In a recent article, Bruce Ruston provides a detailed account of the drama behind the IFDA master trust and its divesture of the key man insurance policies. It is a long, costly story about an organization that pushed the legal envelop in several directions with disastrous results: a master trust without a corporate trustee, insurance investments to avoid Rev. Rul. 87-127, fixed returns, high administration fees, and the stubborn defense of a twenty year mistake. The Rushton article is appropriately critical of the IFDA’s legal counsel. But, to better evaluate that criticism, consideration should be given to those facts reported in the various lawsuits and the Secretary of State’s Consent Order that reflect an organization ran by an iron-fisted executive.

That evaluation should start with Robert Ninker’s 1985 decision to reach out to a young, newly licensed insurance salesman. By 1985, there were ample signs that the IRS was building its case for the taxation of preneed trusts. Mr. Ninker cannot be faulted for making life insurance the preferred alternative because it eliminated income reporting to consumers. Many trusts did not have the consumers’ social security numbers and couldn’t report income if they wanted to. So, insurance was proved a means to avoid the reporting problem. But, Mr. Ninker’s decision to turn to Ed Schainker, an insurance salesman with two year’s experience should have caused the association’s attorneys to raise questions.

Mr. Schainker did what salesmen do, he looked through available products, picked one with a high commission and put together the proposal. The proposal not only skirted the Illinois preneed law requiring preneed purchaser approval, it failed to satisfy the requirements of an insurance policy (ie that the master trust have an insurable interest in the ‘insured’ funeral directors). With such obvious problems, why didn’t the IFDA attorneys apply the brakes to the proposal?

Fast forward ten years, and the IFDA lawyers had cause to remind the client in writing of the firm’s concerns about the authority to act as trustee, and to suggest that the association resign. At that point in time, Mr. Ninker was still the boss. Okay, clients do, from time to time, reject their attorney’s advice.

Fast forward another twelve years, and, Mr. Ninker has retired and the Comptroller has finally forced the association’s hand on the trustee issue. With the IFDA attorney in Mr. Ninker’s chair, the association went to Regions Bank, a leading name among death care fiduciaries, for a proposal. That proposal put the key man insurance issue squarely in the attorney’s lap, and rather than acknowledge a twenty-year mistake, the attorney challenged Regions. In the end, there was no client to hide behind.

The decision to defend the investment “to the end” suggests the law firm may have been ‘in over its head’ from the start.
 

Every funeral home and cemetery feels the pain of this economy, but that pain runs deeper for Missouri and Illinois funeral directors. Per capita, Missouri funeral homes bore the greater brunt of the NPS collapse. In the same year NPS collapsed, the IFDA master trust was forced to divest its key man insurance policies and force substantial losses on preneed accounts. While both states’ funeral directors were angered by the losses, Illinois funeral directors have been faster to accept some of the responsibility for their preneed failure, and to work towards change. Recent comments of MFDEA representatives reflect an association in denial, and on the path of further alienation.

In February, the Missouri funeral association held a legislative day that called for members to blitz state legislators on three bills: SB767, HB1769 and HB1770. When the Missouri cemetery association voiced opposition to SB767, that bill’s sponsor sought input from the State Board of Embalmers and Funeral Directors. The State Board called a meeting to discuss the three bills.

 With regard to each Bill, the funeral association was afforded the opportunity to explain the bill and their intent for the legislation. With regard to the two House bills, the association stated its intent was to elevate the professionalism of the industry. Really?

One of the bills, HB1770, proposes to prohibit preneed sales by any person other than a licensed funeral director. One association representative offered to the State Board that if preneed sales had been restricted in such a nature years ago, the industry would not have suffered through the National Prearranged Services collapse. Such reasoning requires everyone to turn a blind eye to the fact that NPS’ demise was accelerated by a program that was sold by licensed funeral directors. NPS maintained two separate sales programs, and the one sold by funeral directors made promises that were too good to be true.

The association’s twisted logic is further magnified by HB1769. Through this bill, the association supports a new two-year degree/certificate requirement for funeral directors that would eliminate the current apprenticeship program. To make the education requirement more palatable, current licensees will be exempted. Absent from the bill (and any other association proposal) is a requirement for continuing education. So, the association sees a need to educate the state’s future funeral directors, but no need to educate those funeral directors who sold NPS preneed contracts.

When the three bills were met with criticism and opposition at the State Board meeting, association representatives (and supporting Board members) became defensive and accusatory by admonishing the opposition for blocking education needed so badly by the industry. In reality, the bills were opposed because they are protectionist in nature, and poorly written. When the association had ‘floated’ these issues at prior Board meetings, they were met with many of the same criticisms. Such actions only serve to erode the association’s credibility and effectiveness.

