I learned the preneed business from an organization that used the term “preneed counselor”. Consumer advocates, and many funeral directors, rail at that characterization, and insist a salesman is a salesman, no matter what you call them.

For purposes of debate, I would agree that all preneed counselors are salesmen. However, not all preneed salesmen are counselors. While both have to make a living, the counselor places an emphasis on education. But, the distinction between the counselor and the salesman is made difficult by the fact both tend to be compensated on the commission basis. This rubs the public and many funeral directors in the wrong direction; a fact not lost on proactive preneed sellers.

The Catholic Cemetery ran “Point – Counter Point” articles in its December and January editions on the advantages of commissioned-based programs and salary-based programs. Rich Peterson, of the Archdioceses of Seattle, led off with a description of how his “Pre-Need Sales Counselors” perform outreach to a Catholic population that is scattered across a large geographic area. Demographics and geography force the Pre-Need Sales Counselor to go to the families.

Richard Touchette, of the Dioceses of Albany, uses salary-based “Family Service Representatives” to perform outreach to an ‘entrenched’ Catholic population. In contrast to its Seattle counterpart, most of the outreach performed by the Family Service Representatives is done at the Dioceses’ cemeteries.

As Mr. Peterson explains in this article, all preneed programs have costs such as training, staffing and advertising. Mr. Peterson could have gone farther and addressed the costs associated with contract administration, regulator compliance and document development. However, the program that must seek out its targeted audience will always have greater costs per sale. These organizations must be more “proactive” in making their connections to families. The salesmen must spend substantial time away from the cemetery’s offices. Cemeteries and funeral homes with ‘heritage’ may adopt a more passive approach to preneed marketing, and can better handle preneed sales with a salaried staff that remains on the grounds.

Another factor in the commission vs. salary issue is applicable state law on trusting requirements. When a state sets its trusting percentage at 100%, or even 90%, the preneed program must be funded to some degree from the cemetery’s general revenues. Mr. Touchette’s cemeteries are subject to a much higher trusting requirement than Mr. Peterson’s. Consequently, the Dioceses of Albany cemeteries cannot recapture all of these preneed costs at the inception of the sale. A high trusting requirement is even more detrimental to a cemetery than a funeral home.

Funeral homes are not called upon to perform a preneed contract until there has been a death. When state trusting requirements prove too high to fund a preneed program, a funeral home can turn to insurance funding and use the commissions paid by insurance companies to pay counselors/salesmen and offset program costs. In contrast, cemeteries often deliver preneed property and merchandise prior to the purchaser’s death, which precludes insurance funding. Consequently, cemeteries must use trust funding or constructive delivery.

The proactive preneed program will always be distinguished by marketing and outreach that consummates a transaction someplace other than at the operator’s offices. While all cemeteries and funeral homes strive for the heritage that brings families to their door, most face challenges and competition that require them to reach out to their families. Few individuals have the personality and commitment to walk into a family’s home to discuss mortality. For better or worse, the industry has compensated these individuals on a commission basis.

With NPS, the worst was encouraged with commission rates that allowed salesmen to make six figured salaries at the expense of elderly consumers. As one of the states hardest hit by the NPS failure, Missouri’s legislators will be pressured to impose tougher trusting requirements on all preneed programs. Rather than punish all preneed programs by instituting 100% trusting, Missouri should consider a cap on the commission that may be paid to the preneed salesman.

A trade newsletter recently reported on funeral homes forming buying groups to negotiate better terms with casket vendors. Through cooperative alliances, the funeral homes can achieve the numbers required to negotiate better discounts from vendors. Those same economies of scale also benefit preneed programs that utilize trust funding. The larger trust not only provides the operator leverage in negotiating terms with a fiduciary, the trust provides the asset manager the critical mass required for a sophisticated asset allocation model for proper diversification.

However, state laws are often a hurdle to independent funeral homes or cemeteries seeking to form a master trust that would commingle funds from multiple sellers. Laws such as Missouri’s Section 436.031 authorize collective investing by preneed trustees, so long as the funds deposited belong to a single preneed seller. This restriction reflects a legislative concern for the trust’s accounting of deposits, distributions, income and expenses.

Rather than close the door completely on collective investment trusts, the Michigan cemetery law signed into law last week left the door open to a new breed of master trusts.

