The risk of COVID to family members is causing some preneed contract holders to rethink the traditional funeral they have purchased.  During the early stages of the coronavirus spread, a handful of funerals were found to have been super spreader events.  Dozens of attendees were infected, and several deaths resulted.  Funeral homes have since implemented COVID safety precautions that include attendee restrictions, social distancing and mask wearing.  The Centers for Disease Control and Prevention also issued funeral guidance for individuals and families that recommend that they contact funeral homes to discuss changes to the traditional funeral plans.  For their preneed contract holders, funeral directors will generally be flexible in changing the purchased prearrangements.  We have heard where services were moved from a chapel to a cemetery’s outdoor facilities so that social distancing could be maintained.  Funeral homes are also re-scheduling life celebrations to dates that are months into the future.  Changing the purchased prearrangement requires cooperation between the contract holder and funeral home, and sufficient documentation evidencing agreements to changes, or deferrals to performance of memorial services.

In our third post on Missouri’s endowed care cemetery audits we look at the request for the cemetery’s legal documents.  The current audit notice  requests copies of the cemetery’s trust agreement, rules and regulations, contract forms, deed forms, brochures and any other materials making an endowed care representation.  In essence, the audit is going to review these materials for compliance with Chapter 214.  It has been suggested that this review is central to determining whether the cemetery’s documents include certain disclosures about its care fund.  While the Office of Endowed Care Cemeteries has statutory authority to approve endowed care trust agreement, it does not have authority to review the other documents sought in the audit notice.   In that the trust agreement must be submitted to the OECC, it is redundant to include that agreement in the audit process.

What is missing from the OECC audit process is the examination of non-endowed care cemeteries.  Chapter 214 does not require a cemetery to maintain a care fund trust for future maintenance of the cemetery.  However, Chapter 214 was passed to require the non-endowed care cemetery to make very specific disclosures to consumers if chose not to establish a regulated care fund trust.  RSMo. Section 214.370 requires non-endowed cemeteries to post signs and incorporate disclosures in their forms.   Rather than review endowed care cemetery forms, OECC audits should be visiting non-endowed cemeteries to ensure they are making the appropriate disclosures to consumers.

Our previous post discussed care fund audits and the tracking of a cemetery’s property sales and care fund liability.  The next step of the audit process is following the money to the care fund trust (and the back from the trust to the cemetery).  For these purposes, the Missouri audit notice requests trust statements from the bank or trust company that administers the trust.  The trust statements are critical to the auditor’s confirmation that the cemetery deposited the correct amounts in a timely manner.  The auditor also needs the trust statement to verify the trustee’s distributions comply with Missouri law.  We do not have a criticism of what is sought, but rather how much and when it is sought.

In the document request we linked to our prior post (and provided here) the auditor is seeking 7 years of trust statements.  Many fiduciaries archive trust records after two years.  Consequently, the trustee may not be able to produce trust statements from 5 or 6 years in the past.  Yes, cemeteries should archive trust statement on an annual basis.  But it would make more sense for the Missouri Office of Endowed Care Cemeteries to require a trust statement be included with the cemetery’s annual report.    When scheduling a cemetery for audit, the OECC could then provide copies of the trust statements and annual reports filed by the cemetery.   Having current trust statements would also enable the OECC to spot irregularities and prioritize audits.

Missouri is catching up on its auditing of licensed endowed care funds.  Within the past couple of months, most of our Missouri endowed cemeteries received the attached notice requesting reports and documents for audit.  In prior posts, we have suggested that the Office of Endowed Care Cemeteries (OECC) audit process should be revised.  Our next posts will explained how the audit process should change, but with this post we will highlight what the OECC audit is doing right: tracking grave sales and care fund deposits.

To determine if a cemetery is depositing the correct care fund amount on a timely basis, the OECC requests information about property sales and endowed care deposits:

    1. Property Sales

Please provide a list of grave space, lawn crypt, mausoleum, crypt and columbarium niche sales:

The list should include:

–        Contract Number (or other identifying number)

–        Customer Name

–        Contract Date

–        Retail Cost of the property sold

–        The number of property items sold

–        The endowed care liability

If it is possible to provide this information in an excel spreadsheet, this would be very helpful.

