The newest edition of the Missouri Preneed Exam Handbook has some significant problems.  The one we will discuss today is ambiguous instructions regarding the review of preneed contracts.  Paragraph 13 of the Handbook’s scope of financial examination states:

13) Staff shall look at 100% of all active preneed contracts that have been sold since the period covered under the last financial examination and may look at a sampling of other active and fulfilled preneed contracts, at the direction of the executive director and examiner supervisor, as required to assure fulfillment of the general directives of the board as set forth in these guidelines.

The Handbook then sets out the paragraphs of §436.425.  While an earlier part of the Handbook indicates that a seller’s contract form will be requested for review as part of the pre on-site process, Paragraph 13 indicates the examiner will repeat §436.425 review on each contract sold since the last exam.  And then that same type of review will also be conducted on a sampling of contracts that were also part of the seller’s prior exam.

The vast majority of the requirements of §436.425 pertains to contract form disclosures.  Three paragraphs of §436.425 pertain to how the contract must be completed by the seller.  With regard to §436.425 contract disclosures, why should examiners first review the contract form and then all outstanding contracts?  And then, why do the same type of review on contracts reviewed in the seller’s prior exam?  Do the contracts change over time?

As the highlighted language of Paragraph 13 indicates, the Handbook will be the Board’s directives on how to conduct exams.  Those directives need to be complete and clear.  So, if a 100% review is necessary for consumer protection, the Handbook needs to be clear about what that review entails.  Is the consumer’s $25 fee being well spent by having examiners double and triple check contracts for the required disclosures?

“Nitpicking” was one of the terms frequently used by Missouri funeral directors when referencing their preneed exam exceptions report.  (Other descriptions are not appropriate for print.)  The initial exam guideline provided no guidance to examiners for prioritizing problems found in preneed contracts and records.  It was common to see exception reports with dozens, even hundreds, of technical ‘violations’.   The original guidelines did not distinguish certain types of preneed contracts, and that led examiners to erroneously cite numerous contracts with a disclosure violation.   Sellers were then required to respond to these erroneous exceptions.   These responses were frequently bounced back and forth between the Board staff and the seller, without giving the Board or its attorney a chance to weigh in.   Examinations could drag on for several months over insignificant issues.

The State Board eventually took its first step to address this problem a year ago October when a resolution was adopted to have the Examination Committee review each exceptions report before a Board letter would be sent out to the funeral home.   However, the Board’s then Chairman allowed the staff to continue to send exception letters without Board oversight.  Those subsequent exception letters continued to cite some of the same erroneous issues to sellers.

The format of the exceptions report can also be challenging to the State Board’s Examination Committee.  An exceptions report that is several pages long might suggest a funeral home might have some serious problems.  But, as it was with one of our clients, the exception report could be citing problems for contracts which the funeral home is not the seller.   It took multiple letters to the State Board’s Executive Director to resolve that issue.

The Board’s October exam handbook would bring the staff back to the path approved last October.   All exception reports would have to be reviewed by the Examination Committee before a letter is sent to the funeral home.   The examiners would have to prepare the exception report with a summary that classifies problems as legal, recordkeeping or financial.   The first round of examinations focused on contract form compliance and recordkeeping.  As a consequence, most exceptions tended to fall into one of those two categories.  Going forward, the Board should be focused on the financial issues, and the Examination Committee should turn to the exception report’s summary to see how many financial issues are listed.

While the State Board will remain diligent to see that preneed contract forms comply with Chapter 436, this can be the easiest of the industry’s problems to fix.  A seller can be required to revise its contract form and to agree to administer outstanding contracts in compliance with Chapter 436.

Recordkeeping could be a little more difficult to address.  Compliance could mean implementing new procedures or software, or obtaining professional assistance.  But generally, this means prospective changes to how records are created and maintained.   But that may not be necessarily be true when the seller has not maintained adequate records to document Section 436.031 distributions.

Financial exceptions could be one of several issues: the seller is underfunded, the seller is receiving improper distributions, the seller is not making timely deposits, the seller does not maintain adequate records to determine the adequacy of funding, or the seller does not main adequate records to determine compliance with Section 436.031.   Per the handbook, the exception report should explain whether financial problems appear to be isolated or systematic.   The examiner should also provide his/her assessment whether the financial problem is an obvious error.

The handbook’s instructions to prioritize and summarize the exception report are intended to help the Examination Committee with its own assessment when issuing an exceptions letter to the funeral home.  The exception letter could take different courses based on the Exam Committee assessment.   Minor exceptions could be noted to the funeral home with suggestions on how to address the issues, but that the Board is closing the examination file.  Funeral homes with recordkeeping problems and multiple financial errors may get an exception letter that seeks input from the funeral home regarding how it would propose correcting the problems.  Funeral homes with significant recordkeeping issues, significant underfunding or systemic financial issues would receive an exception letter seeking a detailed explanation to be given to the State Board.


The Missouri State Board’s proposed exam handbook would have examiners perform more of their review before an onsite visit is scheduled at the funeral home.  By performing a desk top review, the examiner would be better prepared when visiting the funeral home.  This should expedite the examination process.   There would be four stages to the desk top exam that starts with an information and document request.

Depending upon the sampling to be used by the Board, the examiner sends out an initial examination notification to the seller explaining the sampling process and requesting:  1) all preneed contract forms used since Seller’s previous exam, 2)an outstanding contracts report, 3)a serviced/canceled contract report, 4) copies of specified months of financial transactions (consumer receipt and funding agent transmissions), 5) identification of all funding agents, and 6) whether Section 436.031 income distributions were taken, and supporting documentation.   The seller would have 30 days to provide the contract form and contract reports, and 60 days to provide the other requested information and documents.

The second stage would involve a review of the seller’s annual reports for consistency in assigning sequential contract numbers, and for gaps in reported contracts review could be performed while the examiner waits for the contract forms and reports.

The third stage begins when the examiner receives the seller’s contract forms and contract reports.  Depending on the sampling that applies to the seller, the examiner will specify which outstanding contracts and performed/canceled contracts are to be made available for review during the on-site visit.  After sending a notification letter with the specified contracts, the examiner would then proceed to review the contract forms for Section 436.425 compliance.  This should save the examiner substantial time since the prior exam procedures required that he/she review each outstanding contract for disclosures compliance.

The fourth stage of the desk top exam would begin when the examiner receives the funding agent information, financial transaction reports and Section 436.031 distribution documents (if any).   From the seller’s consumer receipt records, the examiner will reconcile those with the corresponding transmission records and funding agent reports.   If there are any Section 436.031 distributions, the examiner will determine if the records are sufficient to confirm compliance with the statute.

During all four stages, the examiner will note issues or exceptions to discuss with the seller.  When the fourth stage is complete, the examiner will contract the seller to schedule the on-site visit.

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)

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.


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.

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.

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.

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.

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.