In contrast, the recent successes of the IFDA can be attributed to industry representatives who became involved in the association, put aside their differences, and searched for common ground. Through that approach and hard work, the IFDA is earning back credibility with the industry, regulators and legislators.
 

For the past three and half years, many Illinois funeral homes teetered on the brink of financial crisis when the IFDA master trust was forced to write down the value of preneed accounts invested in a special tax exempt fund. As reported last week by the NFDA’s Memorial Business Journal*, the “new” IFDA has negotiated settlements that could restore a significant portion of the write down of the tax-exempt fund. Credit is due to those funeral directors who made a commitment to change the leadership at the association.

The settlement of a class action suit must be approved before funds can be distributed. A hearing on the settlement has been scheduled for June 12th.

The larger of the two settlement funds will be distributed pursuant to Paragraph 4 of the Consent Order (page 13) approved by Illinois Secretary of State. The Consent Order defines “Eligible Pre-Need Contracts” as a contract that was not only subject to the value write-down, but also outstanding as of July 31, 2010. This definition will exclude preneed contracts that were written down in value, but serviced prior to July 31, 2010. In contrast to the settlement administered last year by the Illinois Secretary of State, these settlements will be paid to the trustee instead of the funeral homes.

The terms of the class action lawsuit settlement agreement will govern how that fund is to be distributed.

*"Reprinted with permission from the February 23, 2012 issue of the Memorial Business Journal. To subscribe please call 609-815-8145."
 

The Kansas Secretary of State’s office bore the brunt of the criticism for a Hutchinson cemetery that siphoned off hundreds of thousands of dollars from its trust funds. That office has the responsibility of auditing cemetery trust funds (preneed merchandise and care funds). But, poor record keeping on the part of the cemetery industry has made the auditor’s work difficult, if not impossible. Accordingly, the KSOS office implemented a new reporting system last year that requires cemetery corporations to file quarterly reports regarding their sales of preneed and interment rights. These new reports are intended to enable the office to more closely monitor the cemetery’s trusting requirements. This reporting mechanism has another requirement that went into effect on January 1st: corresponding reporting by the banks and trust companies that administer the cemetery’s trust funds.

House Bill No. 2240 amends the cemetery merchandise law and the permanent maintenance fund law to impose several reporting duties on the trustee. For each type of fund, the trustee must prepare quarterly reports on formats approved by the Secretary of State’s office. With regard to merchandise funds, the trustee must also report its allocation of income to the merchandise and services sold by the cemetery.

For many of those banks and trust companies serving as cemetery fiduciaries, these reporting requirements will come as a rude awakening. Few cemetery fiduciaries are aware that these accounts are subject to a separate set of Kansas laws. Consequently, these banks often price their services as a custodial relationship. Many will not want the fiduciary relationship and its new reporting requirements. With the first fiduciary reports due May 1st, the upcoming Memorial Day will be hectic for Kansas cemeteries for more than the usual reasons.

Click the following hyperlinks to view the HB 2240 sections on reporting: merchandise or permanent maintenance.
 

The U.S. Government Accountability Office (GAO) released its latest report on the state of state regulation of the death care industry.  As it did in 2003, the GAO selected a handful of states to review in depth, and Illinois was one of those states for 2011 report.  The Illinois review is set out as Appendix IV of the GAO report, and paints a bleak picture of preneed oversight in the Land of Lincoln. 

The Illinois review advises that the Office of the Comptroller has 10 staff positions and 10 field audit positions to provide supervision of preneed and crematories.  While it is the Comptroller’s intent to audit each preneed seller at least once every five years, budget constraints have limited audits to those businesses with the most preneed.  Otherwise, the Comptroller will target sellers based on annual reports that either reflects ‘abnormal fluctuations’ or the lack of a corporate trustee. 

And when the Comptroller does find problems, her staff complains that the law provides them little power to address the situation.  The GAO was advised that the disciplinary process is extremely slow and costly.  That latter comment should raise some eyebrows in Illinois.  It was the Comptroller’s office (albeit a prior officeholder) that pushed through amendments to the Funeral or Burial Funds Act just a short two years ago, and now the staff claims the law has no teeth.

The Illinois review ends with the Comptroller’s office on the defense.  Industry representatives challenged whether the Comptroller’s 2010 legislation provided any additional protections.  The Comptroller responds that “there is no way to be sure if the changes to the laws would have prevented these kinds of incidents, but that there may have been the ability them earlier”.  (Obviously someone left out a few words, but they also failed to confer across the hall with that other someone who was more honest about the law’s lack of teeth.)

