That’s the question a member of the Missouri State Board asked of his staff last Wednesday during a discussion of controversial examination procedures. Prior to the NPS fiasco, the answer to that question would have been “the Board is”. While SB1 (appropriately) continued to vest preneed supervision in the State Board, the new law also vests concurrent authorities in other state bodies.

From state to state, preneed supervision is assigned to either elected politicians, appointed agency directors or industry boards/commissions. As the Missouri Board was reminded this past week, the criticism made of vesting preneed supervision in an industry board often includes the characterization of having “put the fox in charge of the chicken coop”. But the advantage of having an industry board as the preneed supervisor is the experience those industry members bring to a complicated transaction.

If the Missouri funeral industry looks east to Illinois, it will find peers regulated by an office with a Tuesday election. The Comptroller candidates who would rather transfer preneed to another state agency than wade into a crisis that offers few answers. If Missouri funeral directors then look to the west, they will see that the fate of Kansas cemetery regulation is also dependent upon Tuesday’s elections. But after a year of meetings and warnings that changes are coming, the Kansas Secretary of State election could mean a new direction (or no direction at all).

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

While Missouri funeral homes may be frustrated by the past year’s changes, the Missouri reform process has been slow and measured in part because the Division of Professional Registration is contemplating its role when someone asks “Who’s the Boss?” In the future, effective preneed supervision must be a shared responsibility.
 

The Missouri State Board of Embalmers and Funeral Directors has released its proposed preneed examination procedures. The release comes just 24 hours before the Board’s October 27th meeting, and so few funeral directors will be prepared to ask questions.

The proposal contemplates different procedures for ‘compliant sellers’ and ‘non-compliant sellers’. With most of the industry concerned about some issue of compliance, the proposal begs the question how the determination of non-compliance is made. The timing of the release and the October 31st renewal deadline suggest that the failure to timely file a properly prepared seller’s renewal may be the easiest way to fall into the non-compliant stack.

The October 27th meeting only allows an hour of discussion of the proposal, so the industry will have to anticipate the time for questions and discussion will occur at the Board’s December meetings.
 

With the exception of a few states, each form of preneed funding has its own statutory requirements. Consequently, different contract forms are required for each method of preneed funding. So, what does this mean for the consumer worried about the safety of funds paid to the funeral home or cemetery.

Among the pecking order of contract forms, insurance funded contracts generally tend to be among the more compliant forms. The larger preneed carriers understand that if they are to win the funeral home’s business, the carrier must be able to provide the funeral home with the preneed contract form. When there is a problem with an insurance funded contract, often it is because the agent has chosen the wrong form. For example, the recent law change in Illinois requires new disclosures to be made in the contract form. If the agent pulls an old form, the contract is in violation of SB1682.

In terms of compliance, the trust-funded contract may place a distant second depending on who sponsors the trust (and whether the consumer’s state requires the filing of the preneed contract form). While the national companies (and some state associations) are diligent about having their contracts reviewed for compliance, that has not been the case for many independently owned funeral homes. While state associations are due credit for bringing a higher level of compliance to their state’s contract form, some associations (such as the contract forms used by the IFDA) set a very low bar.

The most suspect of the funding methods contracts is the depository (or self administered) account. With this funding method, the preneed seller is going solo without the assistance of an insurance company, the state association, or even a fiduciary. All too often, the operator assumes a contract is a contract, and ‘borrows’ a contract form from another funding method. Or worse yet, the funeral home uses the FTC at-need goods and services form as the preneed contract.

To prepare for a regulatory examination, sellers need to confirm they are using the correct (and current) contract form. Within each funding folder, the seller should establish a current contract form folder and a historic contract form folder. Similarly, the operator will want to maintain a current GPL and Outer Burial Container price list and a historic GPL and OBC price list folder (going back indefinitely).

While many consumers tend to purchase preneed based on personal trust earned by the funeral director, contract form compliance demonstrates that funeral director’s understanding of the preneed law. Preneed contract form compliance is also the consumer’s protection should the trusted funeral director ever be hit by a bus. The next owner of the funeral home will be bound by the terms of those preneed contracts, not necessarily the oral assurances of his predecessor.
 

For the past several years, most preneed sellers were more likely to have been audited by the IRS than their state funeral or cemetery regulator. That will likely change in the next year or two for operators in a Midwest state.

The common response to an IRS audit would be to throw the relevant records into a box the weekend prior to the scheduled trip to the examiner’s office. But since the point of sale for preneed is at the funeral home, most states begin the examination process at the funeral home. In some states, the historical approach was to initiate the exam with little or no advance warning. Under such circumstances, it would behoove the preneed seller to organize and maintain his preneed records so as to expedite the examination.

