At age 78, Darrell Bennett should be spending his days on a Florida golf course. Instead, he is back in Michigan trying to salvage his life’s work. Like so many funeral home owners, Mr. Bennett handed over the keys to someone he trusted and took back a note for the purchase price. According to stories published by the MonroeNews and Fox News in Toledo, Brad Prochnow not only failed to make good on Mr. Bennett’s note, he also kept preneed payments made by consumers.

With rising cremation rates, preneed funding failures, and the allure of retirement, a growing number of funeral home owners are thinking about an exit strategy. The decline in funeral home profitability will require more of a plan than taking back a note.

Mr. Bennett hopes that the industry will learn from his experience and take steps to better safeguard consumers’ preneed funds. Another lesson to be learned is that a proper succession/exit strategy involves planning, financial analysis and due diligence. Hiring a consultant or an accounting firm may seem an unnecessary expense, but a view of Mr. Bennett’s interview would suggest otherwise (youtube).
 

While the Comptroller succeeded in getting SB1682 passed, and into law this past February, the office hasn’t revised its annual preneed reporting form to reflect the law’s changes. The report contemplates depository accounts and self-trusted accounts, which were eliminated by SB1682.

Funeral directors, accustom to the IFDA’s assistance, may also find the trust report section confusing. The annual trust statement requests a break-down of trust funds by principal and interest. With diversified portfolios, the report would make more sense if it sought deposit balances, income and account values.

With transition at the Comptroller’s office, funeral homes will be forced to muddle through the upcoming report. The Comptroller’s office will need to be lenient with funeral homes attempting to comply. Eventually, the Comptroller’s office needs to step back from the old forms and procedures, and seek input on how to revise the annual report for easier compliance by the Illinois industry.
 

Triggered by the NPS collapse, preneed reform rolled out of the Missouri legislature like a tsunami. When the funeral industry was slow to organize and respond to the situation, legislators worked with state officials to imposed sweeping changes. While SB1 does reflect input provided to the State Board by the industry, the law has flaws and omissions that need to be addressed. It will take time to determine how best to revise SB1, but for the current legislative session, I have a short Christmas wish list:

  • A continuing education requirement – as a profession, funeral directors have an obligation to stay abreast of new issues and changes. Aside from preneed reform, the industry is in transition in many aspects. Few professionals like forced educational requirements, but the time has come for the Missouri funeral industry.
  • Section 208.010.4 – no one can fault the local MO Healthnet worker who interprets this section to require an assistance applicant to purchase a Chapter 436 preneed contract. This law needs to be revised to clarify that other acceptable forms of final expense funds may be excluded for asset testing.

Merry Christmas!
 

The Illinois Funeral Directors Association is living out its own version of A Christmas Carol, with the Ghost of Yet to Come having painted a fate similar to that of Scrooge.

The court decision reported by the Memorial Business Journal* has all but sealed the fate of the Association. While the attorneys can continue to maneuver (and file appeals), the IFDA’s future is dependent upon how its board responds. But, the Ghosts of Christmas Past and Christmas Present offer little hope for the Association’s members. Everything rests on whether the IFDA Board can change course and demonstrate the leadership required to win back the trust of its current (and past) members.

If the situation in Illinois is like that seen in other states (including Missouri), the IFDA board must confront the frustration of larger operators who have felt ignored for years. Unlike Scrooge’s nephew Fred, many of these operators are neither paupers nor inclined to extend hospitality to an ailing, dysfunctional organization. But these are difficult times for the funeral industry, and operators must begin to search for common ground. The demise of an association will result in a vacuum that will be difficult to fill as reform picks up speed.

*Reprinted with permission from the December 16, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

When funeral arrangements are made subsequent to the death of a family member, the meeting with a funeral director can be very emotional. Addressing the paperwork required by law often adds to the stress of the arrangement meeting. Sensitive to the individual needs of the family, funeral directors attempt to balance legal requirements with the emotional state of the individual who controls the deceased’s disposition.

