During its state convention, the executive director for the Missouri Funeral Director and Embalmers Association stated that their master trust program would have a $3 million dollar surplus if all preneed contract beneficiaries were to die that day.  If the Missouri program were being administered pursuant to common trust fund rules, there should not be any surplus under the facts stated by the program’s executive director.  All assets would have been distributed by the trust to the servicing funeral homes.  One can only conclude from the statement that the Missouri program relies on tax cost accounting for the individual ‘value’ of each preneed contract.

In two prior posts (Consumer Options and Administrative Hurdles: Market Value Allocations and Nebraska’s Push to Market), we discussed tax cost accounting and master trust programs.   Tax cost accounting can be described as tracking deposits plus realized income.  This type of accounting does not reflect unrealized gains and losses.  So when a trust has significant unrealized losses, tax cost accounting results in performance distributions that exceed a contract’s share of the assets’ fair market value.  Each performance distribution digs the program’s hole a little deeper.

Since the Missouri Funeral Trust’s claim of a 5% surplus, the investment markets have been rocked by the insolvency of Greece and the volatility of the Chinese stock market.   These events only add to the general uncertainty caused by the Federal Reserve’s plan to begin raising interest rates.   The Missouri program could still have a ‘surplus’, but it may now be razor thin.  And, that ‘surplus’ will not be uniform to all preneed contracts.   When the Fed begins raising rates, any portfolio holding long term bonds will experience market value declines.

When a master trust program uses tax cost accounting for contract values, or any basis other than fair market value, who has the liability for trust ‘shortages’ caused by performance distributions that exceed a contract’s fair market value?  In Illinois, the trustee was forced to assume a portion of the liability, but funeral homes will bear the remainder with each contract they service.