The Missouri State Board of Embalmers and Funeral Directors met June 15th and 16th to consider legislative proposals offered for technical corrections to SB1. In a prior post, this author took exception to one of the proposals made by a Board member to raise Missouri’s trusting requirement from 85% to 100%. However, a majority of the State Board did not, and voted to include 100% trusting among its proposals to the Missouri Legislature later this year.

While the submitted proposal stated this was ‘a consumer protection matter’, the Board discussion was addressed to the fact insurance funded preneed provides the funeral home a better return. Trust funded preneed was criticized for lacking the investment vehicle to recover the 15% of consumer payments retained by the funeral home when the contract is sold. So, how does the 100% enhance consumer protection?

Historically, trust funded preneed in Missouri has been a liability to industry. When allowed to keep 20% and withdraw all income, funeral homes have been left to service a contract on an amount that may not even cover the costs of merchandise after 15 years.

SB1 takes three key steps towards rectifying that situation. First, the ‘retainage’ the seller may keep has been reduced from 20% to 15%. Second, the trust is now required to accrue all income. Third, and most elusive, SB1 now allows sellers to pool their trusts for investment purposes.

Prior to SB1, sellers were prohibited from commingling their trusts. The accounting systems available in the 1980s were not sophisticated enough to track both consumer and seller funds when multiple sellers were involved.

In the defense of the Board’s position, a trust that averages a gross return of 4% will be hard pressed to pay the funeral home enough to cover its at need prices in 10 years. As more funeral homes are pressed to provide preneed, the growth in ‘guaranteed preneed’ eats into the long-term profitability of the business. An indirect answer to the justification to the 100% trusting requirement.

The weakness in this position lies in the alternative that funeral homes are forced to take: insurance funding and the costs to the consumer.

If the funeral home has to offer preneed, and it has costs associated with providing preneed, then insurance funded preneed becomes the vehicle of choice. One of the knocks on insurance is its costs to the consumer when coverage is purchased with installments.

For the older consumer who cannot afford a single premium policy, the financing of the policy over five or ten years will cause the cost of the funeral to increase substantially.

All forms of preneed are beginning to include separate charges or fees to the consumer. It becomes incumbent upon the consumer to approach the preneed transaction with more questions, including: How much is this going to cost me?
 

Several states have passed laws in the past few years mandating greater preneed oversight. But with state budgets in decline after the 2008 market crash, regulators are hard pressed to find a way to pay for consumer protection.

Colorado’s new law simply states that the contract seller shall bear the cost of its examination.

In failed legislation earlier this year, Kansas sought to finance preneed cemetery oversight through a per contract fee. Sources indicate that Kansas will attempt to implement a $20 per contract fee later this year through new regulations.

Missouri took a hybrid approach last year through seller/agent/provider license fees and a $36 per contract fee. Ten months into the mission to provide preneed oversight, the State Board of Embalmers and Funeral Directors do not have enough data to know how well this approach will work. The first reporting period is still four months away, and no one knows how many preneed contracts have been sold since August 28th. As a consequence, license fees will likely be increased, which hits the smaller operator the hardest.

In a 180 degree change from last year, the State Board is mulling whether to increase the per contract fee, knowing that most sellers pass that fee on the consumer. In response to pressures from consumer advocates, the State Board had originally taken the position that sellers should be required to absorb the $36 fee. The reality is that the costs of preneed oversight are passed on to the consumer in one form or another by the preneed seller, and the per-contract fee provides transparency to the consumer.

Agencies, such as the State Board, that are charged with licensing preneed sellers and agents, need to charge some form of fee to cover the administrative costs of licensure. However, there is justification that the transaction (i.e. the consumer) should primarily bear the cost of examinations and oversight. On the other hand, it is not equitable that consumers bear the costs of disciplinary proceedings for the operator that fails to materially comply with the law.

With the per-contract fee, consumers and operators are provided a clear benchmark of the costs of their state’s preneed protection program. Such a fee will place a burden on regulators who must budget for fixed program costs (such as dedicated staff).
 

The Comptroller’s Office mailed out letters to funeral homes last week advising how to report the first contribution to the Pre-Need Funeral Consumer Protection Fund. The letter tracks the first few paragraphs of the “Senate Bill 1682 Information” page from the Comptroller’s website.

The funeral home letter includes two documents: a Fee Payment Record and a Bank Confirmation Form. For each contract sold, the funeral home must deposit $5 to the Consumer Protection Fund. The $5 may be funded out of the consumer’s payments. The Fee Payment Record will be used to record each pre-need contract for which the funeral home has made a deposit.