The funeral director’s arrangement paperwork is defined principally by the Federal Trade Commission’s Funeral Rule. The Funeral Rule requires that the goods and services selected at the conclusion of the meeting be itemized with costs. The intent is then to allow the individual to evaluate the selections so that he/she can make any desired changes.

Funeral homes must also comply with the Funeral Rule when selling funeral arrangements on a preneed basis. For guaranteed contracts, this would mean that an itemization statement may be incorporated by the preneed contract. To cut down on the paperwork prepared at the time of death, a funeral director may be tempted to resort to the statement of goods and services used for the preneed contract. While this practice is not prohibited by the Funeral Rule, several factual circumstances would make the practice a violation of the Rule.

The FTC website includes “Recent Funeral Rule Opinions”. The opinions include explanations about various fact situations that impact how the statement of goods and services must be prepared. For example, if the preneed contract includes cash advance funds, the funeral director must consider whether the original statement’s descriptions are still accurate. If the family changes any of the original selections (for example, a different casket is chosen), a new statement must be prepared. If the original statement includes a generic description of a casket, it may not comply with the Funeral Rule.

Using the preneed statement may seem a convenience in saving time and minimizing the stress of the arrangement meeting, but the better business practice would be to prepare a new statement of goods and services. The new statement of goods and services also serves to document the funeral home’s compliance with the terms of the preneed contract. With preneed audits looming in various states, funeral directors may regret the time they attempted to save in the arrangement meeting.

Depending upon Congress, theBereaved Consumer’s Bill of Rights Act of 2009 may impose the same Funeral Rule on cemeteries.
 

The Missouri State Board of Embalmers and Funeral Directors will take another step on December 7th towards the process of defining the examination process for preneed funeral contracts. True to mantra that has been repeated over the past several months: this is a work in progress that will evolve as more is learned.

The agenda for the December 7th meeting includes an attachment titled “Financial Examination Process – FAQ”. For the most part, the FAQ is rehash of what discussed at the Board’s October meeting. The FAQ sets out in general terms the steps that will be taken in an examination.

One issue that is not clear from the FAQ is whether the examination will review preneed contract forms for compliance with applicable law. If so, the seller’s contract forms should be included in the Paragraph 2a review request. Including the contract review as a part of the prep work for the on-site exam should cut down on the time spent on the seller’s premises.

Paragraph 2f should prove a crucial step in the process of resolving issues before they reach the Board. If the staff and examiners merely write up the issues and defer all decisions to the State Board, the Board will need to schedule more meetings.

Finally, the FAQ does not offer much with regard to the review of serviced contracts. While the staff’s proposal to review all outstanding preneed contracts drew the most comments, the serviced contract review could prove more instrumental to disclosing compliance errors or fraud.
 

According to Wikipedia,

Regulation is "controlling human or societal behavior by rules or restrictions." Regulation can take many forms including legal restrictions promulgated by a government authority…….

So, regulators are charged with the task of interpreting “legal restrictions” and determining what businesses can or cannot do. When the applicable law is well drafted, and further defined by regulations, a business has the means to research compliance and develop appropriate practices and procedures. A business may only need to seek regulatory approval when implementing a novel practice. In the context of Securities regulation or ERISA, procedures exist for businesses to seek written guidance before implementing a new practice. But, as California funeral directors have found out, that is not the case with preneed regulation.

The dispute between the California Funeral Directors Association and the DCA’s Cemetery and Funeral Bureau was widely reported when allegations of mismanagement and lost funds were made. In typical fashion, the Bureau set out its findings regarding the Master Trust. The Association’s administrative subsidiary (the “FDSC”) responded. The Bureau was not satisfied, and a war of written responses ensued. Frustrated with the Bureau, the FDSC has now filed for an injunction. (For a detailed explanation of the situation, click here for a recent Memorial Business Journal article.*)

The FDSC would seem to be asking the Bureau to step out of the traditional regulator’s box, and discuss some practical approaches to the issues. We’ve heard your positions and criticism, but tell us how to reconcile these dated, and somewhat disjunctive, code sections, and apply that to today’s facts and circumstances.