The review concludes with the statement “[F]urther, state regulators in Illinois stress the importance of consumer education and whistleblower protections to help prevent and detect future problems.”  If the Comptroller lacks funding and enforcement powers under the current law, who is fooling who?  Can additional legislation be too far away?

 

For the past few years, some Kansas cemeteries have been getting nasty grams from their regulator about their care fund trustee’s treatment capital gains taxes. Kansas, like most states, requires a portion of each grave space sale (interment right) to be contributed to a fund or trust for the future care of the cemetery. Kansas law calls that fund a permanent maintenance fund. Missouri law calls it an endowed care trust. In some states it is defined as a perpetual care trust.

Despite what the fund is called, these state laws universally seek to provide the cemetery a source of income to pay for the upkeep of graves (while keeping the contributions in tact). That latter objective, protecting the contributions, brings cemeteries and regulators into conflict when the fund realizes capital gains and losses. The Kansas cemetery regulator has been taking the conflict a step further by interpreting the law to preclude the trustee from paying taxes or fees out of capital gains.

The Kansas regulators (like many of their peers) perceive a ‘looming’ problem with cemeteries: abandonment and the eventual transfer to the municipality or county. Cemeteries are dependent upon the cash flow that comes from space sales (and the accompanying interment fees and marker sales). When a cemetery runs out of spaces, grave maintenance will be completely dependent upon income from the care fund. To minimize the financial burden placed on the county, the Kansas regulator has adopted a very strict interpretation of the law for the purpose of preserving the care fund for the day the cemetery transfers to the government. This interpretation not only precludes the fund from distribution capital gains earnings, but also the trustee’s payment of taxes and fees from the earnings. The regulator reasons that capital gains must be allocated to principal, and the law forbids all distribution of principal.

This puts the cemetery into a bind. The staple of care fund investments, the fixed income security, has been bearing returns of less than 2% for years. When trust expenses are netted from those returns, there is little left to distribute to the cemetery. Necessity has dictated that these funds begin investing in equities. But, the Kansas philosophy would penalize the cemetery. Not only is the cemetery prohibited from using the equity earnings, the cemetery must also pay the taxes incurred on those earnings (reducing what is received from the care fund). The only ‘winner’ is the county. Or is it? If the eventual abandonment takes years, and the cemetery has been deprived income for upkeep and repairs, isn’t the county getting the property in worse shape?
 

Every funeral director has faced the situation where Mrs. Smith comes in with an insurance policy and her funeral plans. Often, Mrs. Smith has gone to trouble of designating the funeral home as the policy beneficiary before having discussed her plans with the director. Often funeral directors file the policy and plan away until Mrs. Smith’s time of need. Frequently, the file includes nothing more than Mrs. Smith’s policy and funeral preferences, and this is troubling for Missouri’s new preneed audit staff.

Although Missouri’s preneed reforms went into effect more than 2 years ago, the new examination process has gotten off to a slow start. The first hurdle was funding. The new law imposed a $36 per preneed contract fee. New licensing fees were also imposed. However, these fees were tied to annual reports and renewals that were not due until October 31, 2010.

The Division of Professional Registration has also had the task of hiring preneed examiners and establishing audit guidelines. Defining those audit guidelines has proven difficult due to fact Missouri has hundreds of funeral home sellers that have been operating with little regulatory input or oversight for 25 years. Consequently, every single examination poses its own unique issues. But the one issue that must be surfacing with regularity is Mrs. Smith and her insurance policy.

After ‘practicing’ on the State Board’s industry members, the examinations began in earnest this past summer. By the Board’s September meeting, Mrs. Smith and her insurance policy were on the agenda. The staff floated a proposed regulation regarding a definition of preneed that would trigger Chapter 436 reporting requirements when Mrs. Smith walked through the funeral home’s door. Once the funeral director was put on notice of the insurance beneficiary designation, he must either report it or take action to reverse the designation.

The staff’s reasoning is that a contract has formed when the funeral director is put on notice of the policy designation. That contract is for a funeral arrangement that is not immediately needed, and therefore falls within the definition set out in Section 436.504(7). The staff further argues that this interpretation is needed to protect the consumer when the only evidence of the contract that exists was a ‘handshake’. While the staff has a point regarding the risks of the handshake, this transaction falls outside the legislative intent of SB1.

SB1 regulates the industry’s ‘sale’ of preneed contracts where consumer funds are paid to the funeral home or cemetery. The law’s intent is to make sure the preneed seller deposits those funds to trust or a joint account, or pays them to an insurance company. In contrast, Mrs. Smith may have purchased her Prudential Life policy from the same agent who sold her car and home insurance.

