When the Missouri State Board of Embalmers and Funeral Directors met June 30th to discuss a proposed rule defining new record keeping requirements for preneed sellers, one Board member spoke a sentiment that many funeral directors share: keep it simple, stupid.   The Board member suggested that consumer receipt records could be as simple as copying the check and the trust deposit slip and retaining those copies in the consumer contract folder.   In contrast, the staff proposal, and this author’s proposal, describe receipts and disbursement journals.   The reason for requiring a receipt journal is to allow an auditor to identify which consumer accounts have received payments, and then to pull those files for review.  The same would be true for disbursements.   For accounts that have no activity (receipts or disbursements), the auditor may not even need to review.   One purpose for the new record keeping is to expedite the exam process.

My mom died recently, and her failure to put in writing her final arrangements resulted in a family conflict.

My mother did not like discussing death, and avoided the topic of her own death at all costs.   A few years ago, my mother asked that I prepare a durable power of attorney, and include powers to take care of her funeral.   In essence, my mother was designating her right of sepulcher to me.   As a Missouri resident, my mother could grant me her right of sepulcher through a durable power of attorney if those powers were specifically set out.   We had a discussion, albeit one she cut very short, wherein she expressed a desire to be cremated, and to have her cremains interred with her father.

A few years later, my mother became more reliant upon my sister, and instructed her to prepare another power of attorney.  My sister obtained a standard durable power of attorney form that granted her general powers to take care of financial decisions.    While my sister was aware of the durable power of attorney naming me as my mother’s attorney in fact, my sister did not advise me of the second power of attorney.

In the days that preceded my mother’s death, my sister advised that my mother had expressed different, and conflicting, preferences for the disposition of her cremains.    Concerned about the costs of an inurnment, my mother gave instructions to scatter her cremains across her parents’ graves or to scatter them on a pond on a cemetery near my sister’s home.    While my sister felt duty bound to follow one of these options, I recommended that we follow the original plan of interring the cremains in her father’s grave.

When my mother did eventually pass, my sister was torn between the various ‘instructions’ my mother had given regarding her cremains.   Coupled with the fact that my mother’s funeral arrangements had not been fully funded, my sister felt overwhelmed.   And, she also began to feel my involvement in the decision making was as an intrusion on her authority.   The process of putting my mother to rest was anything but healing.

The conflict with my sister could have been avoided if my mother had executed a designation of sepulcher coupled with a written plan of disposition.  While my mother had executed a durable power of attorney with a sepulcher designation, it was lost on my sister that ‘her’ own power of attorney form was only for general financial decisions.   Without the written plan of disposition, any discussion regarding the differences in our respective powers of attorneys would only have exasperated my sister’s emotions.

A local Kansas City television station recently ran a story about a consumer’s complaint that his preneed contract did not cover “surprise fees”.   The consumer had purchased the preneed contract from a Kansas City funeral home/cemetery combo where he had also purchased a grave space.   One fact regarding the preneed contract that jumped out to us was that the combo had given the consumer 12 years to pay for the contract.   The length of the installment period allowed the consumer to make low monthly payments that he could afford.  When the consumer finally completed the monthly payments, the funeral home/cemetery sent a reminder that certain final expenses would still be owed at the time of his need.  The greatest of those expenses would be the opening and closing of the grave space.  The consumer was shocked that the purchase of grave space did not include the opening and closing services.

The story struck close to home for me.  When my mother recently passed away, my sister expressed her own surprise about funeral and burial costs not covered by my mother’s preneed arrangements.  As my mother’s power of attorney, my sister had purchased a non-guaranteed preneed contract in a spend down situation.  My mother’s health required that she move into a nursing home and qualify for public assistance.  After making my mother’s prearrangement, my sister asked that I come to the funeral home to explain the contract.  My mother was never a planner, or saver, and had little in resources.  Her savings were not sufficient to cover a basic cremation, and my sister did not know when my mother might receive additional funds.  So, a non-guaranteed contract was my sister’s only option.

When my mother did pass, the preneed contract trust value was not sufficient to cover the cost of my mother’s cremation, let alone the inurnment services and the price of a marker.  My sister became very upset.  Understanding that my sister was struggling with grief, the funeral director and the cemeterian were very patient with her and discounted their services.   But, the reality was that my sister had ample notice that there would be additional expenses.