While the duty to prove compliance is upon the licensee, few state death care regulators have issued any guidance regarding preneed record requirements. One challenge to providing such guidance is that a different set of rules is required for each method of preneed funding. Generally speaking, cemeteries are confined to trust funding because deliveries are made prior to death (thus eliminating insurance for much of what the cemetery sells). However, funeral homes often use both trust and insurance, and often multiple insurance companies and multiple trusts (Pre-88, Post-88, New Law, Old Law, my trust, state association trust, etc). And then some states also allow for depository accounts.

Sellers should set up different ‘boxes’ (or file drawers) for each method of funding. If the seller has offered insurance, trust and depository accounts, then plan on three drawers of documents. And if the seller has used Forethought, Homesteaders and NGL, three dividers will be needed for the insurance drawer. Similarly, the trust-funded drawer should have a Pre-88 folder, a Post-88 folder, and a new law folder. A folder for each bank used to fund a preneed contract should divide the depository drawer.

For the funeral home that approached the different sources of funding as diversification, this benefit comes at the cost of time to organize and maintain the necessary paperwork. Those operators that take the time to prepare and organize their records will minimize the examination’s disruption to their business, and the potential for citations for non-compliance.

In upcoming posts, the content of those folders will be addressed.

 

It seems paradoxical to see preneed regulators ramping up audit programs while state budgets are being slashed to the bone. Yet, several I-70 corridor states will soon implement new preneed audit programs.

Missouri’s preneed funeral audits will be funded out of a combination of license fees and preneed contract fees. Missouri’s new cemetery law did not provide for any additional fees to offset the expense of a new reporting system and audits, and so, one most anticipate the state will look to recover from its expenses from non-compliant cemeteries.

Colorado had a modest, but significant, law change: the preneed regulator was granted authority to assess fees against preneed sellers to fund examinations. With a source for funding, new audit procedures have been submitted for approval.

With regard to cemeteries, Kansas quietly promulgated a regulation authorizing a $20 per preneed contract fee. Kansas would like to use a portion of those fees to implement a preneed contract database that would provide data that would be used in cemetery audits.

Nebraska also has plans to implement a new preneed database for auditing master trusts. In the absence of funding legislation, the Department of Insurance must use a carrot and stick approach with the state’s larger preneed sellers. Similar to the Illinois approach, the Nebraska stick would be the assessment of audit expenses against the non-compliant preneed seller. Illinois’ recent preneed law change (SB1682) raised the possible assessment from $7,500 to $20,000. For the preneed seller found to have issues of material non-compliance, the costs of a full audit could cost tens of thousands of dollars. And then there’s the issue of funding up deficiencies. As the Illinois law spells out, the audit penalty cannot be paid out of the preneed trust.

For preneed sellers from Illinois to Colorado, it isn’t a matter of whether there will be exams or audits, but when. For some states, those exams will come sooner than others. Missouri is currently training new examiners, and could well release them on those sellers who miss the October 31st renewal deadline.
 

The financial fallout from the failures of NPS and IFDA regarding compliance with state and federal laws has accelerated the decision of many funeral directors to switch to the non-guaranteed preneed contract. That non-guaranteed contract represents a fundamental change in the relationship that is established between the consumer, the funeral home and the preneed fiduciary.

The trust-funded preneed contract establishes a fiduciary account that has two beneficiaries: the funeral home and the consumer. It is quite common for fiduciaries to administer trusts with beneficiaries with competing interests. With competing beneficiary interests, the fiduciary must look to the trust provisions, and applicable state law, to determine who may exercise discretionary authorities regarding the trust.

State preneed laws are written in response to existing practices, and historically, the guaranteed contract defined preneed practices. When the funeral home sells a guaranteed contract it is the funeral home that assumes the risk of the trust’s investment performance. With that risk, preneed statutes typically vest in the funeral home the authority to establish the trust, to hire and replace the fiduciary, and to participate in decisions such as investments. State preneed laws have generally been vague or silent about administrative and accounting issues, and fiduciaries have turned to the funeral home for instructions regarding accounting and income reporting.

With the non-guaranteed contract, the funeral home has both deferred the sale of the funeral (until death) and transferred the risk of investment performance to the consumer. Appropriately, the consumer may have questions to put to the funeral home, the fiduciary and the preneed regulator:

  • Must the fiduciary follow a different investment policy with regard to funds held for guaranteed contracts versus non-guaranteed contracts?
  • How is trust asset value allocated to the contracts?
  • How is income and expenses allocated among the types of contracts?
  • How will income and expenses be reported?