But, the staff’s concerns are not without merit. If Mrs. Smith’s children do not know of either the insurance policy or the handshake with the funeral director, they may go to another funeral home. The staff also asks what it is to stop the funeral director from retaining the insurance proceeds when the family has gone to a competitor.

To ensure Mrs. Smith’s wishes are fulfilled, the funeral home should document the policy designation with a written contract (which provides for a return of the proceeds if a different funeral home is used). The contract should also spell out the promises with regard to prices.

However, Missouri consumers would be better served if SB1 fees were spent towards audit procedures that focus on preneed sales, and not Mrs. Smith and her insurance policy. Missouri’s Chapter 333 provides the State Board with authority to implement additional protections when the funeral director accepts an insurance policy in exchange for a handshake.

Our preneed provides peace of mind by freeing your family from the burdens of rising funeral costs and from making difficult decisions during their time of grief.

Since the inception of the transaction sixty years ago, that statement has defined preneed marketing. Even the AARP recently embrace the peace of mind concept. The inflationary protection that can be provided by preneed is the product of the guaranteed contract through which, funeral homes assumes the risks of investment returns and cost increases. But unless today’s consumer can afford to pay for that guaranteed preneed contract with a lump sum payment, the most popular form of preneed funding is forcing many families to choose cremation.

In 1988, insurance moved to the forefront of preneed funding by virtue of a tax ruling adverse to preneed trusts. While insurance was already a major player in the preneed industry, insurance companies had followed the lead of the early preneed pioneers by crafting a product to be used with the guaranteed contract. In the twenty years that followed the tax ruling, preneed insurers built sophisticated programs around their guaranteed contract policies. To win the funeral home’s business the insurance product must provide a commission (to pay preneed program expenses), an increasing death benefit (to offset the increase in costs to service the contract), preneed contract forms and regulatory reporting. The costs of these features are most apparent in the pricing of installment premiums.

Using costs discussed in our prior post, assume a husband and wife (age 67) want to purchase average funerals, opening and closing services and a grave marker. The total costs are approximately $20,000.00. That is a hefty sum for a couple on a fixed income.

The premium rates charged by preneed insurers vary due to factors such as the funeral home’s volume of business written, the commission rates sought by the funeral home, the age and health of the consumer, the term of installments, and the method of invoicing. For purposes of this post, we averaged two of the leading preneed insurer’s premium rates and assumed premium invoices would be mailed to the consumer. The attached chart reflects the monthly premiums for installments over 3 years, 5 years and 10 years. The chart also reflects the total cost of the premiums to the couple.

Most elderly consumers would be hard pressed to make monthly payments of $330, let alone $740. And if the couple elects the 10-year installment plan, the total cost of the original $20,000 package almost doubles. Not much of a cost savings.

Like most consumers, the preneed buyer will begin to ask what can I purchase with $80 (or even a $100) a month. The resulting death benefit will be about enough for two cremations.

If the industry wants to keep the traditional funeral affordable, more flexibility is needed in the funding of preneed. The price guarantee (and the purchase of insurance) may have to be deferred until the consumer (or funeral home) can afford it.

 

To provide a prospective of the cost on one’s final arrangements, consumer groups advise the public that the cost of a funeral could be the third most expensive purchase made during their lifetime (behind the purchases of a house and a car). In doing so, the consumer group often sites the average funeral cost figures provided by funeral trade organizations. These averages typically do not include the costs associated with purchasing burial spaces, monuments and burial services. Because cemeteries are not subject to the FTC’s Funeral Rule, there are no general price lists from which to gather information for cost comparisons.

For year 2009, the NFDA reported the average cost of a funeral (with a vault) to be $7,755. If the funeral costs have tracked the national cost of living increases, the 2011 average cost should be close to $8000. The traditional funeral and burial is not complete without the burial space, a marker and interment services. A Google search for average burial costs doesn’t produce many ‘current’ hits.  One of those Google hits is a 2005 Forbes article, that reported the average burial space cost to be $4,000.

Burial spaces can vary greatly in cost depending on the type of cemetery and the type of burial space. Municipal cemeteries will have some of the lower prices (courtesy of the tax subsidies), and religious cemeteries tend to have some of the higher prices. Prices vary greatly depending on whether the interment is to be made in a ground space, a companion space, a lawn crypt or a mausoleum.

The Forbes $4,000 burial space price seems a bit high, and for the purposes of this article, we will assume the cost of companion spaces to be $4,000 (a family’s first funeral purchase is typically for dad, and spaces are purchased as companions so mom can be assured to have her place next to dad).

