrative services to member funeral homes.  While one such SEC No Action letter included a description of non-guaranteed contracts, the submission was made by Fleet Bank, not a state association or funeral operator.

From the perspective of a consumer or a regulator, the safest method would be to require all payments be deposited directly to the trust.  However, few trustees have procedures or accounting platforms designed for frequent deposit and distribution activity.   Allegations made against the National Prearranged Services trustees include improper custodial arrangements intended to simplify the banks’ role in administrative functions.   The pending Federal civil trial will explore whether administrative procedures outlined by some of the banks amounted to an aiding and abetting of fraud by NPS.

The NPS civil trial may also implicate the administration of consumer payments by the independent TPA.   Doug Cassity asserts that no fiduciary duties were owed with regard to consumer payments until the contract’s purchase price was paid in full.   In one court pleading, Mr. Cassity argued Chapter 436 was silent on the issue and that Chapter 214, Missouri’s cemetery law, authorized NPS’ administration of consumer payments.  While it may be an absurd argument, the assertion will bring into question whether the TPA owes fiduciary duties to the consumer, funeral home and trustee.   For rollover preneed trusts, NPS was not the preneed seller, but rather served as an administrative agent appointed by the funeral home.  Few TPAs may perceive their role as one owing duties to either the consumer or the trustee.

The industry will need to move cautiously in offering the consumer options regarding installment payments and non-guaranteed contracts.