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 Exam Procedures: New Receipt and Transmission Records

Posted in Exams/audits, Missouri - SB1, Recordkeeping

Missouri’s pending preneed exam handbook will establish a new record keeping requirement for the state’s preneed sellers: monthly records of consumer payment receipts and the transmission of those funds to the preneed funding agent.  Seller record keeping proposals are not new to the Board.   (Missouri Seller Records: The State Board Proposal) The Board’s staff proposed a record keeping regulation three years ago, but both Board members and the industry objected.   (Missouri Preneed Seller Records: the Third Time did not prove a Charm) The staff proposal attempted to dictate the format of seller records, and would have subjected licensees to discipline for “inadequate seller records”.    The proposal did not explain the purpose for most of its requirements, and included provisions to allow the Board to expand the record requirements as it saw fit.  Those latter provisions invited abuse by the Board’s staff, a problem that eventually led to the ouster of the Board’s previous Executive Director.

The monthly receipt and transmission records differ from the staff effort in a couple of major ways.  First, the handbook does not dictate a format to sellers.  A seller may document each month’s consumer payment activity in any format so long as examiners can track a consumer payment from receipt by the funeral home to deposit with the funding agent.  But contrary to what one Board member has repeatedly suggested, a copy of the consumer check in the preneed file is a sufficient record.  Sellers would be required to create a record of all consumer payments received each month, and a corresponding record of all payments transmitted to each applicable funding agent.  The Board member opposing all forms of record keeping requirements has cited his own experiences with the IRS, which did not seek such types of records.  Such comments are misleading for several reasons.  First, the IRS actually does have record requirements for audits, and those requirements differ by industry (IRS hyperlink to industry audit guidelines).  The IRS audits for a different purpose than the State Board preneed audit.    And since the Board member’s IRS audit is confidential, no one knows where his representations are accurate.

Monthly deposit and transmission records would allow Board examiners to track consumer payments without having to wade into each preneed contract file.  The monthly records would also allow the exam staff to adopt different procedures for testing a seller’s compliance with Chapter 436’s main purpose: protecting consumer funds.

While the receipt and transmission record requirements may appear to impose two types of records, some Missouri funeral homes have been complying for years with a single record. Excel worksheets can document both the receipt of funds and their transmission to the funding agent.  (Hyperlink to the sample spreadsheet)

Missouri’s Preneed Exam Handbook: How to Spot the Cheaters

Posted in Exams/audits, Missouri - SB1

The Missouri State Board’s proposed exam handbook places a new emphasis on tracking consumer payments to funeral homes.  There are two elements to the Board’s strategy: confirming the consumer’s funds make it to the appropriate funding agent, and that those funds are remitted to that funding agent within the time periods required by Chapter 436.  The State Board’s main challenge will be detecting funeral directors that keep a consumer’s funds and never remit them to a preneed funding agent.  Funeral homes that cheat and keep consumer payments are not likely to report the contract or the consumer payments.   The State Board’s best chance at detecting a cheater may be the documentation required when the preneed consumer returns to the funeral home for the prearranged funeral.

Both Federal and Missouri law require that a funeral home issue a written statement of goods and services (the “Statement”) to each purchaser of a funeral.  The Statement is a contract between the funeral home and the consumer that sets out the price of goods and services, and how the funeral bill is paid.  Missouri law further states that a preneed contract cannot be used in lieu of a Statement.   Accordingly, a Missouri funeral home must prepare a Statement for each preneed contract it performs.  The preneed purchaser (or his/her legal successor) can best determine if the Statement has been prepared consistently with the terms of the preneed contract.

As required by Missouri law, and the FTC’s Funeral Rule, the Statement must set out the form of payment.  The preneed exam handbook contemplates that payment explanation should reference the preneed contract and its funding agent.  To find a cheater, the State Board’s exam handbook would have the auditor review the funeral home’s Statements for preneed payments and then match those Statements  to funding agent records for contract listings and performance disbursements.  If there is no corresponding record of the preneed contract or the payment, then the cheater has some explaining to do.