    1. Endowed Care Deposits

For deposits listed in the endowed trust statements provide an itemized listing of the contracts included in that deposit and the amount of the deposit that pertains to each contract.

We have highlighted language from the request that is a clue to expediting the audit.  An Excel spreadsheet can simplify the process of tracking sales and computing the correct EC deposit requirement, particularly for Missouri’s complex requirements (see RSMo Section 214.320.1 for 4 different trusting and flat amount rates).  In the attached copy, we provide clients an Excel spreadsheet that separates the four types of interment right sales, and calculates the EC deposit requirement.  There is a separate tab for each month of the year.  The sheet includes bank information so that it can be printed and used as a deposit record with the bank.  The sheet can then be used to also comply with the deposit tracking record.

Tracking property sales and EC deposits is the most important function of any care fund audit.  We had one cemetery complain that documenting property sales to the OECC is burdensome.  While there are some burdensome elements to the audit, this is not one of them.   But, cemetery operators should anticipate the auditor comparing the Excel sheet to the cemetery’s lot book to ensure a month or two reconcile.

A Google search of “state funeral association master trust” will return hyperlinks to dozens of state funeral director associations.  In the 1970’s, funeral associations began establishing master preneed trusts as an alternative to passbook savings accounts.  As preneed gained acceptance with funeral directors, the associations saw the opportunity to provide administration and create a revenue source that would help sustain the association.  The master trust also provided substantial benefits to member funeral homes.  These programs relieved funeral homes from most compliance requirements, reduced administrative expenses and provided ‘critical mass’ required to diversify investments.   Almost fifty years later, most of the country’s independently owned funeral homes have access to a master preneed trust.   However, the same is not true for cemeteries.

When that same Google search is edited by substituting “cemetery” for “funeral”, the result does not find any state cemetery associations.  We know of only one state association sponsoring a cemetery master care trust, and that association is a hybrid funeral/cemetery association in Illinois.  With most states now mandating cemetery care funds, why haven’t cemetery associations formed a master trust as a resource to offer members?   Until the bond market cratered twelve years ago, there wasn’t much demand to diversify endowed care trusts.  Most care funds were invested exclusively in bonds.  Bonds had been safe and reliable for care funds.  Trustees could purchase bonds and park them until maturity.  Income, comprised solely of interest, could be swept and paid to the cemetery.  Cemetery care funds were relatively simple to administer.

When the mortgage crisis drove interest rates to near zero rates in 2008, care fund trustees rode their bond portfolios to maturity in hopes that higher bond yields would eventually return.  Twelve years of low interest rates have forced care fund trustees to diversify care funds into dividend producing equity investments.  But such diversification can be difficult for small trust funds.  Volatility in equity markets requires active management and supervision by the trustee.  Diversification is further complicated by the fact that many equity funds require large minimum investments.  Many banks have responded to these asset management responsibilities by establishing minimum size requirements for care fund trusts.  It is common to see minimum requirements of $500,000, and even at $1 million.

Regulatory compliance for cemetery care funds has also changed dramatically over the past 12 years.  An Oklahoma oilman named Clayton Smart stole millions of dollars of care funds from cemeteries in Michigan, Tennessee and Indiana.  Several states have passed new cemetery laws that expanded state supervision of care fund trusts.  These changes are imposing greater reporting requirements on cemeteries and trustees.

Following the lead set by state funeral associations, cemetery associations can also utilize the master trust to overcome lagging interest rates and comply with increased state supervision.  With the master trust, the care fund trustee can consolidate asset management from dozens of accounts to two or three investment portfolios.  This provides a significant efficiency to asset management.  The pooling of care fund assets also allows the fund manager to access equity investment options that have minimum requirements.  The combination of efficiencies and access to additional investment options means higher returns for care funds that are otherwise too small to diversify.

Another major efficiency is the trustee’s ability to file a single Federal and state tax return in lieu of individual returns for each care fund trust.  When managed individually, small cemetery care funds can be eaten up by fees and expenses.  Tax returns are frequently outsourced to CPAs that charge hundreds of dollars.  Some banks also assess an additional fee for the tax reporting required by the CPA.  These individual trust expenses can be minimized or eliminated by the master trust structure.

State regulatory filings can often be consolidated, providing further efficiencies to the trustee and the cemeteries.  The master trust approach also enables the trustee to utilize standardized trust agreements, forms and procedures.  This type of standardization simplifies the trustee’s oversight of distribution requests.

