It would be my assumption that the majority of the country’s cemeteries do not maintain a trust for the maintenance and care of its graves.  While this may differ from state to state, most states’ perpetual care statutes exempt small family cemeteries, not for profit cemeteries, municipal cemeteries, county cemeteries and church cemeteries from their care trust requirement.  Consequently, there may be tens of thousands of cemeteries that will be dependent upon volunteers to mow the grass after the last grave has been sold.

In the absence of a cemetery trust fund, it was once very common for a family to set aside a few thousand dollars in a grantor care trust to provide income for flowers and maintenance of that family’s grave spaces.  Today, banks are very reluctant to establish, or accept transfer of, grantor care funds.  For the past several years, small trusts’ expenses have exceeded income.  Trustee fees often consume the first 1% of the trust’s income. Then, there are tax preparation expenses.  Grantor care trusts are subject to the same tax reporting requirements as the cemetery care fund trust (a Section 642i return).  The Section 642i return is a hybrid type of complex 1041 that  typically requires the bank to engage an outside tax preparer.  Tax prep fees for a cemetery care trust can run from $250 to $500.  For a $10,000 grantor care fund, the lowest tax prep fee would consume the next 2.5% of trust income.  Accordingly, the $10,000 grantor care trust must earn 3.5% before a dollar can be distributed for the care of the family’s graves.

Funeral preneed trusts face similar expense hurdles, but state funeral director associations developed master trusts to achieve diversification and economies of scale.   In consolidating funeral accounts, the association master trust reduced administrative expenses and gained the critical mass needed to diversify investments.

But, the master trust concept has not gained much traction with state cemetery associations.  That has forced a few death care fiduciaries to piece together cemetery master trusts with small accounts.  Until a grantor care trust has the opportunity to join one of those master trusts, the family’s graves will not see flowers anytime soon.

We had hoped that the Trial Court’s Finding of Facts would shed some light on how a Missouri preneed trust holding life insurance would have income to distribute.  Despite being invested primarily in life insurance policies, Allegiant Bank made monthly income distributions to NPS.  The Trial Court made several findings on how Allegiant Bank failed to comply with R.S.Mo. Section 436.031.3, but there is no mention whether Allegiant Bank complied with the realized income requirement.

There are three elements of the Section 436.031 income distribution: the trust’s market value, aggregate deposit balance and realized income. When responding to a Section 436.031 income distribution, the preneed trustee should maintain documentation reflecting the then current deposit balance, market value and accrued income.  (This feature of Missouri’s old preneed law remains relevant because it continues to govern preneed contracts sold prior to September 2009.  Consequently, some Missouri funeral homes continue to seek income distributions from their preneed trusts.)  The Trial Court found that when Allegiant Bank made income distributions to NPS, they breached its fiduciary duties to consumers by neither confirming the trust’s aggregate deposit balance or the value of the trust’s assets.

One common mistake made by Missouri trustees was to use the trust’s principal amount in lieu of aggregate deposit balance.  But, the Trial Court found that Allegiant didn’t even bother to use the trust’s principal in a test for compliance with the law.  The Trial Court acknowledges that the trustee is dependent upon the preneed seller for the trust’s aggregate deposit balance.  While NPS provided monthly packets of reports, Allegiant made no record of any effort to reconcile the trust’s deposits and market value.

The NPS trusts were invested primarily in life insurance and debentures.  Allegiant relied upon the face amount of the life insurance, without confirming whether the policies were paid up.    Nor did Allegiant make any efforts to confirm the value of the debentures.

With regard to ‘realized income requirement’, we find a single finding related to that issue.  Finding No. 684 indicates that Missouri bank examiners concluded that “since September 23, 1998, approximately $47M has been distributed from income cash to the Seller.”   What!  Didn’t anyone challenge how the trust earned $47,000,000 of income?

Click here to view excerpts from the Finding of Facts that relate to income distributions.

“Allegiant [Bank] violated the industry standard of care by not maintaining consumer-level deposit records, because, as here, where there are multiple beneficiaries of a trust, the trustee must keep records of the individual deposits made for each consumer.”

This finding by the trial court in the NPS civil trial had to come as a shock to Allegiant Bank, and would probably come as a surprise to many preneed trustees.  With regard to the trustee’s recordkeeping requirements, both the NPS trust agreement[1] and applicable Missouri state preneed laws[2] incorporated typical industry standards. The Allegiant Bank trust officer believed that the records produced by the bank’s trust accounting system would suffice for compliance with the trust agreement and Missouri law.