Even when a cheater is exposed by its Statements and lack of funding agent records, a county prosecutor may still be reluctant to pursue fraud charges.  A fraud prosecution requires financial injury to the preneed contract purchaser.   When the contract has been performed by the funeral home without additional payment, there has been no injury to the consumer.   So long as a funeral home can hang on and perform preneed contracts, the State Board and the prosecutor are held at bay from bringing fraud charges.  Criminal charges are frequently deferred until the funeral home has failed and gone out of business.  That is too late for consumers who have outstanding preneed contracts.

Instead, cheaters can be prosecuted under Chapter 436 provisions that require timely deposit of consumer funds.  Depending on the form of funding, Missouri law requires that funeral homes remit consumer funds to the funding agent with a specific number of days (joint accounts are 10 days, insurance requires 30 days and trust funding requires 60 days).   Per Section 436.465 it is the seller’s duty to maintain adequate records to show compliance with the law.  By making receipt and transmittal records a fundamental element of preneed exams, the State Board can begin establishing recordkeeping standards for sellers that prosecutors can rely upon when pursuing the cheaters.


Missouri’s Next Preneed Exam Manual: Start Following the Money

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

The Missouri State Board of Embalmers and Funeral Directors introduced a new preneed examination handbook at its October meeting.  (Click the following hyperlink to access the preneed handbook.)  The proposed handbook would change the emphasis of the preneed exams from contract and recordkeeping compliance to tracking consumer funds paid to the funeral home.

For most Missouri funeral homes, the preneed examination conducted after the passage of Senate Bill No. 1 in 2009 was their first.  Preneed funeral sales have been regulated by the State Board since 1982, but a random audit process meant that the vast majority of funeral homes had never been through an exam.  So when new exam powers were given the Board in 2009, the initial goal was to review 30 years of contracts and records, and ensure funeral homes were using compliant contracts and keeping adequate records to track consumer funds.   This meant that examiners had to wade through decades of preneed transactions.  Those first exams were anticipated to be time consuming.

With each funeral home having now been through a preneed exam, the State Board looks to expedite the process and provide greater consumer protection.  We will use future blog posts to review key changes proposed by the Board, but the following is a summary of the changes:

  • More of the examination would be conducted as a desk review before the on-site visit is scheduled.
  • Rather than review each outstanding preneed contract for Section 436.425 compliance, the examiners would review a seller’s contract form for disclosure requirements, and then a percentage of outstanding contracts are reviewed for completion in accordance with Section 436.425 (signatures, addresses, phone numbers and service descriptions, etc).
  • Examiners would be provided guidelines for Section 436.425 contract form compliance. The procedures used for the first round of exams did not provide guidelines about how to apply Section 436.425 to the various forms of preneed contracts.  Section 436.425 contemplates different types of preneed contracts (trust funded, insurance funded, joint account funded, guaranteed, non-guaranteed, etc), but the handbook did not address these differences and many sellers were erroneously cited for contract exceptions.
  • Examiners would begin reviewing seller records that reflect when each consumer payment was received, and then transmitted to the preneed funding agent.
  • Performed and canceled preneed contracts would be reviewed for corresponding disbursement payments from the preneed funding agent.
  • Sampling percentages would be set for a seller based on prior exam results. The fewer financial based exceptions the smaller the sampling percentage.  Funeral homes with significant exceptions would be subjected to a 100% review.

Concerns over “abandoned” cemeteries: When to act and who will assume control

Posted in Care Funds, Cemeteries

These are tough times for cemeteries.  Too many planned on a steady revenues from grave sales, and have not trusted enough funds for future maintenance expenses. Grave sale revenues have been dramatically cut by the public’s acceptance of cremation.  Subsequent to the Great Recession of 2008, many of our funeral home clients reported a significant uptick in their cremation rates.  Families could no longer afford to spend $12,000 for a funeral that included a casket and a grave space.  Families cited the economic downturn as justification for spending $2,000 on a cremation and taking Mom’s ashes home in an urn.  Cemeteries are frequently left completely out of the family’s decisions about the disposition of cremated remains

The Great Recession also undercut cemeteries’ reliance on trust revenues.  Both preneed merchandise trusts and permanent maintenance care fund trusts had been income oriented and invested primarily in fixed income securities.  Mortgage backed securities were an investment staple for both types of trust, and most cemeteries were accustom to pulling all net income from their trusts.  This resulted in many cemetery trusts being maintained at their minimum statutory requirement.   When the home mortgage bubble burst, values of mortgaged back bond funds dropped and many cemetery trusts ‘went under water’.