History has a way of repeating itself. In 1988, after years of audits, the IRS decided to force a universal method of income reporting on preneed trusts by issuing Rev. Rul. 87-127. Other than terminating reporting methods that it found objectionable, the Service hadn’t given much thought to whether the industry could comply with the new reporting requirements. Nor did the Service think to provide compliance procedures. For more than eight years, the industry struggled to find a way to comply with the grantor reporting requirements. (Some funeral directors are still struggling today.)

If effective preneed reform is the goal, death care regulators need to do more than inform operators what they cannot do. These laws tend to be ambiguous, and regulators need to participate in the process of finding workable solutions.

*Reprinted with permission from the November 18, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

Yesterday, the St. Louis Post Dispatch reported on the federal indictments handed down against six NPS officials. The article includes two statements that hint at the legal strategies to be employed by NPS and federal prosecutors.

"We have anticipated this (indictment) for a number of years, and he is looking forward to finally confronting these allegations line by line in court," Rosenblum said.

In 1992, Missouri filed a civil suit against National Prearranged that led to a court agreement on minimum deposits into trust accounts. That deal wasn’t followed, and the defendants concealed their transactions from regulators in Missouri and other states, the federal indictment alleges.

The first statement, made by Doug Cassity’s attorney, is a posturing statement that warns of a long public trial. The message is twofold: we’re going to make you spend a lot of money and we’re going to flyspeck the actions of Missouri regulators. Mr. Cassity’s legal team will likely assert that NPS complied with Missouri law, and did nothing to conceal its actions. Earlier this summer, NPS attorneys commented that the company was doing fine until regulators intervened in 2008. (If that were the case, why would Mr. Cassity have been anticipating the indictment for a number of years?)

Basing a defense on any failure of the State Board serves as a subterfuge. However, the federal prosecutor must respond by showing how NPS concealed its actions. With some Missouri funeral homes criticizing the former Attorney General for having let NPS off the 1992 hook, a NPS trial serves as a stark reminder to Governor Nixon of the lax enforcement of Chapter 436.

Missouri funeral directors should anticipate a get tough response from the Attorney General’s Office like that taken recently in Bates County.
 

In a move to remain autonomous from the funeral industry and its oversight, the Missouri cemetery industry met with its regulator during the summer of 2008 to discuss reform legislation. Disagreements precluded effective legislation from being passed in 2009, but extensive changes was passed in 2010, and became effective on August 28, 2010. Now, the Missouri cemetery regulator has the task of implementing the law, and notifying cemetery operators and trustees of the new requirements.

Missouri’s Cemetery Endowed Care Trust Law (Sections 214.270 et seq) is administered by the Office of Endowed Care Cemeteries. A brief summary of the new law’s requirements can be found on the OECC’s website.

The new law makes substantial changes to perpetual care trusts (Section 214.330), sales documents (Section 214.282) and the preneed merchandise sales (Section 214.387).
Some perpetual care trusts define capital gains as income.

The new law incorporates the uniform principal and income act, precluding capital gains from being treated as income. This change is being imposed retroactively to existing trusts, thus forcing many cemeteries to amend their trust agreements. But, the new law does authorize fixed distributions that can exceed the trust’s income.

The new law also imposes the following requirements on perpetual care trusts:

A. Trust records must be made accessible to OECC examiners.
B. Trust instruments must be filed for approval.
C. Sales documents for interment rights and merchandise must comply with the Law, or the contract can be voided with interest refundable to the consumer.
D. The OECC can order the trustee to suspend your PC distributions.
E. PC deposits must be made on a monthly basis (instead of semi-annually).
F. The PC requirements have been raised for certain interment rights.