During its 6 year term as the NPS trustee, Allegiant Bank did not request or maintain records of the deposit balances of the individual contract beneficiaries.  Allegiant Bank assumed that it could rely upon NPS to provide individual deposit balances upon request.  The trust officer believed he was not required by either the trust agreement or Missouri law to keep specific customer account information.  The trial court disagreed, finding that though Missouri law imposes a duty on the preneed seller to create a record of consumer payments and deposits, the statute does not abrogate the trustee’s duty to maintain records of deposits to the trust after that information is obtained from the seller.

The trial court reasoned that without keeping records of the deposit activity, the trustee could not reconcile trust transactions to determine if distribution requests were accurate.  The trial court did not find that the trustee has to create such individual consumer deposit records, but rather the trustee must seek such records from the seller and then keep them for purposes of reconciliation of distributions.

Click this hyperlink to view excerpts from the Findings of Fact and Law that discuss the individual deposit recordkeeping requirement.

 

 

 

 

 

 

[1] . Section 4.3 of the Trust Agreement stated: “Trustee shall at all times maintain accurate books and records reflecting all transactions in any way pertaining to the trust.”

[2] The first sentence of Section 436.031.5 read, “The Trustee of a preneed trust shall maintain adequate books of accounts of all transactions administered through the trust and pertaining to the trust generally.”

  • It is inevitable that a cemetery will run out of graves (and revenues) and eventually become the ward of taxpayers.
  • For cemeteries with ample inventory of graves, the public’s embrace of cremation translates to declining grave sales and the acceleration of the cemetery’s demise.

For several years, the media have been making these dire predictions about cemeteries.  If accurate, it can only be a matter of time before cities, towns, counties and townships are required to step in and take charge of each cemetery that lies within their boundaries.  But, municipalities are pushing back and creating  a different narrative that suggests there are alternative paths for cemeteries.  Municipalities are advising that they are poorly suited to operating a cemetery because they lack the expertise and personnel to run a cemetery efficiently.  Rather than waste tax payer funds, municipalities are exploring joint enterprises, special committees and even the privatization of cemeteries.  We offer Glendale Memorial Park as an example of the latter.

Glendale Memorial Park “failed’ in 1962, and the city of Glendale Arizona stepped in to assume control and operation of the cemetery.  The cemetery did not have a care fund trust.  The City operated the cemetery for 23 years before implementing an ordinance requiring grave sale revenue to be deposited to a care fund trust.  For the next 15 years, the cemetery accrued all income to the trust.  Eventually, the cemetery’s care fund grew to $4.5 million and the City began to apply grave sale proceeds and the care fund interest income to the cemetery’s upkeep.  Despite a very healthy care fund, the cemetery began operating at a deficit and the City hired consultants in 2018 for advice.

The consultants provided two recommendations: make significant investments in columbariums and staffing, or sell the cemetery to a private death care firm with the expertise to properly operate the cemetery.   The consultant’s recommendations reflect the reality all cemetery operators face:  adjustments and investments must be made for a clientele that wants cremation and memorialization.  If you are unable or unwilling to adapt to cremation, then you better sell the cemetery.

For the reasons stated in the attached report, the City of Glendale chose to sell the cemetery rather than make the recommended investments.  Reading between the lines of that report, we can also predict some of the buyer’s motivations.

  • The buyer negotiated for $3.8 million of the cemetery’s care fund. The City likely directed the care funds into very conservative investments.  The buyer understood that with diversified investments, the fund could generate a greater return and offset more of the maintenance costs.
  • The cemetery had been operated by the City for 55 years without a proactive sales program. That would mean that the majority of living lot owners probably have not purchased merchandise such as markers, vaults or urns.  The cemetery’s lot book would provide a reliable lead list for marketing merchandise sales.
  • The cemetery probably has sections that could be re-developed for cremain interments or scattering gardens.
  • The purchase prices of interment spaces were probably below “market”.  The buyer could generate higher revenues by simply raising prices to those charged by competing cemeteries.
  • The cemetery may also have had facilities that could be used for other revenue generating purposes (life celebration events or memorials).
  • If the cemetery had acreage that had not been platted and dedicated, that land could be sold for other commercial purposes.

Depending on the facts and circumstances, municipalities may look to explore the ‘privatization’ alternative.  But, municipalities need to perform due diligence on each prospective buyer.  Selling a cemetery to an inexperienced or under financed death care firm could work to exasperate the cemetery’s condition.  The municipality could be forced to take over the cemetery again, with a condition worse than when it was ‘privatized’.