A 2016 news article about a troubled New York cemetery reported that more than two-thirds of that state’s regulated cemeteries are underfunded.  (Grand View Cemetery: Buried in Costs)  An increasing number of New York cemeteries are turning to their local municipalities for help, but New York state law restricts the assistance that can be given.  That has led cities and towns to reject requests to take over ‘abandoned’ cemeteries.  The liability with assuming a failing cemetery can be substantial.  The state of New York has agreed to chip in $2 million for the repair of two mausoleums that had fallen into disrepair.  With regard to the Whispering Maples Memorial Gardens’ mausoleums, the cemetery owners had not walked away, but rather could no longer cover the growing expenses to maintain the mausoleums.  The owners stopped making deposits to the care fund and the preneed trust, and instead applied consumer funds to daily operations.  The New York cemetery regulator was criticized for not interceding years earlier.  But sometimes there are few visible signs that the cemetery is in trouble.

Rural cemeteries like Filer Cemetery in Idaho are frequently ran by volunteers that are motivated by a duty owed to relatives buried there.  But running a cemetery has become more than they bargained for.   As families embrace cremation, fewer are taking their loved one’s ashes to the cemetery.  That means few people to volunteer for the board of trustees, to provide maintenance or to manage the cemetery.  Such cemeteries are often exempted by state law from maintaining care funds, and lack capital to invest in columbariums and niches.  As with Filer Cemetery, many such burial grounds run out of volunteers and resources and eventually become the responsibility of municipalities and counties.  (Filer Cemetery: The Sexton can no longer do the job alone and Filer Cemetery: The cemetery district could proceed to ballot)

It is a tall order to expect the state regulator to spot which troubled cemetery needs intervention, and then to transfer control to the local municipality.

New York Times: Can I Pre-Pay without working with a funeral home?

Posted in Final Expense Trust, Preneed, Preplanning

The New York Times article on funeral planning blurs the line between pre-paying and pre-funding.   The savings accounts discussed by the article are one method of pre-funding funeral costs.   But the POD savings account is far less secure than final expense trusts or final expense insurance policies.  The concern many consumers have is that the ne’er-do-well nephew will spend the funeral funds if they are discovered before the consumer’s death.  A final expense product, whether insurance or trust, will offer better protection and investment return than a POD CD.  Many funeral homes can offer recommendations about pre-funding alternatives when the consumer is not yet ready to pre-pay and purchase a preneed contract.

The article also suggests that not all funeral homes are ‘sold’ on prepaid funeral contracts.  There is a grain of truth to that statement. Investment returns on many preneed funding options are not keeping pace with funeral cost increases.  These preneed shortfalls are causing funeral homes to shy away from guaranteed preneed contracts. But it is rare to find a funeral home that does not offer some form of preneed.  If non-guaranteed preneed is the only option, we refer consumers back to the advice offered in our first post on the Times article.

New York Times: What if I Move or Die Away from Home?

Posted in Final Expense Trust, Preneed, Preplanning

This section of the New York Time’s funeral planning article attempts to address two separate issues.  The issue of what happens when the consumer moves away is one of portability and whether the preneed contract can be transferred to a new funeral home.  As we discussed in our first post on the Times article, certain issues control how portable the contract will be.  The funeral director quotes are misleading.  Portability and cancellation are two different issues.  Cancellation of a contract often comes with penalties.  Portability is an issue to be discussed with the funeral director before the contract is purchased.

If death occurs away from home, there will be additional costs to transferring the body back home, or to have the cremation performed at a different location.  Some national funeral home companies offer repatriation services as part of a preneed contract, but at an additional cost.  If a consumer has a concern about such costs, another option could be travel insurance that includes repatriation services.

NY Times: But Mom said everything was taken care of

Posted in Prepaid Funeral Contract, Preplanning, Transition Documents

We’re back to that recent New York Times article about funeral planning.  The reporter offers spot on advice about the ‘gaps’ of preneed arrangements.  A surviving parent will frequently advise adult children that they need not worry about his (or her) funeral because they have purchased a preneed contract.  As the article suggests, adult children should sit down with their parent to discuss those funeral and burial plans, and then review the preneed contract.  If there is a single preneed contract, that would be the first red flag that the parent has left out a key component of a complete funeral arrangement.