Section 16 of SB 674 establishes a transition period for Michigan cemeteries to transfer their endowed care trusts to corporate fiduciaries. Subparagraph (2) of that section addresses the traditional master trust established by a single cemetery that has multiple trusts or a master trust among multiple cemeteries with common ownership. The subparagraph also references preneed trusts. The opening for pooling among unrelated trusts comes in subparagraph (3) where Michigan’s cemetery commissioner is given the authority to approve ‘other comparable methods of bundling or pooling of trust or escrow funds for investment purposes’.

The fiduciary services provided by national banks are subject to Federal regulations set out in 12 CFR Part 9 (“Reg 9”), and more specifically, collective investment funds are subject to 12CFR 9.18. State chartered fiduciaries and Office of Thrift Supervision chartered fiduciaries are subject to similar requirements. The fiduciary’s authority to pool preneed trust accounts is derived from 12 CFR 9.18(c)(4). The regulation sends the fiduciary back to state law for its authority, and prohibitions. In the absence of express authority (and express prohibitions), the fiduciary is in ‘no man’s land’ with whether it is required to follow the requirements of Reg 9, which include a written plan, audits and asset valuations.

The Michigan law seems to appreciate that Reg 9 requirements go beyond what should be required of a preneed master trust, and appropriately, make the non-traditional master trust subject to a case-by-case approval. The test will be whether the proposed pooling arrangement has sufficient accounting procedures to protect participating operators and their consumers. Missouri is particularly sensitive to this issue in light of the NPS failure, and its procedures for trust rollovers.

A Los Angeles Times story about Jerrigrace Lyons, California’s ‘death midwife’, generated ten days of entertaining barbs and counter-barbs on an SCI chat board. The article describes how Ms. Lyons assists families that choose home funerals in lieu of a funeral home.

One of the posts challenges a fellow funeral director for the assistance he provided a family, stating in uncertain terms that such services exposed the funeral director to legal and professional liability. Because the post was somewhat tactless, the liability issues were skirted in subsequent responses. Undeterred, the poster ("Chuck") challenged consumer advocates and fellow funeral directors on the liability issues.

But, Chuck’s main point has to do with the funeral director’s exposure for professional liability when assisting a home funeral. Chuck attempted to bait consumer advocates into providing a statement that funeral directors should be liable only for the services they provide. Out of better judgment, the consumer advocates advised ‘no can do’.

Incompetence or mistakes can trigger professional liability, but professional liability can also result from the funeral director’s failure to discharge an obligation imposed by statute or regulation.

The standards required by a funeral director’s license differ from state by state. Only a handful of states prohibit home funerals. Consequently, it stands to reason that most states permit the funeral professional to assist families who want to explore the home funeral alternative. But as with any profession, it is incumbent upon the funeral director to understand what is required by his/her license, and to ascertain from a meeting with the family whether the circumstances and the family’s intent comply with applicable state law.

As another poster explained, some states’ definition of “funeral directing” impose an obligation on the licensee (whether it be the funeral director or the establishment) to maintain control of the body until the final disposition is made. In such states, the funeral director may have an obligation to witness the committal.

Funeral directors willing to assist with home funerals probably do so out of a commitment to professionalism rather than the prospect of revenue. To disparage funeral directors ‘for crossing the line’, or to label families who chose home funerals as ‘crackpots’, serves only to discredit the professionalism of the death care industry.  

The Federal Reserve’s December 17th decision to cut its interest rate to less than a quarter of a percent is meant to encourage investors back into the stock market. But for many cemeteries, the prospect of depressed interest rates will have dire consequences to endowed/perpetual care trusts that are subject to state laws which limit or restrict equity investments.

State laws have historically imposed conservative investment standards upon endowed care funds to ensure preservation of the trust corpus. However, the bull markets experienced during the past decade often came at the expense of bond returns and other fixed income investments. With stagnant returns, cemeteries in states such as Michigan and Missouri have been seeking law changes to allow endowed care trusts to diversify for growth and larger distributions.

In 2006, a straightforward approach was introduced in the Michigan legislature. HB 6254 would have allowed an endowed care trust to distribute 50% of its accumulated net capital gains to the cemetery operator. However, that bill got lost in the turmoil of the Clayton Smart fraud. Instead, Michigan is now on the road to a more complex approach to diversification that incorporates the Prudent Investor Rule and oversight governed by rules and regulations to be promulgated by the Cemetery Commissioner.