In subsequent posts, we will look at how some municipalities are taking proactive steps to keep a cemetery viable (and thus avoid it becoming abandoned).

PNC Bank has been hit with $15 million of punitive damages because Allegiant Bank did not know its client.

Before opening a fiduciary account, banks are required to perform due diligence on the trust’s grantor and on the trust’s purposes.   Such due diligence is referred to as ‘know your client’ or “KYC”.  KYC requirements had been in the works prior to 9/11, but the terrorist attacks provided the political momentum needed to pass the Patriot Act.  For preneed trusts, the Office of the Comptroller of the Currency had issued due diligence guidelines in April 2000.  The OCC memorandum warned that preneed trusts posed unique risks to banks, and that a preneed trust should be accepted only after due diligence reviews of the funeral company and the applicable state preneed laws.

In a March 2015 post (NPS Trustees: Pre-acceptance Due Diligence), we discussed the legal arguments made that Allegiant Bank had breach its fiduciary duty by accepting the NPS trusts without adequate due diligence of NPS and Chapter 436.  Although we did not know the facts and circumstances of Allegiant Bank coming to be the NPS trustee, one SDR argument carried the most weight: Allegiant Bank failed to properly comprehend Chapter 436.  Four years late, the Trial Court cites that argument as its basis for awarding punitive damages.

We learn through the Judgment’s Finding of Facts that Allegiant Bank courted NPS with a list of hand written questions prepared by Herbert Morisse, the bank’s only trust officer.  While Mr. Morisse had 17 years’ experience as an estate planning attorney, he only had 2 and half years’ experience in administering trusts.  The NPS trusts would represent the first preneed trusts under his supervision.  (See Pages 17 through 22 of the Judgment.)  Despite his lack of experience with Missouri’s preneed law, Mr. Morisse did not seek assistance from Allegiant Bank’s outside legal counsel.  Instead, Mr. Morisse sought to ‘familiarized himself’ with the Missouri law and define the due diligence to be conducted.

The Court found Mr. Morisse made several critical erroneous interpretations of Chapter 436, the Missouri preneed law.  Mr. Morisse failed to recognize that NPS associate funeral homes and individual preneed contract purchasers were beneficiaries to the NPS trusts.  Mr. Morisse also erroneously applied the Missouri law to allow the income distributions from the NPS trusts.  But worse of all, Mr. Morisse interpreted Section 436.031 to hold the preneed trustee harmless from any investment made by an outside investment advisor.

In a discussion starting on Page 284, the Court states that the decision is not about the vilification of Mr. Morisse, but rather an indictment of the institutional failure of Allegiant Bank to understand the requirements of a Missouri preneed trust.

As discussed in our 2015 post, the OCC’s preneed trust guidelines have been modified since April 2000, and are now part of the Personal Fiduciary Activities Handbook (Page 67).  The guidelines recognize that the preneed trustee is dependent upon the funeral company for individual consumer account information that will be used for performance and cancellation distributions.  Consequently, the OCC also refers banks to OCC Bulletin 2013-29 (additional requirements for assessing and managing risks inherent to third party funeral home relationships).  Thanks in part to NPS, banks have a KYC obligation to periodically assess the risk posed by the preneed trust:

  • Are the parties’ respective responsibilities and duties clearly outlined in the governing documents?
  • Does the funeral home provide periodic reports sufficient to reconcile deposit and distribution requests to consumer account balances?
  • Does the bank document periodic efforts taken towards oversight, accountability, monitoring and risk management?

National Prearranged Services is back in the news after a trial court issued a new $102 million judgment against PNC Bank (the corporate successor of Allegiant Bank).  Allegiant Bank served as NPS’ Missouri preneed trustee for six years beginning in 1998.  When PNC Bank agreed to purchase Allegiant in 2004, PNC performed due diligence that found several serious problems with Allegiant’s administration of the NPS trusts.  PNC required Allegiant to resign from the NPS trusts.  Four years later, NPS collapsed and several civil lawsuits were stayed while criminal proceedings were brought against Doug and Brent Cassity, several NPS officers and David Wolf, the investment advisor used by NPS.  In 2015, the Special Deputy Receiver won a $395 million civil judgment against PNC Bank.  That judgment was successfully appealed by PCN Bank, and the matter was sent back to the trial court with instructions to re-try the issues under breaches of trust law rather than tort law.  The appeals court also instructed that lawsuit be tried as a bench trial rather than to a jury.  After a four week trial, the court issued a 305 page ruling that found Allegiant Bank breached several fiduciary duties owed to funeral homes and preneed consumers.  (To access the ruling click this hyperlink.)

