The Funeral Director Daily recently wrote about the Evergreen Cemetery Association in Brainerd, Minnesota. Like so many cemeteries, Evergreen is running a deficit and its board is worried about the future. The Funeral Director Daily suggests the situation cries out for a relaxation of government restrictions over the Association’s care fund. If the cemetery could withdraw more from the care fund, the Association would not need to seek support for the county. We too have posted about the need for more states to pass legislation allowing cemeteries to take the unitrust option for their care funds. But, Minnesota laws may already provide a solution for cemeteries like Evergreen.
Our focus has been on statutes that primarily target for-profit cemeteries. These cemeteries are subject to restrictive laws that limit care fund distributions to net income. But most states’ cemetery laws exempt certain classes of cemeteries from regulation or distribution restriction. Accordingly, cemeteries owned and operated by churches, municipalities/counties and non-profit associations are typically subject to lower standards than for-profit cemeteries.
Minnesota law makes such distinctions between the different types of cemeteries. Evergreen appears to be a non-profit cemetery association, with a care and improvement fund established under Minn. Stat. 306.37. Investment of Evegreen’s care fund would likely be governed by Minn. Stat. 306.38. The FDD article references a restrictive investment standard that incorporates from the savings bank law. That particular statute actually governs municipal and county cemeteries. But if you were to drill down into the savings bank law, you will find the ability to hold equity securities. (Interestingly, the Minnesota Commerce Department website indicates the state does not currently have any savings banks.) In summary, cemeteries operated by non-profits and municipalities/counties do seem to have the authority to invest their care funds in the equities that will produce a higher yield.
To get to those higher yields, a non-profit association or municipality could have their care fund trustee explore Minnesota law that authorizes the power of adjustment between principal and income. Over the past two decades, most states have passed a form of trust law that enables trustees to redefine income for purposes of distributions. These laws generally fall into one of two camps: the power to adjust or the power to convert to a unitrust. Some states have passed both types of laws. Minnesota appears to be in the power to adjust camp. Some say that this camp provides the trustee the greatest flexibility in meeting the needs of income beneficiaries. Where the unitrust statute generally caps fixed distributions at 5%, the power of adjustment could justify a higher level of distribution.
With Evergreen, the 5% unitrust could provide an annual $30,000 distribution that exceeds the current deficient (and the county’s $20,000 contribution). Where the power to adjust could authorize the trustee to make an even higher distribution, the Minnesota statute requires justification. Because of that requirement, cemeteries like Evergreen should anticipate push back from their care fund trustee when queried about the power to adjust.
Exercising the power to adjust most frequently occurs with estate planning situations where the bank and its attorneys are more comfortable. Bank compliance attorneys do not typically have experience with states’ fragmented cemetery laws. Cemetery laws are confusing, and frequently archaic.
Cemetery trusts also tend to be smaller than the more lucrative estate planning trust. The estate planning trust may hold millions of dollars, and generate the fees that warrant the risk and expense of making adjustments between principal and income. With non-profit cemetery associations and municipalities, the care fund may only be a fee hundred thousand dollars. Those funds may be too small for the risk perceived by the bank.
But there are arguments to be made on behalf of the cemetery. A care fund does not have the classic competing interests of the principal and income beneficiaries of an estate planning trust. In contrast to the estate planning situation, the beneficiary interests of the cemetery and the lot owner are more closely aligned. Both seek to provide care for the cemetery. If current care cannot be sufficiently addressed, and the cemetery falls into disrepair, future maintenance costs will be even higher.
Banks may also push back because the care fund is too small to adequately diversify. To achieve long term returns in excess of 5%, the care fund must be diversified. Many banks may feel that a $600,000 care fund may be too small to adequately diversify. However there are fiduciaries and fund managers with death care experience that can help small care funds achieve these types of returns.
Cemetery operators are conservative by nature, and would always prefer a statute that expressly authorizes fixed distributions. But these are times that require operators to seek solutions from what applicable law allows. In the case of many ‘exempt’ cemeteries, the broader state trust code may authorize the necessary change to how the care fund is administered.