Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

Missouri Preneed Annual Reports: Include Those Pre88 and Post88 Trusts

Posted in Exams/audits, Missouri - SB1

The Missouri Preneed Annual Report for 2017 is a little different from prior years.  Schedule H (trust funded contracts) now seeks information about Pre88 trusts and Post88 trusts.  Previously, Schedule H only referenced trusts that administered contracts sold subsequent to August 28, 2009.  This had been a source of confusion for Missouri funeral homes.  Accordingly, many have never filed a Schedule H for Pre88 trusts or Post88 trusts.  This was an issue we raised in defense of a seller called before the Missouri State Board of Embalmers and Funeral Directors last Fall.   Chapter 436 as amended gave the State Board authority to seek information about contracts sold prior to the effective date of Senate Bill No. 1, but the annual report identified trusts with contracts sold subsequent to the effective date.

As amended, Schedule H could still be confusing to funeral homes.  The addendum for listing individual contracts advises that it applies to “Pre and Post 8/29/2009”.  But the instructions correctly advise that the addendum is for listing preneed contracts sold between September 1, 2016 and August 31, 2017.    If administered correctly, Pre88 trusts and Post88 trusts should not be adding new contract sales.  If so, Schedule H’s for Pre88 Trusts and Post88 Trusts will not have a contract report.  The addendum should be marked “N/A”.   Only Part A of the Schedule need be prepared for Pre88 and Post88 trusts.

The NPS Appeals Opinion: What does it mean for Preneed Fiduciaries?

Posted in Missouri - SB1, NPS/Lincoln

In an opinion issued last week, the Eighth Circuit Court of Appeals struck down key NPS trial rulings that resulted in a $491 million jury verdict against PNC Bank (as the successor to Allegiant Bank).  The appeals opinion states that the trial court erred when it allowed the NPS receiver to argue tort based claims to a jury.  Instead, the NPS receiver should have been limited to arguing breach of trust claims to the judge.   The breach of trust claims would have substantially limited the bank’s exposure for the acts or omissions of other NPS trustees.  The opinion suggests that the most that Allegiant Bank could be held liable for was $66 million.  The judgment was remanded back to the trial court for additional trial proceedings.

In affirming two other key rulings, the opinion muddies the waters for preneed trustees.   Prior to its restatement  in 2009, Missouri’s Chapter 436 enabled the seller to use the trust agreement to define and limit the trustee’s duties.  And when the trust assets exceeded $250,000, the seller could also designate an independent fund manager and exculpate the trustee from liabilities arising from investments.  NPS exploited these Missouri law provisions to reduce the bank’s role to that of a custodian.  Allegiant Bank argued these issues as defenses, but the appeals court relied upon the restatement of trusts to hold that consumers and funeral homes are also beneficiaries of a preneed trust.  (Frankly, that holding should not come as a complete surprise to the funeral industry because the IRS came to the same conclusion in Rev. Rul. 87-127.)

When the beneficiary holding is coupled with the opinion’s discussion of the exculpation provisions of R.S.Mo. §436.031.2, preneed trustees have reason to be concerned.  The appeals court focuses on the following language from the statute:

“In no case shall control of said assets be divested from the trustee nor shall said assets be placed in any investment which would be beyond the authority of a reasonably prudent trustee to invest in.”

The opinion states that Allegiant Bank had an ongoing duty to monitor the prudence of investments, and cannot be relieved of liability unless it ensured that the fund manager was investing trust assets “within the authority of a reasonably prudent trustee”.   This is sure to be an issue regarding which PNC Bank will seek to introduce evidence.   NPS’ investment advisor was directing consumer funds to be invested in whole life insurance policies.  That was a common investment option following Rev. Rul. 87-127, and whole life insurance policies would seem to be within the authority of a reasonably prudent trustee.   Armed with 20/20 hindsight, the trial court could deem that the common control between NPS and the insurance company, and the ‘independence’ of the fund manager, required Allegiant Bank to drill deeper.  But how deep?

Preneed trustees that allow the appointment of independent fund managers will be monitoring the trial court’s handling of this issue.

Missouri’s Executive Order No. 17-03: Going on Record

Posted in Compliance, Missouri - SB1

As we had suggested in a prior post, the Missouri State Board of Embalmers is acting to facilitate the directives of Executive Order No. 17-03 before the Board’s member vacancies are addressed.  Public hearings have been scheduled for Augusts 14th and 15th at the Division of Professional Registration.  The State Board will also accept comments online, or in writing via email, US mail or fax.

To facilitate online comments, the State Board has expanded their website.  Licensees who take advantage of this online opportunity can click the ‘offending’ regulation and provide their comments.  When doing so, licensees should tailor their comments to the standard that the State Board must follow (whether the burdens of the rule outweigh its benefits or protections).  For example, we have submitted comments regarding 20 CSR 2120-2.070(9).  The first sentence of that rule reads as follows:

 The establishment license issued by the board is effective for a fixed place or establishment and for a specific name of a person or entity authorized to conduct business in Missouri and may include one (1) “doing business as” name.