Back to last week’s television report, Channel 41 made the local funeral home/cemetery (and the death care industry at large) look to be a bad guy.   The station’s reporting was flawed on several points.  If the station had performed any due diligence, the reporter might have learned that Missouri funeral homes and cemeteries are governed by two different preneed laws.  The station neglected to report that Missouri cemeteries could not sell opening and closing services at the time the consumer purchased his preneed contract.  While Chapter 214 was re-written in 2010 to allow such sales, low investment returns have discouraged Missouri cemeteries from offering those services on a preneed basis.   So, there was a good legal reason why the preneed contract excluded opening and closing services.

Cemeteries also make disclosures in other documents that the purchase of a grave does not include the opening and closing services.   Such disclosures are typically made in the interment sales document, the cemetery’s rules and regulations, and the interment rights assignment form.  The station was disingenuous when including the consumer’s remarks to the otherwise and characterizing the preneed contract disclosure as buried in fine print.

Funeral homes and cemeteries routinely deal with consumers who have not read their preneed contract.  As addressed in a post made a few years ago (Consumers: Reading the Bold Print), the industry can only go so far to disclose what is and is not covered by the contract.  The industry takes grief into account when responding to such situations.  But grief is no defense to a consumer who neglects to read the contract prior to the time of need.

To compound their bad reporting, Channel 41 patted themselves on the back for saving this consumer unnecessary expense, suggesting that they had saved thousands.  But, the ‘surprise fees’ described by the reporter included cash advance items that are always at the consumer’s discretion.   The reporter may not have been aware that there are installment costs to the funeral home.  Many funeral homes will not offer installment plans because of the investment loss associated with deferring payment on a guaranteed contract.  This particular contract probably cost the funeral home hundreds of dollars.

 

In our January 3rd Post, we described the process (or lack of process) between the State Board of Embalmers and Funeral Directors and the Division staff for establishing the examination procedures that would be applied to preneed sellers for the next five years.  The industry railed at the Staff’s recommendations for the scope of financial examinations and the sellers’ recording keeping requirements, and the Board gave a tacit approval in March to the staff to continue the examination process pursuant to the previous guidelines.  The staff proposals are vague and confusing, and we have outlined some of our concerns in Posts made December 4th, April 18th, May 1st and May 24th.  But as the Board considers the industry’s objections to the proposals, the staff presses on with the scheduling of examinations.

At its May meeting, the Board established a Rules Committee to take up the stalled record keeping proposal (and other rule proposals that have grinded to a halt).   Now, the Board has scheduled a Rules Committee meeting for June 30th at 8:00 am.   This is the time for sellers to begin making suggestions to the Board and the staff regarding recordkeeping and the examination process.  But, the recordkeeping requirements must be addressed first.

The principal purpose for Senate Bill No. 1 is to ensure that consumer funds are handled properly.  Accordingly, the examiners need the type of records that reflect all funds handled by the seller, and that such funds were transferred to the funding agent (depository accounts, trusts or insurance) in a timely manner.  For purposes of that discussion, we have submitted this proposal to the Board.

A preneed client recently complained about preneed shortfalls they were experiencing on trust funded contracts.  We went back to our 2014 blog post (The Factors Contributing to Preneed Shortfalls: Investment Return and Operator’s Performance Costs) and began an analysis of those factors.  Since the ‘culprit’ is usually poor investment returns, we started with a review of the client’s trust.   Over the past ten years, this client’s Post88 Trust had a net investment return of more than 3.5%.   In comparison to what most trusts are returning, this client has had a fairly healthy return despite the 2008 financial crisis, low bond rates and a volatile equity market.

We next spoke with the client’s CPA to request the internal rate of cost increase.  This has not proved to be an easy number to provide, and so the CPA will have to ‘dig deeper’.  But, the CPA felt that the rate of cost increase was probably on the north side of 4%.

