It is common for master preneed trusts to have investments directed by an independent fund manager. The pooling of smaller trusts allows funeral directors to achieve the critical mass needed to engage professional asset management. When investment functions are delegated, the trustee typically wants to be relieved of the supervision and liabilities that accompany those functions. In contrast to Missouri’s old preneed law, the Iowa preneed funeral law authorizes the appointment of an independent investment advisor (Iowa Code Section 523A.203(4)) but is silent on whether the trustee could be held harmless. One of the defendant NPS banks cited this law to the Federal court as authority for delegating its investment functions, and then cited authority under the Uniform Trust Code to vary the terms of trust management from those set out by statute. The bank required the trust agreement to indemnify it for any investment decisions made by the investment advisor. State association master trusts have followed the same legal path with regard to getting the trustee to agree to an independent fund manager.
However, the Federal court trying the NPS lawsuit denied this argument in an order (12-31-14 Order – Comerica MSJ ) rejecting the summary judgment request of the defendant bank. The Court’s order stated that there is a point at which public policy prohibits a trustee from contracting away liability for breaches, and that the jury would decide its liability for any breach. It went to advise that a trustee always has an overarching duty to protect all trust assets for the beneficiaries. As we have suggested in prior posts on the use of hold harmless clauses and independent fund managers, the statutes that contemplate fiduciary indemnities require beneficiary consent. The master trust programs view the preneed seller as the trust beneficiary. The order issued by the Court is premised on the preneed contract purchasers as trust beneficiaries.
Missouri’s prior preneed law was unique in its granting of exculpation to the trustee when an independent fund manager was appointed. Consequently, other state’s master trust programs had to follow the course used by the Iowa NPS trustees: reliance of the Uniform Trust Code for authority to incorporate a hold harmless provision in the master trust agreement. Judge Richard Webber seems poised to strike down a legal argument that the preneed industry has relied upon for more than 30 years.