Historically, funeral planning would begin with the purchase of a grave.  With the cremation rate now exceeding 50% in many parts of the country, this may no longer be accurate.  Regardless, the first question children should put to their parent(s) is what do you want done with your remains.  If the parent wants a traditional burial, a minimum of two preneed contracts will be needed: one for a funeral and one for the burial services and merchandise.  This should be true even when the funeral home and cemetery are owned by the same company.

Cemeteries no longer include the opening and closing of grave spaces with the purchase of the grave.  The parent should have a document that transfers interment rights in a specific grave.   Most cemeteries no longer issue deeds.   Rather they convey a right of interment.   But, that document will not likely address the services required to open the grave and then close it.

There are other services and merchandise that will be required to use the grave: a vault or grave liner; a monument or marker; an inscription on the marker or a bronze scroll with the name and dates.  If the parent has chosen cremation instead of a traditional burial, there are other items to be taken care at the cemetery: inurnment fees; an urn; bronze memorial plate; memorial services, etc.

If the parent does have a cemetery preneed contract, adult children should make an inquiry with the cemetery to discuss what might be left out.  Many cemeteries offer limited preneed options because the costs of granite and bronze rise too quickly.  It would be a good idea to take the contract to the cemetery to discuss the other costs they could expect.

There is also the possibility that the parent has purchased a preneed cremation contract and not made any arrangement for the disposition of their ashes.   My own mother’s plan was to sit on my fireplace mantle.  That did not fit well with my wife’s decorum for our family room.  Eventually, we obtained a second right of interment to my grandparents’ graves.

Even with a preneed funeral contract, there are frequently items that the funeral home does not provide.  Preneed funeral contracts frequently offer to set aside funds for cash advance items.  Most frequently, cash advance funds are used to pay for flowers, obituaries, minister fees and live music.  If the parent is contemplating a memorial at the church, there will be a separate expense to the church.  Again, adult children would be best advised to take the preneed contract into the issuing funeral home and discuss what is, and is not, covered by the contract.

New York Times: How to Plan Your Own Funeral

Posted in Guaranteed, Non-guaranteed, Preneed, Prepaid Funeral Contract, Transition Documents

Earlier this year, the New York Times ran a story that on funeral planning that raised several valid issues and recommendations.  We will use the next few blog posts to explore certain issues and recommendations in greater detail.   With this post we will start with the article’s discussion of prepaying for a preneed contract, and the differences between guaranteed and non-guaranteed plans.

The article references one side of the consumer protection argument against prepaying preneed arrangements.   That argument is that everyone should preplan their funeral, but an individual should not purchase a preneed contract until forced by Medicaid eligibility requirements.  (To qualify for public assistance, consumers often purchase an irrevocable preneed contract.  These arrangements are called spend downs.)  Until Medicaid is an issue, the article’s sources recommend that individuals establish an investment account or depository account that they can control.

The AARP offered another view of prepaying a preneed contract that the Times article does not discuss.  As the AARP explained in a 2010, a guaranteed preneed contract can protect families from rising funeral and burial costs.  Funeral costs have risen substantially over the past decade.  The rate of cost increase varies with funeral homes.   But the range of rates is estimated to be more than 3%.  Money placed in a depository account at the local bank is currently earning less than 1%.  So, costs are outpacing the savings account by at least 2%.  In ten years, a $10,000 funeral and burial package will cost $13,000.  The bank account has grown to $11,000, leaving survivors to pay for the balance.  That simple math makes the guaranteed preneed contract an attractive option for the individual who knows what type of funeral service they want, and what funeral home they want it from.

As the Times article explains, a guaranteed preneed contract is an arrangement where the funeral home uses today’s prices for a funeral to be provided at a future date.    In contrast, the non-guaranteed preneed contract makes no promises about the future costs of the funeral.  The non-guaranteed contract is more of a savings account that will be used at death.  From a funeral director’s perspective, the key difference between the two types of contracts is that the funeral home assumes the investment risk for the return paid on the consumer’s funds.

