It has been three years since we last posted about those states that have passed laws allowing cemetery trusts to take a unitrust election. Since then, Arizona, California and Indiana have joined the list. The movement towards fixed care fund distributions has not caught on as quickly as some thought when the concept was introduced about 10 years ago. This seems true not only on the state level but also with regard to individual trusts.
While the unitrust election has been available in Missouri for more than ten years, we understand that a small minority of endowed care cemeteries have made the election. We can think of three possible reasons for the reluctance on the part of cemeteries. First, small care fund trusts can be difficult to diversify and the trustee will be reluctant to agree to the election. Second, the election is irrevocable, and cemeteries with large care fund trusts are reluctant to be limited to a 3% fixed distribution. Third, cemetery operators may not understand the unitrust concept.
A pooled master trust would be the solution to the small trust hurdle, but unlike the Missouri Funeral Trust, there is no state association master care trust. State funeral director associations have been in the master trust business for decades. Oddly, only a few state cemetery associations have ventured into the master trust business. We have always found this perplexing. For state funeral director associations, their master trust may be the most attractive resource offered to members. Through the pooling of cemetery trust assets, operators could have the critical mass to obtain investment returns exceeding 3%.
Missouri cemetery operators with large care funds hesitate to bind themselves to a fixed 3% distribution. While Missouri’s law allows a fixed distribution range of 3% to 5%, both operators and trustees are reluctant to take the 5% election out of a concern that the trust’s return may not cover the 5% year in and year out. But if a smaller percentage is elected, the state regulator (with the support of the state cemetery association) has taken the position the election is irrevocable and cannot be changed. In advocating for the unitrust election, Missouri’s cemetery association included language that negated a trustee’s power to adjust principal (and thereby increase the income distribution to the cemetery). The unitrust election is intended to protect the trustee when balancing the interests of the trust’s income beneficiary and principal beneficiary. But the Missouri law ignored the fact the cemetery is beneficiary of both the principal and the income. State regulators advocate for the preservation of principal so that income will be available for future years. With interest rates near zero, a trust must look to capital gains for income distributions to the cemetery. If the trust can produce returns in excess of 5%, why not allow the trustee to adjust principal from time to time and make larger distributions. If a portion of those gains are being accrued, everyone benefits.
We have advised several cemetery clients on the advantage of taking Missouri’s unitrust election. Almost all were confused by that section of Chapter 214. Rather than take a straight forward approach, Section 214.330 incorporates from other sections of Missouri trust code with caveats. As a result, no one seems to agree on how the Missouri unitrust election works. With that ambiguity, cemetery operators and trustees both tend to avoid the election.
We anticipate that some of these same hurdles exist in the other states that have adopted the unitrust election for cemeteries. Small trusts are not capable of getting a sufficient return. The law isn’t sufficiently flexible for swings in investment returns. (We also once thought that the Virginia law provided the flexibility to address operators’ concerns about missing out on large trust returns. But, that flexibility was negated when subsequent to the law’s passage the Virginia Cemetery Board defined trust income to exclude capital gains. ) And, operators and regulators need to find a common voice in recommending the election to cemeteries.