In our letter to the State Board, we acknowledge the protections afforded by public by requiring licensees to register ‘doing business as’ names with the Secretary of State and the State Board.  However, the State Board has refused to articulate any protections or benefits from restricting licensees to a single DBA.  As the Missouri industry consolidates, operators that buy out a neighboring competitor will find it difficult to capitalize on that firm’s goodwill when limited to a single DBA.  In the absence of any protections or benefits, the State Board faces an easy cost/benefit analysis.  With other regulations, the cost/benefit analysis will prove more challenging.  Accordingly, licensees will want to consider both sides of the analysis.

Missouri Rule Rollback: How to Start the Process?

Posted in Compliance, Missouri - SB1, Uncategorized

Despite lacking sufficient members to take official actions, the Missouri State Board of Embalmers and Funeral Directors met last week to discuss Executive Order 17-03.  As we reported back in January (Missouri Rule Rollback), the Order represents a significant undertaking by the State Board.  Seven months later, the State Board has less than a year to comply with the Order, and no one knows when the Governor might fill the Board’s vacancies.

Rather than wait for those appointments, the State Board may want to initiate notice of the public review process.  The Order requires notice published in the Missouri Register, followed by a 60 day period for public comments.  Following the 60 day public comment period, the Board is then required to hold two public hearings to allow the comments from the public and businesses.   The Order also requires the Board to solicit comments and advice from licensees and interested parties.

With the Missouri funeral industry giving the State Board low approval ratings, the public review process gives licensees an opportunity to provide objective comments about those regulations that the consider “ineffective, unnecessary, or unduly burdensome”.

The $64 Million Dollar Question: Is the Money there?

Posted in Master Trusts, Missouri - SB1

While the Missouri State Board of Embalmers and Funeral Directors’ Complaint against the Missouri Funeral Trust alleges the program has failed to maintain adequate records, documents and oversight, funeral directors want to know whether the trust is adequately funded.   Although the State Board raised issues with some contracts reported with zero deposit balances, the Complaint does not expressly assert that the Missouri Funeral Trust has failed to deposit consumer funds, or has improperly distributed consumer funds. Nor does the Complaint include any allegations of mismanagement of trust funds.  Funeral directors are left to wonder whether the MFT has serious problems or the State Board is being ultra critical.

A Cassity Update: Doug’s Request for a Compassionate Release

Posted in NPS/Lincoln, Uncategorized

Prison life has been hard on Doug Cassity.  The de facto executive officer of National Prearranged Services was sentenced to 10 years in Federal prison for his role in the preneed fraud that involved hundreds of millions of consumer funds.  With about 6 years remaining on his sentence, Mr. Cassity has requested a release from prison because of failing health.  Click the following hyperlink to read his Request for Recommendation for Compassionate Release.   Funeral directors who want to express their concerns about Mr. Cassity’s health, and his request for release, may use the following hyperlink.

Cemetery Care Funds: Virginia and Georgia Join the Unitrust Movement

Posted in Care Funds, Cemeteries

Effective July 1st, the cemetery laws of Virginia and Georgia are each amended to authorize fixed distributions from cemetery perpetual care trusts.  They join Florida, Tennessee, Michigan, Missouri and Iowa in embracing some form of the unitrust option for cemetery care fund distributions.  The unitrust option is a dramatic departure from the net income distributions that state laws have historically restricted cemeteries to.  Several years ago, we posted on the fledgling unitrust movement (Cemetery Endowed Care Funds and the Fixed Income Investment), and warned that states would need to include safeguards when authorizing a fixed distribution option.  Virginia and Georgia have taken different approaches to the unitrust option, with Virginia pursuing a safer route to ensuring principal growth to cemetery care trusts in future years.

Georgia’s Senate Bill No. 147 will allow a cemetery operator to begin taking 4% fixed distributions by giving the care fund trustee and the Georgia Secretary of State 60 days written notice.  In contrast, Virginia’s Senate Bill No. 891 will require the cemetery operator to first make a request to the care fund trustee to convert to the fixed distribution method.  The law provides that the trustee may reject the request.  If the trustee does approve the request, it must then develop a written investment and distribution policy, and propose any trust agreement amendments needed to permit the fixed distribution.  The investment and distribution policy must set out an asset allocation that targets a diversified portfolio capable of providing both the targeted distribution and growth to the trust principal.   When the investment policy and proposed trust amendments are finalized, the cemetery operator then must provide the Virginia Cemetery Board 90 day’s written notice of the election, and include a copy of the trustee’s policy and amendments.  The Virginia law authorizes the Cemetery Board to engage third parties (with those costs paid by the cemetery operator) to evaluate the trustee’s policies.  If the trustee’s policies are not found to be sufficient to satisfy the law’s requirements, the Board may reduce the percentage of the fixed distribution, or preclude it altogether.  Once the fixed distribution is approved and implemented, the trust must satisfy two financial tests that are intended to ensure the growth of the fund’s principal.