Funeral homes use one of three types of preneed investment vehicles: insurance, trusts and depository accounts.  With insurance funding or depository accounts, the funeral home is challenged to find any investment efficiencies.  Funeral homes that use depository accounts are receiving the same rates that individuals can get, less than 1%.   Individual CDs are typically required by state law, and funeral homes are often restricted to short term CDs.   So, no jumbo rates are available.   Preneed insurance companies are paying a slightly higher rate, but often with various limitations.  The death benefit is often limited during the first few years of coverage.   Most preneed insurers are currently paying under 2%.

Trusts have the opportunity to provide higher returns when investments are properly diversified and the trustee expenses are reasonable.   But, many funeral homes are opposed to pooling their trusts for investment, and as consequence, do not see a return that will cover cost increases.    So regardless of the investment vehicle, funeral homes experience an investment shortfall when servicing a guaranteed preneed contract.

For the consumer that knows the funeral they want, and what funeral home to use, the guaranteed preneed contract can have a cost saving benefit that justifies prepayment.  For the consumer that appreciates the need to begin planning but has not committed to a specific service or to a particular funeral home, the guaranteed contract has disadvantages.   When transferring to a different funeral home, the new funeral home may not be obligated to honor the prices in the contract.  Some state laws allow the funeral home to retain termination fees.

Many funeral homes are shying away from guaranteed preneed contracts because of investment losses, and are offering non-guaranteed contracts.   When offered a non-guaranteed contract, the consumer should ask certain questions to determine whether to prepay for that contract, or to establish the type of depository account described in the Times article.

  • What form of funding does the funeral home use?
  • Will the funeral home waive any termination fees or transfer fees?
  • What type of return has the funeral home received on its preneed funding over the past 5 years?
  • Using the funeral home’s most popular package, how much does it cost today and how much 10 years ago?

If a funeral home offers depository accounts as the funding option, any fees charged by the funeral home would probably dictate that the consumer follow the advice in the article and set up their own POD account.   If the funeral home offers insurance funding, limitations such as return of premium and a low death benefit increase would also suggest a POD account might be better.   If the funeral home uses a trust, determine whether the investment return covers funeral home costs.  It would also be beneficial if the funeral home waived all fees so that the non-guaranteed preneed contract would be completely portable.

Another consideration is whether the consumer will be funding the non-guaranteed contract over time.  Funeral homes that offer only insurance funded contracts may not be able to accept multiple payments.  This could also prove a problem for funeral homes that use certificates of deposit.

The Division: Regaining that 2008 Mojo

Posted in Missouri - SB1

During the summer following NPS’ collapse, the Missouri Division of Professional Registration provided crucial leadership to building the consensus required for Senate Bill No. 1.  Rushed efforts to re-write the Missouri preneed law had failed, and the Legislature then turned to the Division.  Represented by Connie Clarkson, Becky Dunn and Kim Grinston, the Division prepared a draft bill, formed a committee of regulators and industry representatives and coordinated a series of meetings.  Led primarily by Ms. Grinston, the Division promoted a frank discussion among the members of the working group committee.  One of the Division’s top priorities was to fix the law’s failure to address insurance funded contracts.  For years, the State Board had relied upon an attorney’s opinion, and the Division was puzzled by the trust requirement being imposed on sellers who only sold insurance.

Within two years of the passage of Chapter 436, the IRS issued Rev. Rul. 87-127, and several large preneed sellers switched to insurance funding to avoid onerous tax reporting requirements.  Some of those sellers saw the gap in the Missouri law, and a way to avoid paying the $2 contract fee.  The attorney assigned to the Board wrote an opinion that was the used to threaten sellers into paying the $2 fee on insurance funded contracts.  We may never know why the opinion required a trust.  The opinion was not formally issued by the Attorney General’s Office and the State Board would not release the opinion.

The Division went into the 2008 meetings seeking a very broad definition of insurance funded preneed contracts:

  1. No preneed seller or provider shall accept an assignment of insurance proceeds or knowingly allow the preneed seller or provider to be designated as the beneficiary in an insurance policy unless a preneed contract has also been issued by a licensed seller. A preneed contract shall only be required by this section if the insurance proceeds are to be used for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required and the price of such services, facilities or merchandise are guaranteed by the provider or seller.  A preneed contract written pursuant to this subsection shall be deemed an insurance-funded preneed contract and shall comply with this section and all applicable provisions of sections 333.700 to 333.900.