With regard to preneed, cemeteries must start from scratch. The prior law provided a low trusting requirement for services (opening and closings), and a segregated account requirement for marker and monument sales. To avoid the funeral licensing and trusting requirements of SB1, Missouri cemeteries must now comply with RSMo. Section 214.387. (To read a prior post on the new trusting requirement click here.)

Section 214.387 will require a cemetery to establish either an escrow account or a new trust, and comply with the following:

A. Escrow agents must be independent of the cemetery.
B. Escrow agreements and trust agreements must be filed with the OECC for approval.
C. Twenty percent of consumer payments may be retained but all subsequent payments must be deposited to a trust or an escrow account.
D. If a trust is used, all income must remain in the trust.
E. Deposits must be made within 60 days of receipt by the cemetery.
F. Preneed reporting to the OECC will begin in 2011.
G. New sales contract forms are required.

Banks that serve as a cemetery trustee will soon be receiving a letter advising of the new requirements. Missouri cemeteries will have more than New Year’s resolutions to prepare for 2011.

 

Missouri is one of the few states that does not impose a continuing education requirement for funeral directors. Where continuing education is required, the state funeral director association typically sponsors programs that satisfy the CE requirements, and provides revenues needed to supplement the association’s budget needs.

The passage of SB1 has provided the Missouri Funeral Directors and Embalmers Association with an opportunity to reach out to members (and non-members) with classes about the new law’s requirements. However, the MFDEA faces challenges in reaching the Missouri industry: attendance is not mandatory, the economy is down, funeral directors are taking a wait and see approach, and the interpretation of the law’s requirements by the Board/staff is muddled.

Since the law’s passage in August 2009, Board members and staff have expressed frustration with the industry. Funeral directors did not attend legislative hearings or Board meetings in the numbers that were anticipated. Response to the new licensing requirements has been slow, and accompanied by complaints.

The past two years have been demanding and time consuming for the Board and its staff. Those two years have been marked by trial and err processes, some of which have succeeded and some of which have been jettisoned. For an industry that rarely attends a Board meeting, the result has been confusing.

The proposed examination procedures discussed at the State Board’s October 27th meeting include controversial provisions that will likely change before the Board’s meetings in December. Reviewing every outstanding preneed contract of every seller would be time consuming and excessive. Under certain circumstances, such a procedure may be warranted. If a seller cannot provide indicia of what his outstanding preneed liability is, then the Board has no recourse but to look for every contract.

However, there will be an on site examination of every seller. And, there will be a review of at least a sampling of the seller’s contracts. The exam will also involve a review of the performed contracts. At the conclusion of the review, the examiner will conduct an exit interview to advise the seller of the findings. These minimum procedures will provide the Board and the staff an opportunity to educate each seller regarding issues on non-compliance. But, the next steps of the examination process will provide sellers an opportunity to educate the Board and its staff.

The examination procedures represent the best efforts of the staff, with input from the Board and other states’ preneed regulators. Preneed is not only unique from state to state, but often from seller to seller. And, there are Missouri funeral homes that will argue the current Board membership is not a fair representation of preneed sellers.

So, after the exit interview is conducted, the examiner will return to the Board offices to prepare a report. That report will be sent to the seller to so that it may provide comments, rebuttal and proposed corrections. Then the examiner and staff will have to opportunity to revise the report that is filed with the State Board. Then the Board will decide what actions should be taken. If the Board/staff and the seller are in disagreement, a hearing will follow.

The rebuttal report and Board hearing will provide sellers the crucial opportunity to educate the staff and the Board about practices and procedures that were not adequately addressed in the Chapter 436 hearings, or subsequent Board meetings. Pressures to pass a law, and then implement that law, have resulted in the Board (and staff) pushing aside issues. One on one with the Board, sellers will have the opportunity to slow the process down and address SB1 and how it’s being interpreted and applied. For staff that has only dealt with problem programs, or Board members familiar with their approach to preneed, the rebuttal report and hearing will continue Missouri’s preneed educational process.