Missouri County Cemeteries: Legislation to Allow Trust Diversification

Posted in Care Funds, Cemeteries

The Missouri legislature has passed a bill to authorize county commissioners to diversify their cemetery trusts.  Prior to the passage of House Bill No. 51 Missouri’s counties were restricted in how they could invest cemetery care funds.  Essentially, a Missouri county could invest care funds only in government bonds.  But, since the mortgage bond crisis of 2008, government bonds have had very low returns.  With county revenues also declining, commissioners have pressed for the authority to diversify cemetery care trusts.

HB No. 51, read in conjunction with R.S. Mo. Section 214.170, would allow Missouri counties to invest in equity securities and pay out 95% of the net income.  (5% of the income would have to go into a reserve to cover future losses.)  The law governing such trusts does not define income, and so a County would seem authorized by the Uniform Trust Code to have their care fund trust instrument define capital gains as income.

Cemeteries owned and operated by corporations already have the authority to diversify their endowed care trusts.  However, the 2010 amendments to Chapter 214 limit care fund distributions to interest and dividend income or a fixed distribution not to exceed 5%.   With the current investment market, cemetery corporations may think that they too would like authorities similar to HB No. 51.

The MFT Complaint: A Sham Seller

Posted in Compliance, Exams/audits, Missouri - SB1, Recordkeeping, Uncategorized

In paragraphs 53 through 71 of the MFT Complaint, the State Board sets out certain duties that only a licensed Missouri preneed seller may perform.  The Complaint asserts that these seller duties are either being performed by the funeral homes that contract to be ‘providers’ with the MFT, or by Eagle Bank as trustee for the MFT. In essence, the State Board is arguing that the MFT is a sham seller.

Many business organizations transact through agents, but the Complaint asserts that, per the provider agreements, the funeral homes are not agents of MFT.  We can’t help but think that the State Board has misstated this issue.  The funeral homes are the point of sale for MFT contracts, and are collecting funds from consumers.  The funeral home are acting in some form of an agency capacity when preparing contracts and forwarding consumer funds.  But, if the State Board is given the benefit of the doubt, this problem could be remedied with an amendment to the MFT provider agreement.  If funeral homes are unwilling to assume an agency relationship, the State Board could easily bring disciplinary proceedings against the funeral homes for performing seller functions without a license.

The risk to the MFT in establishing agency relationships with each funeral home provider is that it assumes responsibility for the agent’s compliance with Chapter 436.  One funeral home’s refusal to comply could jeopardize the MFT’s seller license, and all those funeral home providers who rely upon that license.

With regard to the MFT trustee, the Complaint states the MFT has delegated all of its duties to Eagle Bank.  As between a preneed seller and the trustee, there will be some overlapping administrative duties.  A trustee could well agree to assume all administrative functions regarding the acceptance of contracts and funds, and the distribution of trust funds directly to funeral homes and/or consumers.  But, the delegation of such functions is typically set out through an administration agreement between the seller and trustee.  Fiduciaries customarily require administration agreements to limit their liability exposures.  The Complaint does not describe the agreements that exist between the MFT and its trustee.   Nor does the Complaint offer whether the MFT has provided Eagle Bank written policies and procedures.  Such documents would evidence the oversight needed to overcome the sham allegation.

The MFT Complaint: Rollovers and Sellers

Posted in Administration, Exams/audits, Missouri - SB1, Recordkeeping

In our prior post, we looked at Paragraphs 39 through 52 of the Complaint filed against the Missouri Funeral Trust, and the implications of Missouri’s Common Trust Fund law.  In this post we will look at paragraphs 79 through 95 of the State Board Complaint, and what exposures rollover funeral homes could have.

The Complaint asserts that the MFT has denied that it is the seller of some, or all, of the preneed contracts rolled over by funeral homes that they had sold prior to 2009.  The Complaint alleges that the rollover funeral homes informed the State Board that they were relieved of the seller duties when MFT assumed the seller functions, but that neither the funeral homes nor MFT have provided the State Board any “rollover” agreement.

These sections of the Complaint suggest to us that the MFT may have entered into an administrative arrangement with funeral homes that had been their own seller under Missouri’s prior Chapter 436.  We anticipate that MFT then became the funeral homes’ seller for preneed contracts sold subsequent to August 2009.  MFT has asserted from time to time that seller responsibilities created under SB1 could not be applied retroactively to funeral homes that were never sellers under the new law.  Accordingly, the Complaint seems to be taking issue with that position, and seeking to discipline MFT for misrepresenting the law’s requirements to funeral homes.  If MFT were to be wrong about this issue, the State Board could bring disciplinary proceedings against each rollover funeral home for failing to obtain a seller’s license.