The working committee agreed with the need to regulate the sale of insurance funded preneed contracts, but objected to the Division’s draft bill.  The Division dropped the draft bill and shifted gears to work out a consensus on the issues.  The insurance assignment issue was kicked down the road until the September 4, 2008 State Board meeting.   The agenda for that meeting included the working group draft recommendations where certain  “Insurance Restrictions” were included.  Those restrictions drew comments from working group members who sought clarification on the Division’s intent.  The insurance assignment discussion begins on page 50 of the September 4th transcript, and the Division stated early that “if someone walked into your funeral establishment with a term-life policy that was already sold and said I want to sign these proceeds over to the funeral home, that wouldn’t be prohibited, but I would be prohibited from selling  you the term-life policy and the preneed policy together…”.  The Division’s main concern was over the sale of term life policies, not the assignment of insurance that consumers purchased from third parties.  As one working group member phrased it, the assignment of an insurance policy to the funeral home as beneficiary was more in the nature of preplanning, not prepayment.   To avoid any confusion on the issue, the Division agreed to remove the “Insurance Restrictions” recommendation from the working group’s final recommendations to the Legislature.

The Division’s handling of those 2008 meetings earned respect and trust from the Missouri funeral industry.  But that respect and trust began to erode a few years later when a different Board staff proposed a regulation to ‘re-define’ insurance funded preneed contracts to include insurance assignments.  The relationship worsened as the Division staff adopted an adversarial style with licensees and implemented policies that exceeded the Board’s authority.  The Division now has an opportunity to rebuild the industry’s trust by returning to the same honest approach taken in 2008.   No more overreaching with licensees or manipulating the State Board.

The Missouri State Board: But Will the Division Change its Ways?

Posted in Exams/audits, Missouri - SB1

The rift between the Missouri State Board of Embalmers and Funeral Directors and their Executive Director culminated in her resignation effective June 30th.    Over the course of the past several years, the State Board drew the ire of the industry in a number of ways.   The staff implemented regulation proposals before they were officially promulgated, and continued to do so even after the Board subsequently rescinded some of those rules.  The staff screened communications directed to the State Board, including seller responses to examination reports.  Missouri’s preneed annual report form was expanded beyond Missouri law requirements not once but twice.  Funeral establishments seeking license renewals were required to provide business licenses, or proof that business licenses were not required.   A priority was given to the enforcement of DBA requirements that threatened discipline to hundreds of licensees.  Discipline was sought on a seller over the adequacy of records before the adequacy of records was defined.  The ability to amend license applications was restricted, forcing funeral homes to incur the expense of new licenses.  Funeral homes seeking advice on the Board’s unwritten policy changes were instructed to hire an attorney.  And then there were the Chapter 436 complaints initiated by the staff before the Board had promulgated the procedures rule required by statute.

The inclination of many Missouri funeral directors will be to lay all blame at the feet of the outgoing Executive Director.  But, the scope of the staff’s actions could not have flown completely under the radar screen of the Division of Professional Registration.  Through administrative and legal support, the Division assists the State Board to enforce licensing standards set out in statute and regulations.  But since the 1986 amendment of Chapter 436, the Division has, from time to time, pushed the Board beyond its statutory authorities.  Rather than seek legislation to address gaps in the law, the Division has relied upon internal legal memorandums when providing the Board direction.  By not adhering to a strict construction of Chapter 436, the Division opened a path that the outgoing Executive Director followed.  When the Executive Director got ahead of advice from counsel, she increased the Board’s exposure to litigation.

With the financial examination process now dialed back to zero, the Division has an opportunity to regain the trust of the State Board and the trust of the industry.  No more overreaching to find statutory authority.  If a gap in SB1 poses a genuine threat to consumers, then disclose the need for remedial legislation.  As we will discuss in our next post, the Division was truthful with legislators in 2008 about a critical gap in the 1986 law.  Be as truthful with the State Board and the industry about gaps in SB1.