For cemetery associations struggling to attract or retain cemetery members, the master trust provides a valuable resource to smaller cemeteries.

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.

In contrast to Missouri’s Chapter 214, most states’ cemetery laws do not exempt all cemetery associations from care fund requirements.  We do find that some states exempt small non-profit cemeteries (typically based on acreage).  Some states limit non-profit cemetery exemptions to grandfathered situations (a cemetery established prior to 1940).  These small cemetery associations are more akin to a family cemetery and are dependent upon volunteer services for maintenance and care.  As discussed in the Exception that is the Rule, more than 95% of Missouri cemeteries are exempt, and cemetery associations comprise the second largest segment of “exempt” cemeteries.  Missouri’s exemption makes no distinctions on the size of an association’s cemetery.

Unlike the church cemetery, the association cemetery must be self-sufficient when generating revenues to provide care and maintenance to graves.  When Chapter 214 was amended to provide supervision of endowed care funds, preneed was not a major source of revenues for Missouri cemeteries.  Two and a half decades later, cremation has cut into the burial ritual.  To battle the decline in burials, cemeteries have turned to preneed, which has become an important revenue stream for many of our cemetery clients.  Through preneed, cemeteries can make burial plans more affordable to their customers.  But obviously, the vast majority of Missouri’s cemetery associations have cut themselves off from preneed revenues because of the fear of state regulation of their endowed care funds.

That fear is not without some merit.  The Chapter 214 audit process has a reputation for poorly defined and time consuming.  Rather than focusing on whether the cemetery is timely depositing the correct amounts to trust, the audit assumes the broader scope of general compliance with Chapter 214.  And then there are the limitations upon what the association can withdraw from the care fund.  When net income is defined to exclude capital gains, the association may not view interest and dividends as sufficient to meet their maintenance expenses.   Some have told us that Missouri’s unitrust election is not enough.

In our next couple of posts we will look at Missouri’s unitrust election and then a revamping of the Chapter 214 audit process.

As suggested in our prior Cemetery Preneed Exemption post, Missouri’s endowed care cemetery law (Chapter 214.270 et seq) has a huge flaw when it comes to religious cemeteries: they are either all in or all out.   Religious cemeteries often have good cause for seeking exemption from state endowed care laws.  Our religious cemetery clients typically have care trusts that do not comply with state law for one reason or another.  One client’s care trust held farmland.  Another client trust included provisions for withdrawal for the benefit of the church.  Several clients maintained co-trustee relationships with a corporate trustee.

For the religious cemetery that has a proactive preneed program, Missouri’s all in or all out is a major problem.  If a religious cemetery is to be exempt from Missouri endowed care requirements, they must elect to be outside of the entire act, including its preneed provisions (RSMO Section 214.387).

When passed in 1994, the law’s focus was on establishing care funds and consumer disclosures.  Little thought was given to the preneed transaction.  To be fair to those involved, few cemeteries were offering preneed, and most of those sales were for markers and monuments.  Cemeteries offering opening/closing services, vaults and engraving services, could register with the Missouri State Board of Embalmers and Funeral Directors.

Prior to 2009, preneed sellers were not licensed in Missouri.  Rather, funeral homes could register as a preneed seller.  This would require a preneed trust and a contract that complied with Chapter 436.  The State Board did not have audit powers, but a $2 per contract fee was required with the annual registration.  The preneed compliance threshold was pretty low, and so several cemeteries registered with the State Board.

Everything changed with the implosion of National Prearranges Services in 2008.  A major reform effort was launched for the Missouri funeral industry that included licensing, more detailed reporting, examinations and significant new fees.  Seeing the writing on the wall, the cemetery industry quickly scrambled to carve out a Chapter 214 preneed niche for cemeteries.  But as we now know, that niche is based on the cemetery being licensed under Chapter 214.

Opting in under Chapter 214 as a non-endowed cemetery is not the answer for religious cemeteries.  The disclosures required of a non-endowed Missouri cemetery would be misleading.  Many religious cemeteries have a care trust, but just one that does not comply with all Chapter 214 requirements.  Yet, we hesitate to recommend a religious cemetery take their preneed cemetery program under Chapter 436.