For many funeral homes, the latter issue (the reporting of trust income) drove both investment policies and accounting procedures. No one likes to get a tax statement on a preneed contract, and so many funeral homes went to tax exempt bonds in belief this relieved the trust from reporting income to the consumer. But, the IRS requires tax-exempt income to be reported because it impacts the taxability of social security benefits. If the consumer hasn’t received an accurate statement of income and expenses, his account has exposure for a $50 penalty if the trust isn’t being reported pursuant to a Form 1041QFT. (This accuracy reporting penalty more than likely led the IFDA corporate fiduciary to effect a Section 685 election for all master trust accounts.)
 

For the upcoming wave of non-guaranteed contracts, there are only two permissible methods of reporting income: grantor statements to the consumer or a Section 1041qft. Regardless of which income reporting method is used, the funeral home and fiduciary can not simply park the consumer’s funds in a tax-exempt fund. The preneed trust’s allocation of income and expenses for tax reporting will be similar for both approaches, thus making the trust’s tax return a tool for regulators when evaluating the fiduciary’s administration and accounting.
 

The Texas preneed regulator may have left some consumers scratching their head. On September 16th, the Department of Banking issued a press release that a cease and desist order had been issued to prohibit a Lubbock funeral home from selling trust-funded prepaid funeral contracts. But, a Lubbock newspaper reported comments from the Department of Banking that the funeral home could still sell insurance-funded prepaid funeral contracts. So, how is the funeral home can sell one form of preneed but not another?

With insurance-funded preneed, the funeral home typically acts as an agent for the insurance company. The insurance company provides a preneed contract form, and establishes procedures regarding the administration of premiums. The insurance company also provides consumer statements and regulatory reports. Essentially, the funeral home has a minor role in the preneed transaction once the insurance application is completed.

With trust-funded preneed, funeral homes either act as their own ‘seller’ or they contract with a third party sales organization. In many states (such as Missouri), the state association master trust is a third party seller and assumes the seller’s compliance responsibilities. Those responsibilities include contract compliance (preneed contract form and trust agreement), consumer payment accounting, trust allocations, recordkeeping, and regulatory reports.

Apparently, the Lubbock funeral home acts as its own seller. DOB auditors cited the funeral home for poor recordkeeping, and the failure to deposit consumer payments. There is nothing in the press release (or news article) to suggest the funeral home was guilty of any criminal act or that preneed funds are missing. It is quite possible the funeral home’s inadequate records contributed to its failure to make the required deposits.

The funeral profession is on call 24 hours a day, seven days a week, and providing service to families comes before everything else. And, for many funeral directors, preneed compliance is an intrusion on the time that should be devoted to families.

But, regulators are warning that if the services offered to families include trust-funded preneed, the funeral home cannot push the preneed paperwork into the bottom drawer.
 

Regulators in California, Missouri and Kansas have already implemented strategies that are intended to make preneed fiduciaries more accountable to the consumer. Over the past few weeks, this blog has covered new reporting requirements in Missouri and the audit drama playing out in California. In Kansas, the fiduciary for a failed cemetery has been sued for various breaches of state law. Because the pool of experienced preneed fiduciaries is relatively small, the events transpiring west of the Mississippi River will influence many Illinois fiduciaries to spend some time with SB1682.

One SB1682 requirement that has already caused a rift between funeral homes and preneed fiduciaries is the annual statement requirement. Illinois law now requires the trustee to report to the preneed purchaser receipts, disbursements, and “an inventory of the trust” (including expenses).

Recent statements reflected substantial account decreases, and that has strained the relationship between the funeral home and some of its consumers. While funeral homes would rather avoid inflaming consumers with news about deteriorating accounts, the fiduciary is bound by law to provide the consumer an annual accounting.

IFDA members can deflect some consumer complaints, but eventually, the buck will stop with the funeral director. To regain consumer confidence, funeral directors should be prepared to show they have a plan for the funds entrusted with them.
 

On September 9th, Missouri’s State Board of Embalmers and Funeral Directors conducted its first public meeting since forwarding new (and extensive) reporting requirements to preneed funeral sellers and providers. In no mood to entertain complaints from the industry, the Board advised licensees to “do their best”. In response to criticism of the new trust reporting requirements, the Board advised that fiduciaries are only being required to certify individual account data regarding transactions for which they have oversight responsibilities. Fiduciaries are not being required to certify the preneed contract data for which the seller is responsible (purchaser and beneficiary names and addresses).

What the preneed fiduciary is being required to certify is aggregate trust data regarding deposits, income and expenses. With regard to each preneed contract, the trustee must also certify the 5% origination fee and 10% sales expense that have been paid to the seller, and the market value of each contract. The State Board advised the industry that these reporting requirements will likely change next year. For example, the current report does not contemplate the amount deposited to trust per contract, or whether the preneed contract is guaranteed or not (which is necessary to determine whether the 10% sales expense is appropriate).

The course of reporting requirement changes will be influenced by the industry’s efforts as a whole to comply with the October 31st renewal requirements, and the January 31st voluntary reporting request.