Many cemeteries require endowed care contributions that often are in addition to the cost of the burial spaces, so assume an endowed care contribution of 15% or $600.

The cemetery will also charge for the services of opening the grave, installing the vault, and then closing the grave when the interment is completed. It is not uncommon for an opening and closing to cost $1,500 to $2,000.

And there is the cost of the marker or monument. Assume a granite companion upright monument is chosen. The averages differ, but a cost of $2000 is quite reasonable.

For the average family, the surviving wife faces an ‘average’ cost of $16,000 when her husband dies. When one scans the automotive ads, you will find at least a few new car models that cost less than a funeral and burial. The ad I’m reviewing also offers financing for 72 months. In contrast, funeral homes and cemeteries expect payment in full within weeks of providing their property, goods and services.

Even when insurance proceeds will be available to pay the funeral and burial, it may be months before proceeds are received. If there is no life insurance, the cost may be too high to use a credit card. While the family may prefer the traditional funeral and burial, the cost, and its immediate payment, can be too high.

For those families that do not choose cremation, the lack of flexible financing is leading to increasing receivable issues for death care operators. Trade magazines are reporting that the receivables carried by operators are growing in terms of amount and defaults. So, even when the family opts for the traditional funeral and burial, the operator is seeing an increasing number of those families failing to pay.

The historic advice has been to get as large a down payment as possible, and then stay diligent on follow-ups with the family for payment. Death care operators are now being advised to help the family not reach beyond their means. Apparently, this is still not enough. It is time for the death care industry to consider installment payments (and, not only in terms of at-need services).
 

Here in the Midwest, the death care industry is just beginning to experience the increase in preneed reporting and oversight. Some funeral directors are already frustrated with the new requirements, and are biding the time to when they can vent towards the preneed regulator.

Over the past 4 years, state agencies in Illinois, Kansas and Missouri were made to account for their roles in the failures of preneed programs. The replies were very similar: an outdated law tied our hands. There was some truth to those excuses, and state legislatures responded with laws that provide the regulators greater oversight authorities, including expanded examination powers. What rankles funeral directors is that the examinations are aimed at individual operators who had nothing to do with master program collapses.

With the preneed sale originating at the funeral home or cemetery, the on-site examination is a necessary component to effective oversight. However, state regulators struggle with how to conduct an effective preneed examination program. Limited budgets are also requiring the examination process to be efficient.

Illinois stands out from the other two states in that it had audit and reporting procedures in place before its crisis arose. Illinois funeral homes have given diverging descriptions of their audit experiences. Some reported having regular audits, while others report they had never been audited. To better understand the Illinois procedures, I requested a copy of the Comptroller’s examination guidelines. That request was declined with an explanation that such a disclosure may make it easier for funeral homes to circumvent the audit process.

The Illinois audit process failed both the industry and the consumer because the trust procedures contemplate depository funding and relied too heavily upon the tax cost basis of the preneed trust fund. The examination did not incorporate procedures regarding the qualifications of the depository/trustee, the investment of the funds or the fees charged to the funds. A recent conversation with an Illinois examiner suggests that the Comptroller continues to follow the old audit procedures despite their deficiencies.

In contrast, the staff for the Missouri State Board of Embalmers and Funeral Directors has been giving a lot of thought to how the on-site audit should be conducted. Prior to the collapse of National Prearranged Services, the State Board had minimal preneed reporting and examination powers. The examinations conducted this year are the first in 20 years, and recent regulation proposals provide a clue to what concerns the State Board staff have from those initial exams (isolated insurance policies, old contracts, etc).

While the State Board tabled the staff concerns for future discussion, those issues will continue to be reflected in the procedures followed by examiners (and by the preneed seller reports submitted to the State Board). For Missouri preneed sellers, the situation may only add to their frustration. First, there is the uncertainty of what to expect when the examination is conducted. And then, there are the issues raised by the examiner regarding practices that funeral directors may have been following for years.

There is not much that can be done about the frustration that stems from the evolving examination process. The preneed transaction is changing, and regulators will have to adapt their exam procedures accordingly. But the State Board will serve an important role in keeping the examination process focused on the crucial issues. That focus will be defined by the exchange that occurs between the staff and the Board over specific audit findings. These exchanges serve to educate the staff and examiners on the business of the death care industry, which should improve the efficiency of preneed oversight.

As other Midwest states initiate new preneed examination procedures, their regulators must find different ways to ‘learn the business’. Pursuing the wrong issues will only waste precious resources and alienate funeral homes and cemeteries.