Some of Missouri’s cemeteries introduced the unitrust concept to legislative negotiations held in 2007, and then again in Chapter 214 hearings held this past summer. That proposal would allow the cemetery operator to make an election to require the trust to make an annual fixed distribution of between 3 to 5% of the trust’s value. Missouri’s cemetery law (Chapter 214) lacks a clear definition of “income”, and regulators have taken contradictory positions over the years about whether capital gains may be treated as income to be distributed to the cemetery operator. In an attempt to clarify this ambiguity, the cemeteries turned to Missouri’s Uniform Trust Code and RSMo Section 469.411 to provide a clear standard for income, to promote diversification and to provide cemetery operators greater distributions. But in doing so, the proponents have ignored certain realities, and the controversies that surround the unitrust concept.

Many endowed care trusts are too small to effectively diversify for a fixed distribution of 5%, and proponents have fought alternatives that would grant the trustee authority to reduce distributions below 3%. The proposal would also restrict a trustee’s authority to make income and principal adjustments, a crucial element of the Missouri law.

In view of the current financial environment, cemeteries need the authority to diversify endowed/perpetual care funds. But, a balance needs to be struck between fostering growth in the trust and meeting the cemetery operator’s income needs for maintenance and care. Finding that balance should not be left to the unitrust concept, and faith in the stock market.

Even when the need for reform is apparent to all, the legislative process can take years. With the Michigan Senate having approved a House substitute, that state’s cemeteries are a step closer to reform that could have avoided Clayton Smart’s pillaging of $70 million dollars of endowed care funds.

The Michigan Legislature’s website provides the history of SB 0674, from its introduction in August 2007, to the Senate’s December 19th vote to adopt the House substitute. Including the Attorney General’s investigation, the Michigan reform process has taken over two years. As with all reform efforts, some were not happy with the delays encountered in the Legislature’s efforts. Getting it right is not as easy as it would seem.

In reporting on Forethought’s cut in growth payments last month, the Funeral Service Insider made a curious statement about the taxability. Referencing one of Forethought’s products, the article stated that a funeral home would have received the product’s growth tax free, and now would have to recognize the bonus as income. The article suggests that Forethought’s executive replied by advising that the taxability of the bonus would depend how the funeral home handles it.

Excuse me, but how are insurance proceeds or bonuses not taxable to the funeral home?

If a preneed insurance carrier is suggesting that policy proceeds are not taxable to the funeral home that accepts policy proceeds as consideration for performing a preneed contract, how does that company explain the transfer-for-value rule?
 

It has to be bad when your main source tells you its time for the Methadone clinic. With the worst financial crisis in our lifetime, and spiraling costs, what funeral director isn’t already battling a case of the sweats and shakes when reviewing his/her preneed program?   And now you’re being told to go cold turkey on the only preneed transaction that you offer.   

With Forethought having joined the bandwagon against the guaranteed preneed contract, funeral directors are being forced to reexamine the transaction.  It is an examination that is long over due. However, dropping the guaranteed contract will not be as simple as Forethought suggests. 

 

For fifty years, the US funeral industry has defined preneed as a cost saving transaction that will provide peace of mind to the "consumer".  As many funeral directors recall, Forethought/Batesville taught them how to structure this transaction around the casket sale. And, now they tell the funeral director it’s a mistake. No wonder some funeral directors are a bit miffed with their insurer. Funeral directors that embrace Forethought’s prescribed medicine could suffer sharp withdrawal pains that have long-lasting side effects.   

 

Preneed insurers are crucial to most preneed programs, but funeral directors need to appreciate that their insurers are responding to changing market forces. Insurers are looking for alternative markets, and consequently, we are hearing more about ‘final expense policies’ and ‘funeral expense trusts’. These products can be marketed independently of the funeral home, relegating the funeral director to an end provider.   For the funeral home that maintains an insurance agency, the final expense product offers a larger commission. But, the final expense product also targets a more affluent consumer. How many of your consumers are candidates for a $20,000 policy that provides a 2% return, and requires a $200+ monthly premium?

 

Rather than go cold turkey on the guaranteed contract, the industry will begin to explore hybrid contracts that provide partial cost protections. For the older, and less affluent, consumers, the industry needs to look at cooperative trust arrangements similar to those offered in England, Canada, New Zealand and Australia.   With regard to these alternative trusts, we face a ‘minor’ hurdle: our preneed exemption from certain securities regulations is based on the guaranteed contract being a sale of goods and services. 

