As discussed in our prior post, funeral homes are becoming increasingly dependent upon their preneed trustee for individual account administration.  Many trustees that provide account administration rely upon programs that use tax cost basis accounting.  (For a prior discussion of tax cost basis see “Consumer Options and Administrative Hurdles: Market Value Allocations”.)    Tax cost accounting programs require the trust to realize income and capital gains before preneed contracts can reap any investment return.  Prior to the 2008 mortgage crisis, most preneed trusts were invested primarily in long term bonds, and thus, were income return trusts.

Ten years’ of declining bond yields have forced many preneed trustees to diversify investment portfolios into equity holdings.  However, tax cost accounting has had a countering force on the fund manager.  The fund manager must sell assets in order for the trust to reap an investment return.  As a consequence, this year’s investment market surge has not necessarily translated into higher contract distributions for those preneed trusts with a tax cost accounting system.

When a fund manager seeks to harvest growth on a regular basis, he must then find new growth opportunities to provide a consistent return.  The fund manager will be forced to ‘ride the crest’, increasing the trust exposure to market volatility.