We then started looking at the client’s contracts in terms of those that paid in a single premium and those that paid by installments.  We found that this client had allowed consumers to use 8 year installment terms so that monthly payments were less than $100.  We soon found that these long term contracts were not affording the trust sufficient time to recoup investment return.  Assuming that the client’s internal rate of cost increases were 3.5% (and matched the trust’s investment return), the payout on the 96 term contract was $1700 less than the contract’s sale price.   Then, we assumed that the ‘loss’ would be the same so long as the trust return matched the rate of cost increase, but that did not prove to be the case.  The higher the client’s rate of cost increase, the greater the cost of installment payments.  We found that the shorter installment terms (24 months) could even result in a $500 loss.   Logic suggests that the installment cost to the preneed seller is even greater when the investment return is less than the rate of cost increase.

We have always advocated the need to provide the consumer payment options, but we now recognize the need for program provisions that offset the loss of investment return.

The clock is on for the second round of Missouri preneed audits  financial examinations, and the Missouri Division of Professional Registration wants to avoid the slow start that plagued the process 5 years ago.   Although the State Board has yet to approve the Division’s proposals for seller recordkeeping and the scope of the exams, exam notices were sent out to the first group of lucky sellers.   The notice includes a document request that begins with the following item:

A current statement from your state of federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have indentifying the payments, earnings and distributions for each active preneed contract.

What the Board seems to be requesting is a trust record that reflects what each preneed account has received in consumer payments, total trust income and total expense distributions.   In essence, the request anticipates the trustee maintains a running total of income and distributions made from each preneed account.  While fiduciary accounting systems track the tax cost basis (or book value) of the trust as a whole, a trust’s tax cost basis represents the netting of income and expenses.   Federal fiduciary accounting rules do not contemplate a record of the aggregate income and expense incurred over the lifetime of the trust account.  If such a record is not required by the bank’s fiduciary regulator for the trust as a whole, fiduciaries would not perceive the need to maintain such a record for each individual preneed trust account.

Sellers are already complaining that the financial examination process is creating too much of a burden on funeral homes.  This document request would require banks and trust companies to expand their recordkeeping, and perhaps cause some to withdraw from the business.  Instead of expanding the record requirements of preneed fiduciaries, the Division could seek existing records that would document individual account expenditures.  Most, if not all, preneed trusts file a Federal Form 1041QFT, which requires an individual account listing of income and expenses.  It may not constitute the single record that an examiner would prefer, but a trustee should be able to produce tax returns for the seller’s five open audit years.

The first record described in the proposed Missouri recordkeeping regulation could actually require preneed sellers to maintain three, maybe four, sets of journals:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from both preneed trusts and preneed joint accounts, specifically identifying the date, source, and description of each item deposited as well as the date, payee, and purpose of each disbursement;

This section contemplates a journal for consumer payments received by the seller and deposited to trust or joint account, and a journal of disbursements from the preneed trust or joint account to the seller.  With regard to trust funded contracts, Missouri law requires all consumer payments be made to trust.  However, this proved burdensome for sellers with a high volume of payments, and consequently sellers are allowed to administer payments through a commercial clearing account.  When a clearing account is used to process individual consumer payments, a commingled, lump sum deposit is then made to the trust at month end.

When a seller does use a clearing account to administer consumer payments, the regulation may require one receipts journal for the clearing account and another receipts journal for the trust account.  Or, the regulation could be interpreted to require a receipts journal and disbursements journal for the clearing account.  The journals would have to be sufficient to allow an auditor to determine that the consumer payment was deposited to trust within the time required by statute.

When consumers make their payments directly to the trust, the seller may, or may not, actually handle the payment.  Consumer payments may be made by a direct deposit or by checks mailed directly to the trust.  When the seller does not handle the payment, it is not clear whether the seller would be required to document such payments to the receipts journal.

Another question that comes to mind is whether the seller can use a bank transaction report to satisfy the receipts journal requirement.  Some of our bank clients include the consumer’s name when recording a deposit to their system.   However, commingled, lump sum deposits made from a clearing account would not reflect individual consumer names.  With such deposits, supporting detail might have to be provided that reflects a reconciliation of the deposit to the clearing account receipts.

To the extent that bank generated reports are used, sellers will have to be current in their production of such reports because most banks limit the time such data is maintained on line.  The banks we work with limit the availability of such data from 18 months to 24 months.  Sellers are only audited once every 5 years, and if a seller waits until an audit is scheduled to retrieve reports, the first three or so years will not be available.