The ruling spares no criticism of Herbert Morisse and the upstart trust department of Allegiant Bank.  Allegiant Bank established a trust department late in 1997, and Mr. Morisse was the department’s first and only trust administrator.  Mr. Morisse had practiced law as an estate and probate attorney for 17 years before joining the trust department of UMB Bank in 1995.  Three years later, he left UMB Bank with a marketing officer to join Allegiant Bank.  The ruling’s findings of facts provide detailed background on Mr. Morisse’s experiences, which did not include supervision of trust investments.

Allegiant Bank’s trust department had 2 employees other than Mr. Morisse: an administrative assistant and the marketing officer.  The court found the trust department woefully understaffed and inexperienced.  The ruling repeatedly describes fund transfers made from the NPS trusts that Mr. Morisse either failed or neglected to reconcile.  Mr. Morisse would authorize transfers without knowing whether they were for contract performances, investments or intercompany transfers.  When intercompany transfers were made, Mr. Morisse assumed something of value would be transferred back to the trust.  But, in actuality, many transfers simply went to a Cassity controlled entity without the return of any asset.  Mr. Morisse also failed to question NPS about insurance reports that reflected outstanding policy loans.

The ruling’s finding of facts suggests that NPS was not necessarily hiding from Mr. Morisse all that it was doing.  Rather, Mr. Morisse erroneously assumed that Section 436.031 held him and Allegiant Bank harmless from any investments made by David Wolfe, and that the trust officer need not review the transactions between the trusts and Lincoln Memorial.

In the next few weeks, we will use the blog to delve deeper into the ruling’s conclusions of law that could impact Missouri preneed trustees.

The Missouri Court of Appeals recently issued an opinion involving facts that are all too familiar with funeral directors: family members disputing who controls a funeral and the right to cremains.

A mother contacted a St. Louis funeral home about arrangements for an adult son who was gravely ill.  The funeral home sold the mother a preneed life insurance policy in an amount to cover a visitation and cremation.  The mother also signed an authorization form indicating she was her son’s “next of kin”.  When the son died a month later, the mother went to the funeral home to make the final arrangements for the cremation.  While the funeral home was meeting with the mother, the deceased’s adult son arrived at the funeral home and demanded that his father be given a full funeral and burial.  The funeral home advised the mother that her grandson had the legal right under Missouri’s right of sepulcher law (Section 194.119) to determine the disposition of his father’s remains.  At that point, Grandma informed Grandson that he would have to pay for the funeral and burial on his own because she would only allow the preneed insurance policy to be used for a cremation.  Unable to come up for the cost of a funeral and burial, Grandson agreed to the cremation and signed the funeral home’s statement of funeral goods and services.   After the cremation was performed, Grandson collected his father’s cremains from the funeral home.  Shortly thereafter, Grandma went to the funeral home to get the cremains but was advised her grandson had already collected the cremains.  Grandma felt that since she had paid for the cremation she was entitled to her son’s cremains and sued for a refund.

The appeals court ruled against Grandma, finding that she was not a party to the contract for her son’s cremation.  Even though she had paid for the insurance policy used to fund the cremation, the cremation contract was between the funeral home and Grandson.  Relying upon Section 119.350, the court reasoned that since the cremation contract was silent on who was to receive the cremains, the statute authorized the funeral home to release those cremains to the son.  One lesson other funeral homes could take from this case would be to discuss release of the cremains with the family members and include an instruction in the statement of goods and services about the cremains’ release.

In our last post we discussed the need for the Missouri State Board to provide guidance to their financial examiners regarding Section 436.425 and insurance funded contract forms.  In this post we will discuss Section 436.425 and trust or joint account funded contracts.

Subparagraph 9 has created confusion for examiners and sellers.  That section states that a preneed contract shall “set forth the terms for cancellation by the purchaser or the seller”.   The Missouri law is clear that consumers must have the right to cancel a preneed contract and receive a refund.  But what about the seller?   Funeral homes frequently will leave a contract in place when the consumer has defaulted on installment payments.  The question is whether a funeral home must include some form of cancellation rights.  Other than default on installment payments, are there circumstances when a funeral home should be authorized to cancel the preneed contract?  Would that be true even for non-guaranteed contracts?

