Final arguments were heard in the NPS civil trial this past Friday.  With the SDR having presented evidence through the prior Friday, the defendant trustees presented their case in less than a week.  This may reflect that the NPS trustees had viewed their duties as having been defined by Chapter 436 as relatively low.  As the defendants’ expert on fiduciary duties, expert report of Professor Hanna outlined the following areas:  A) Income Distributions;  B) Use of Lincoln;  C)Alleged Knowledge of Inappropriate Banking Activities;  D) Consent Judgment;  E) Policy Loans;  F) Debentures;  G) Adequate Recordkeeping;  H) Investment Advisor; and I) Trust Distributions.

The expert report was prepared as a litigation document to defend against claims being made by the SDR.  As a consequence, the report does not discuss how the preneed trustee’s duties are interrelated.  Nor does it address duties which were omitted by the SDR.   One such crucial duty was the trustee’s responsibility to report trust income pursuant to either Rev. Rul. 87-127 or IRC Section 685.  Either method required the trustee (or its agent) to have individual contract data for periodic income and expense allocations.

The preneed trustee’s duties regarding trust distributions, income distributions, tax administration and adequate recordkeeping are interrelated, and cannot be viewed as separate and distinct duties.    But, subsequent to NPS’ removal of UMB Bank as trustee, the successor fiduciaries did not seek individual contract data.  The defendant banks viewed their recordkeeping as limited to the accounting provided for an account’s asset management.  Professor Hanna argues that a prudent trustee would not read Chapter 436 to impose a requirement to keep individual contract accounting.  The defendant banks’ defense is based on complete reliance upon the preneed seller for instructions for distributions and tax allocations.

The intent behind SB644 was to enable the state association to establish a master trust program that allowed the fiduciary to look to the seller for all instructions regarding individual account transactions.   But, in 1982, most preneed trusts were also reporting income as a funeral home grantor.   The IRS was already challenging that reporting method, and eventually closed that door in January 1988.  Rev. Rul. 87-127 was the first red flag to the NPS trustees that consumers were a trust beneficiary, and that some form of individual account data would have to be obtained from the preneed seller.

For large preneed programs, individual contract accounting may have to be performed by the preneed seller.  But for such programs, the preneed trustee should have policies and procedures for retention of individual account records that permits internal auditing of distribution instructions and tax allocations.  The expert report would lead us to believe that the NPS trustees did not have such policies or procedures.

In our next post, we will look at the NPS trustees’ standard of care regarding the use of Lincoln and the investment advisor.