The administration of a cemetery preneed program is dramatically different than that for a preneed funeral trust.  A cemetery preneed trust involves multiple subaccounts and frequent distributions for deliveries made prior to death.  (See Cemetery Preneed Oversight: the Bucket Factor)  The financial examinations conducted by the Missouri State Board of Embalmers and Funeral Directors will be entering their third stage soon, and more attention will be given to trust administration (and distributions in particular).  We could see a Chapter 436 financial exam bogging down when reviewing a cemetery preneed program.

Rather, Missouri’s Chapter 214 needs to be amended to provide more flexibility to religious cemeteries and other exempt cemeteries that want to sell preneed while opting out of the endowed care fund requirements.

When Missouri’s endowed care law was passed in 1994, all cemeteries were required to register with the Office of Endowed Care Cemeteries.  Cemeteries can seek licensing as either an endowed care cemetery or a non-endowed cemetery, or the cemetery could claim it was exempt from Chapter 214 pursuant to the definition of “Cemetery” pursuant to RSMo Section 214.270(4):

(4)  “Cemetery”, property restricted in use for the interment of the human dead by formal dedication or reservation by deed but shall not include any of the foregoing held or operated by the state or federal government or any political subdivision thereof, any incorporated city or town, any county or any religious organization, cemetery association or fraternal society holding the same for sale solely to members and their immediate families;

The Missouri Endowed Care Act also provided definitions of cemetery association, fraternal cemetery and religious cemetery:

(5)  “Cemetery association”, any number of persons who shall have associated themselves by articles of agreement in writing as a not-for-profit association or organization, whether incorporated or unincorporated, formed for the purpose of ownership, preservation, care, maintenance, adornment and administration of a cemetery.  Cemetery associations shall be governed by a board of directors.  Directors shall serve without compensation;

(22)  “Fraternal cemetery”, a cemetery owned, operated, controlled or managed by any fraternal organization or auxiliary organizations thereof, in which the sale of burial space is restricted solely to its members and their immediate families;

(36)  “Religious cemetery”, a cemetery owned, operated, controlled or managed by any church, convention of churches, religious order or affiliated auxiliary thereof in which the sale of burial space is restricted solely to its members and their immediate families;

The original intent behind the 1994 amendments to Chapter 214 was to provide consumers information and disclosures regarding whether a cemetery did or did not maintain a care fund for future maintenance.  The law change would not force a cemetery to establish a care fund, but if it did not that fact had to be disclosed to the consumer at the cemetery gate and on its documents.

The law changes recognized that certain types of cemeteries were dependent on outside sources of funding for future maintenance, and therefore could be excluded from Chapter 214.  Cemetery associations are non-profit organizations with a single purpose of providing care and raising funds for their cemetery.  Fraternal cemeteries have a very similar purpose, but are also recognized by state law as having a charitable purpose.  Religious cemeteries obviously would rely upon a specific church, parish or synagogue for support.

Currently, 1,118 Missouri cemeteries are registered pursuant to the requirements of the state’s endowed care law.  Approximately 90% of all registered cemeteries have claimed they are exempt from Chapter 214.  However, the number of “exempt cemeteries” is probably much greater that those registered with Missouri’s Office of Endowed Care Cemeteries.  Our review of the registered cemeteries did not include any of Kansas City’s prominent religious cemeteries.  While a number of Jewish Cemeteries in the St. Louis area are registered, few other prominent religious cemeteries in St. Louis or Springfield are registered.

Our clients include a number of cemetery associations, some of which have made the decision to remain off the regulator’s radar screen.  Invariably, representation of a cemetery association will almost certainly lead to a discussion regarding declining revenues and the need to invade their care fund.  It is our personal experience that the association’s board will be reluctant to share their financial difficulties with the cemetery membership, let alone with a state regulator.

This begs the question whether Missouri’s endowed care law is of much benefit to the state’s cemetery consumer.  A very small number of cemeteries are jumping hurdles for compliance with Chapter 214, but the vast majority of cemetery consumers have no access to information needed to determine whether their cemetery is in a position to provide adequate care for years to come.  Should Missouri consider a simpler, more comprehensive cemetery care fund law?

In our next post we will examine how the Chapter 214 exemption puts Missouri religious cemeteries at a preneed disadvantage.