Subparagraph 15 addresses the installment payment issue more specifically.  This subsection requires a disclosure of what happens when the contract beneficiary dies before all installments have been paid.  Examiners have attempted to apply this section to contracts regardless of whether the form is guaranteed or non-guaranteed.  We have taken the position the disclosure should only be applied to guaranteed contracts paid with installments.   If the contract is guaranteed, but requires a single payment, the disclosure would not be required.  With a non-guaranteed contract, the consumer simply applies the trust or depository account to the costs of the funeral.  No promises have been made about prices.

At its April meeting, the Missouri State Board of Embalmers and Funeral Directors discussed the formation of a “Phase 3 Committee” that would provide input for the revision of the Board financial examination handbook.  The Board staff is about half way through the second round of preneed examinations (“Phase 2”), and the Board wants to adopt new examination guidelines that can be implemented when Phase 2 Exams are completed.   However, there is an immediate need for a Phase 2.5 Committee.   Exception comments from the Board’s preneed examiners suggest there is still confusion on how the Section 436.425 should be applied to certain types of preneed contracts.

Section 436.425 begins with the statement that “All preneed contracts ……shall clearly and conspicuously” and then sets out 16 subparagraphs that require certain contract disclosures.  Shortly after the passage of Senate Bill No. 1, the Board’s staff recommended a regulation that required a specific disclosure statement be given to each preneed consumer.  That ‘mandatory disclosure’ recited all of the Section 436.425 disclosures.  In preparing the mandatory disclosure regulation, the staff had applied a very literal interpretation of Section 436.425 to conclude that all disclosures must be included in a preneed contract regardless of its funding source.  In doing so, the staff violated one of the basic doctrines of statutory construction:  avoid a literal interpretation of a law when such would produce an absurd result.  The Missouri Legislature did not intend for trust funded contracts to include insurance disclosures, or insurance funded contracts to make trust disclosures.  Such disclosures would only confuse elderly consumers. The State Board eventually came to appreciate this and rescinded the proposed regulation before it was formally promulgated.

While the Board’s examination staff is no longer requiring each preneed contract to include all Section 436.425 disclosures, examiners are still confused about certain disclosures.  For example, the Board needs to take a position on the disclosures required for spend down contracts.  The examiners are under the impression that consumers making insurance assignments for spend downs must receive a contract that contains disclosures about cash surrender values and policy cancellations.  Those types of disclosures are intended when the consumer purchases an insurance policy to fund a preneed contract.   When the consumer seeks to assign an existing life insurance policy, the funeral director will not know the policy’s cash surrender value, or the owner’s rights under the policy.  As reflected in the State Board’s own recommendations to the Legislature, Senate Bill No. 1 was intended to regulate preneed contracts issued in conjunction with the purchase of a life insurance policy.  The Section 436.425 disclosures reflect that intent.  The spend down contract funded by an insurance assignment do not pose the same risks as the contract funded by an insurance purchase.

In the next post, we will look at Section 436.425 and trust funded contracts.

We continue our discussion of the composite Federal Form 1041QFT with a post about the individual account statement.

With the composite return, income and expenses are allocated to the individual preneed account and taxes are computed at that level rather than at the trust level.  To allow the IRS to test the composite tax liabilities, the trustee is required to attach a statement to the Form 1041QFT that reflects each individual account’s share of income and expenses.  The statement is required to set out each type of income, the gross amount of each type, each type of capital gain, each type of deduction or credit, the account’s gross and net income, the account’s tax liability and termination date if contract beneficiary died during the tax year.   With qualified dividends and long term capital gains taxed at lower rates, the individual account statement must set out each type of income so that the IRS agent can confirm each account’s effective tax rate.

The QFT form has a composite box on line 12 that must be checked.  The composite box puts the IRS agent on notice that the tax liability is not to be computed using the income and expenses entered into the 1041QFT form.  (We have had IRS agents miss the box and attempt to increase the trust’s tax liability by using the 1041QFT form numbers.  In each case, the issue was resolved by referencing the composite election and the individual account statement.)

We have reviewed 1041QFT returns where the individual account statement referenced a percentage, a single gross income number and the tax liability.  The tax preparer obviously used a year end allocation of income and tax liabilities.  Although this method does not comply with the 1041QFT instructions, the IRS may not challenge because the method frequently computes the tax liability at the higher trust tax rates.