It is common for a funeral home to offer a discount to a preneed contract purchaser when the sales price is to be paid in full at the time of purchase. However, funeral homes are often inconsistent in how the discount is applied to the preneed contract. We have seen the discount recorded as a payment credit, a reduction to the aggregate purchase price, as a reduction to the cash advance funds, or as a reduction to the purchase price of the guaranteed goods and services. Of these approaches, we would recommend the latter.
We recommend against the payment credit approach because it can cause an auditor to mistake the account as being underfunded. With the payment credit approach, the funeral director will complete the contract using the General Price List to prepare the final contract purchase price and then reduce the outstanding balance owed. Auditors will typically compare the trust balance to the contract sales price to determine if the contract’s funding is adequate. In Missouri, the auditors send a letter to each consumer when the trust does not appear to be ‘fully funded’.
When the discount is applied to the aggregate purchase price without reference to either the guaranteed goods and services purchase price or the cash advance items, there can be confusion regarding the proper sales expense charge. In Missouri, the 10% sales expense can only be charged to the purchase price of the guaranteed items.
Applying the discount to cash advances will reduce the funds meant to cover expenses that the consumer must bear at a future date. The consumer hasn’t truly saved anything through the discount.
If a discount is to be given, it should be applied solely to the purchase price of guaranteed goods and services. But, funeral homes must also consider the FTC opinion that non-declinable services cannot be discounted. (Click here for Opinion 09-1) Consequently, other itemized goods and services essentially bear the entire discount.