The Bank Confirmation Form is intended to establish an audit trail for the mass exodus of preneed funds from self trusted accounts, and from the IFDA master trust. This form serves to put funeral home’s pre-need trustee on notice that it will be required to provide records to the Comptroller’s Office.  

The Comptroller’s letter to funeral homes omits information that the website page provides consumers. Fiduciaries that are accepting Illinois pre-need trusts should take note of the Comptroller’s consumer information:

Notice to Consumers — Your independent trustee must provide an annual notice to all consumers of the status of their funds including an explanation of any fees charged by the trustee, an explanation of the purchaser’s right to a refund and identification of the primary regulator of the trust or insurance company under state or federal law. Here are some suggestions for ensuring compliance with the new provisions:

· Be sure the corporate fiduciary or insurance company that you use is aware of this requirement.
· Be sure the corporate fiduciary or insurance company provides you with a copy of the annual notice.
· Retain a copy of this annual notice in your file.

Historically, preneed fiduciaries have defined their duties by treating the death care operator as the trust beneficiary, and the trust as a single account. The Comptroller’s trustee requirements reflect a trend that forces the fiduciary to factor the consumer into the beneficiary equation, and to provide an accounting on an individual contract basis.

Missouri funeral homes will get their first glimpse of their State Board’s proposal for self reporting for preneed sales.  Under the prior law, preneed sellers merely reported the number of contracts sold and their aggregate sales price. 

For Missouri regulators to properly assess whether ‘old’ Chapter 436 trusts and joint accounts are properly funded, the new reporting requirements will have to ask for data that funeral directors may find intrusive.  But the state with the trusting requirements closest to Missouri’s has been self reporting for many years. 

Iowa makes its reporting forms available through its website.  Preneed sellers, preneed agents, insurance companies and banks each have their own reporting form. 

By addressing the forms now, Missouri’s State Board will be affording funeral directors 3 months to prepare reports on all existing business.  Depending how well the funeral home has kept its records, this should be adequate to meet the October 31st deadline.

Funeral homes that used either trusts or joint accounts under the prior Missouri law may want to look at Iowa’s form to anticipate what individual contract data could be required.  The Iowa forms also provide instructions and Q&A sections. 

The next round of legislative proposals have been posted to the State Board of Embalmers and Funeral Directors website. At the top of the list is whether the trusting requirement should be raised from 85% to 100%. The proponent believes this will enhance consumer protections. He is not alone.

The Illinois Legislature heard the same from Rep. Dan Brady last year. And, the Funeral Consumers Alliance has been advocating the same position for years. But, does this requirement truly enhance consumer protection?

Competition dictates the type of preneed program a funeral home maintains. Metropolitan funeral homes often have no choice but to maintain proactive programs that require training, marketing, management and dedicated staffing. To offset program costs, the funeral home must receive revenue from the preneed sale. Setting the trusting requirement at 100% forces the funeral home towards insurance products, and their commissions. A legislative agenda that forecloses the trusting option makes little sense when insurance played a major factor in both the NPS and IFDA failures.

For the consumer’s perspective, a major weakness in the old Missouri law was the preneed seller’s right to withdraw income from the preneed trust. Without the accrual of income, the preneed contract became less portable as it aged. While SB1 may have other trust issues to address, it did fix the income accrual issue.

Some have argued that SB1 did not go far enough in providing the consumer refund rights to the income earned by a trust. The seller of the guaranteed contract is afforded the right to retain the income on cancellation because he takes the risks associated with the price guaranties. But prior to SB1, there was little authority for the non-guaranteed contract. If the preneed purchaser places a premium on refund rights, then the non-guaranteed contract authorized by SB1 is the better option.

With regard to Illinois law, the glaring weakness regarded the self-trusting provision and the lack of fiduciary oversight. With trusting already set at 95%, many larger funeral homes were already dependent on insurance funding. Deprived of revenues to maintain a trust program, funeral homes relied upon the IFDA. The lack of oversight and transparency lead to abuses by past IFDA leadership.

SB1682 took the crucial steps of requiring corporate fiduciaries, and imposing the prudent investor rule. But a question remains about who should provide oversight to the preneed fiduciary.

So, how does 100% trusting further enhance consumer protections in either Missouri or Illinois?

The debate over insurance versus trust has been waging for twenty years. While each has its strengths and weaknesses, the death care industry has done little to offer the consumer meaningful options for funding and price guarantees. Establishing barriers to either form of funding (or to non-guaranteed contracts) will do little to enhance consumer protections.
 