 

To facilitate the administration of preneed contracts and trusts, the Securities and Exchange Commission has issued a series of “No Action Letters” regarding the preneed contract or the preneed master trust. See, e.g., Fleet National Bank (Sept. 5, 1990); Funeral Services of Iowa, Inc. (September 28, 1987); Michigan Funeral Directors Association (August 27, 1987); Associated Funeral Directors Service, Inc. (September 5, 1986); Drexel Trust Company (September 12, 1983).

 

For purposes of collective investment, the trust-funded, non-guaranteed preneed contract will need to utilize an alternative exemption from the SEC regulations. 

For twenty-two years many Missouri funeral directors have deposited 80% of the preneed funeral contract purchase price into trust, and withdrawn all income in excess of that deposit. For a $5,000 contract sold in 1998, the funeral director has been required to maintain $4,000 in trust. When that contract is performed in 2008, the funeral director is authorized under Chapter 436 to withdraw an amount equal to that deposited to trust: $4,000. Today, and for the foreseeable future, that distribution will exceed that contract’s ‘value’ under the mark-to-market approach. Depending upon the facts of a particular trust, the difference between these two approaches could exceed the trust’s annual realized income. This puts the trust further into the hole and threatens the funeral director’s long-term viability.

Assume the funeral director has a $1,000,000 trust with a contract population that averages 10 years in duration. On the average, 10% of the trust’s contracts are serviced each year, or $100,000. Depending upon trust’s asset allocation, the current financial crisis could have trimmed a third of that trust’s value. If a 25% value decline is assumed, the funeral director’s trust is worth $750,000. If the trust’s value remains ‘flat’ over the next year and the funeral director services 10% of the trust’s contracts, he will withdraw $25,000 ‘excess’ value over the next year, or 2.5% of the trust’s value. For trusts invested exclusively in fixed income, the difference may exceed the trust’s actual return.

Switching to the mark-to-market approach will be painful for funeral directors. For that ten-year old, $5,000 preneed contract, the funeral director would receive $3,000. Today, that service might sell for $6,500. The cost to provide the service will vary from funeral home to funeral home, but many will find it difficult to do so for a profit when only paid $3,000. Of course, there has been income distributed from the trust over the past ten years, but not necessarily to the funeral director performing the contract.

Consequently, Missouri legislators need to consider two important Chapter 436 revisions: the mark-to-market approach and trust income accrual. If the Missouri funeral director had accrued the income and earned a net 3.5% over the past 10 years, the mark-to-market approach would have paid the funeral director $5,642 instead of $3,000.

The mark-to-market approach has proven a bitter pill for Illinois funeral directors, and legislators should expect a similar reaction from some Missouri funeral directors.  The legislature can not retroactively apply the mark-to-market approach, but funeral directors need to consider whether the approach is in the best interests of existing business.
 

When its Halloween, the media is naturally attracted to a story that involves horror and a cemetery.  The Belleville News-Democrat found a new type of horror for its seasonal article involving a cemetery: Missing Trust Funds!

For added suspense, the newspaper reports there are two cemeteries, and both were (or are?) owned and operated by Forever Illinois, a sister corporation of National Prearranged Services.  Determining who owns and operates the cemeteries seems to be an issue of confusion for the Illinois regulators.  The cemeteries have turned into a hot potato.

Concerns over the Forever Missouri cemeteries had to have influenced Missouri regulators’ efforts to seek new enforcement authorities in Chapter 214.  Unlike their Illinois counterparts, Missouri regulators lack clear authority to involve either the attorney general’s office or local prosecutors. 

In terms of the toxic NPS fallout, Texas ranks a close second to Missouri.  In response, the Texas Department of Banking has released a legislative proposal aimed at closing what it perceives are the loopholes in Chapter 154 of the Texas Finance Code. 

To facilitate discussion of the issues with death care operators, insurance companies and fiduciaries, the Department of Banking released an Explanation of Intent of Proposed Changes.   A few of the DOB issues include:

  • Putting cemeteries on notice that they could be defined as a "funeral provider".
  • The seller/permit holder must exercise reasonable controls over contract administration.
  • The elimination of third-party preneed sellers.
  • A minimum net worth of $100,000 for permit holders.
  • A standard information brochure that covers both forms of funding.
  • Income allocation requirements for non-guaranteed items.
  • Distribution documentation.
  • A new guaranty fund.