Sellers should also note that the regulation is also seeking the source of funds, i.e., whether the consumer paid by check or cash.

At one time, it was custom for preneed sellers to book consumer payments to the funeral home’s income records, and defer recognition of the income until performance of the contract.  The funeral home’s tax records would have been a source for the journals, and other records, sought by the proposed regulation.  However, the practice of booking preneed payments to income is no longer encouraged. Consequently, the proposed regulation would require the Missouri preneed seller to maintain financial records that are in addition to their tax and financial records.

At its March meetings, the State Board again received from the Division staff a rule proposal that would define the minimum records that a preneed seller would have to maintain.  The first recordkeeping proposal was offered last July, but was never discussed.  The recordkeeping proposal was subsequently included on the December agenda, but was only discussed briefly.  In prior posts to our blog, we have suggested that a recordkeeping regulation is needed as the foundation to establishing procedures for the second round of preneed financial exams.  With second round exams now being scheduled, we will explore over the next several weeks the recordkeeping proposal in greater detail:

Adequate records for a seller to maintain shall include, at a minimum:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from both preneed trusts and preneed joint accounts, specifically identifying the date, source, and description of each item deposited as well as the date, payee, and purpose of each disbursement;

(2) ledger records for all preneed trust and preneed joint accounts showing, for each separate preneed contract, the source of all funds deposited, the amount of such funds, the descriptions and amounts of withdrawals, and the names of all persons or entities to whom such funds were disbursed;

(3)preneed contracts, trust agreements, trust administration agreements, provider agreements, preneed agent agreements, and all correspondence related to the preneed contract;

(4) accountings showing the disbursement of funds;

(5) records showing disbursements;

(6) the physical or electronic equivalents of all checkbook registers, bank statements, records of   deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;

(7) records of all electronic transfers from preneed trust or preneed joint accounts, including the  name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;

(8) reconciliations of the preneed accounts;

(9) those portions of preneed files that are reasonably related to account transactions;

(10) records of credit card transactions related to any preneed transaction to the extent permitted by law and the payment card industry data security standard;

(11) all information obtained by the seller related to any insurance policy used to fund any preneed contract that may include a copy of the insurance policy, any assignment or beneficiary designations, any statement showing any status of any insurance policy used to fund a preneed contract.

(12) any communications between the seller and the purchaser and/or beneficiary of the preneed contract related to the preneed contract;

(13) any written certificates of performance received by the seller.

The staff for the Missouri State Board of Embalmers and Funeral Directors posted the 779 page agenda for next week’s meetings.  Doesn’t the state have a policy against the waste of natural resources?  Granted the agenda includes minutes and regulation proposals from several prior meetings, but a Cliff’s Notes would be helpful to know what’s going to be on the exam.

As reported in several prior posts, the preneed examination process in Missouri has been a work in progress for the past five years. Funeral homes in that state have been selling preneed for more than 30 years without much oversight or recordkeeping guidelines. When the law was re-written in 2009 in response to the NPS collapse, the Missouri State Board of Embalmers and Funeral Directors was given the responsibility of examining each preneed seller at least once every 5 years. Now that each seller has been through an examination, the Board has the task of defining the seller’s record requirements so that the exam process can be streamlined. But streamlining the process will require guidelines that the Missouri industry can follow. Missouri has hundreds of preneed sellers that use joint accounts or trusts or insurance or, sometimes, a combination of all three. The examination process is further complicated when the seller uses different procedures for a single funding mechanism. For example, sellers with trust funded contracts frequently have some consumers making payments directly to the trustee and other consumers making payments to the funeral home.

With that background, one would have to look at the seller’s records proposal to be discussed this Wednesday by the Missouri State Board as a starting point. While the Board’s staff is under some pressure to initiate the next round of preneed examinations, the proposal does not provide sufficient guidance to sellers who want to make the next exam less painful. In our January 3rd post (Missouri Second Round of Exams:100% Reviews), we described the back and forth process that the State Board and its staff must navigate to define the next round of exams. To expedite that process, the State Board and their staff need to include the industry in the process of defining seller record requirements.