Small town funeral homes often lack the volume of business to warrant a ‘preneed program’. And, if there is no competition, why hassle with the costs of preneed compliance. The short answer is reputation and integrity.

A recent article about an Iowa funeral director suggests the operator may have only handled a hand full of preneed transactions a year. But rather than establish a trust, he placed the consumer’s funds in the funeral home’s operating account. Insurance policies were also handled improperly.

These ‘issues’ began to surface with the annual report filed with the Iowa preneed regulator a year ago. The next annual report suggested further problems, and now the operator must pay a civil penalty of $2,500, bear the expense of a CPA audit and a new trust. This is a stiff penalty for a small business, but not such that would put the operator out of business. As the comments to the article suggest, the greater hit could be to the operator’s reputation.

 

The State Board of Embalmers and Funeral Directors gave notice last week of hearings to be held in June regarding proposals made to correct or revise SB1.

If the Board follows the course taken in meetings held earlier this year, the proposals will likely be published to the Board’s website. These postings will provide Missouri licensees and preneed consumers the opportunity to provide the Board feedback on the proposals. Appropriate feedback and questions would likely be incorporated by the Board in its questioning of the proposals.

The following hyperlinks provide the proposals and explanations of the Preneed Resource Company. Start drafting!
 

The Wall Street Journal has long been viewed as a leading source of business and investment news. But last weekend, the WSJ ran a short article on preneed, and demonstrated its lack of understanding of the transaction.

The article attempts to characterize preneed as an investment, and then explores issues such as cash surrender charges, cancellation penalties and the NPS failure. This is all very misleading because preneed is not an investment, or a security, but rather the purchase of funeral goods and services.

Those who are considering the purchase of preneed should not view the transaction as an investment. The Securities Exchange Commission determined decades ago that the transaction is a purchase of goods and services, not an investment. While the transaction may be entered as a ‘hedge against rising costs’, there are forms of preneed that do not provide such protections.

The WSJ article ends with advice that also misses the mark. An elder law attorney suggests that a simple trust, costing “a few hundred dollars”, could substitute for the preneed transaction. Unless the attorney is considering individual trustees who serve without compensation, the combined cost of the trust document and the initial corporate fiduciary fee could be several hundred dollars. The corporate fiduciary will then have a minimum annual fee that will be ‘a few hundred dollars’.  With a corporate fiduciary, this rather simple plan could end up costing ‘a few thousand dollars’.

The next time the WSJ reports on preneed, it should do its homework, and not use the transaction as weekend filler.
 

Kansas regulators want to be able to put a new sign in front of a troubled Hutchison cemetery: Under New Management! And, it would please the state of Kansas and the city of Hutchison if that new management team does not include them.

State and local officials appreciate that the grave lot owners, and the community, are better served by keeping cemetery ownership in the private sector. So, when the operator’s noncompliance threatens the cemetery’s viability, regulators must act, or eventually face the liabilities of running the cemetery.

Some Hutchison citizens may be puzzled why the recent plea does not include mandatory time. Getting the cemetery into the hands of a reputable operator has a higher priority, and the old owner’s cooperation may be needed. Fulfilling preneed contracts and addressing permanent maintenance trust deficiencies will better serve the Hutchison community.

The Kansas regulators must now find a suitable successor.
 

Give the State Board credit for attempting to clarify how insurance assignments must be handled for compliance with Missouri laws. 

For several months, the State Board has sought clarifications from MO HealthNet regarding spend-downs. On May 12th, the Board emailed to the industry new MO HealthNet guidelines for insurance assignments. One day later, the legislature passed HB 2290.

HB2290 addressed a gaping hole left in Chapter 208 when SB1 was passed. Chapter 208 excluded funeral contracts that complied with Chapter 436 provisions that no longer exist. The drafters of HB2290 took a broad-brush approach to the problem. Having done so, funeral homes and cemeteries are left to ask MO HealthNet and the State Board new questions.

 

By the bill’s reference to Chapter 436, must a “Burial Plan” or “Preneed contract” comply with the requirements of SB1? This would be a defeat for cemeteries who have the option of selling preneed under Chapter 214. 

 

If an insurance policy was not purchased with the intent to fund a preneed contract, why then, bring the true spend down into Chapter 436 (and further burden the Board’s oversight functions)?

The MO HealthNet guidelines can be found on the State Board’s website.

 

Missouri funeral homes should note that the guidelines impose a duty on the funeral home to notify the Department of Social Services when excess funds remain from a participant’s preneed contract. If the preneed contract was irrevocable, that should flag to the funeral director that he should make an inquiry.