A Missouri funeral home client recently had a consumer with a trust funded contract cancel their prearranged funeral and request a refund. The contract was sold subsequent to the 2009 law change, which provides the consumer a refund equal to all payments in excess of a 5% origination fee. Missouri law allows sellers to withdraw a sales expense of 10% of the sales price, but that amount must be refunded if the consumer cancels the contract. Trust income can be used to fund the 10% sales expense owed by the seller. However, this particular contract had not been in trust long enough to earn the sales expense amount. When advised of the amount that the funeral home would owe the consumer, the funeral home questioned why the trust could not refund the entire amount. In the absence of a Missouri law provision that entitles the funeral home to the trust income, a nationally chartered fiduciary is bound by the Office of the Comptroller of the Currency rules governing common trust funds. In prior posts we have discussed Regulation Part 9, and how funeral preneed trusts are a form of common trust fund. (Strength in Numbers) Each consumer account is a separate trust, and should be administered accordingly. The OCC would frown upon a trustee withdrawing funds from one consumer trust to fund a distribution owed to the beneficiary of another trust.
Prior to the 2009 law change, Missouri preneed sellers were entitled to trust income, and trustees were exempted out of the OCC rules regarding income administration. It was fairly common for state preneed laws to vest trust income in the seller (as a way to ensure taxation of trust income to the seller instead of the consumer). Missouri’s prior law was an example. Accordingly, trustees could appropriately transfer or distribute income from consumer accounts. The concept that each consumer account is its own separate trust is not only foreign to Missouri funeral homes, but also to Missouri’s State Board of Embalmers and Funeral Directors.
A preneed trustee must look to trust income to fund trust administrative expenses. Similar to the client with the contract cancellation, preneed contracts that are serviced within a few months of sale do not earn sufficient income to offset the cost of creating the consumer account. One Board member’s comment was that the seller should bear that cost. However, the reality is that more and more sellers are dependent upon the trustee for individual consumer contract accounting.