The IFDA master trust turned a new page today, and for participating funeral homes, the first step in a long recovery process.  With the appointment of Merrill Lynch Bank & Trust as a temporary trustee, the association begins the process of looking for a permanent trustee.  The appointment also coincides with the trust’s accounts being put on a mark-to-market basis. 

The mark-to-market approach taken by the IFDA master trust will mean that the trust’s value will be allocated among the preneed contracts each month. Until the benefits of key man insurance purchased by the master trust are realized, funeral directors will be servicing contracts for far less than they were promised.  It was not clear from the Q&A circulated to funeral directors whether insurance proceeds will be allocated to preneed contracts serviced while the actuary study is being performed. 

Funeral directors who left the IFDA master trust for NPS must feel whipsawed by these circumstances.  

Missouri funeral directors questioning reporting requirements being considered by the legislature should note that the IFDA reports its preneed contract values to consumers annually. 

 

Two class action lawsuits were filed last year over the mismanagement of Grandview Memorial Gardens (Madison, Indiana), and a settlement has been reached in the suit involving the cemetery’s preneed trust funds. Over the course of about 14 years, the cemetery went through three changes of ownership, four trustee changes and sold several million dollars of preneed contracts. When Indiana regulators examined the Grandview preneed trust in 2006, they found $144,000 of assets. Then the regulators began to tally the cemetery’s preneed liabilities, but found those obligations exceeded the trust’s balance before they got to the purchasers whose names began with “B”.

With regard to the fiduciaries that administered the Grandview trust, the plaintiffs’ attorneys included one basic discovery request that may have proved damaging to the banks: show us your policies and procedures for administering a preneed account. The Office of the Comptroller of the Currency has issued written guidance to national banks advising of the need for internal controls, and policies and procedures for the preneed account. Taking a page from the OCC memorandum, the Grandview attorneys focused their discovery on the banks’ oversight of Grandview’s preneed trust.

Specifically, the discovery sought to confirm that each fiduciary had accounting procedures to determine whether: (1) distributions exceeded an account’s deposits and income, and (2) deposits could be identified by a particular preneed purchaser.

While the settlement does not represent an admission by the defendants, the fiduciaries agreed to pay $216,000 to the plaintiffs. 

 

Funeral homes and cemeteries are businesses that serve families when they are most vulnerable. To guard against exploitation, the death care industry establishes standards of professionalism, and state governments pass laws and regulations. Consumer advocacy plays an important role in educating consumers about these standards, and providing families tools in evaluating death care operators. To best serve their members, consumer advocates must be informed and objective in responding to potential abuses. If not, these organizations can discredit their purpose and damage their relationships with the death care industry. 

A Fort Myers newspaper ran a recent story about the frustrations of an elderly couple that wanted to trade in their burial crypts for cremation services. The story indicates the couple had purchased two burial crypts more than a decade ago, and became angry when the cemetery would not provide a credit equal to their original purchase price. The story relies upon Bill Swain, President of the Florida Funeral and Cemetery Consumer Advocacy, to flesh out the facts and to provide a perspective. In doing so, Mr. Swain seems to have spun the facts in an attempt to kill two birds with one stone: labeling the cemetery as greedy and disparaging preneed.

In response to the cemetery refusing to re-purchase the burial crypts from the couple, the paper attributes the following to Mr. Swain:

This is one of the drawbacks of prepaying for any funeral needs, ….

Why not just give them the money back when (the cemetery) can sell it for three times as much?

The laws in Florida are on the side of the funeral business, not on the consumers.

It is no secret that consumer advocates oppose preneed, and a casual read of the story would suggest that this is another example of preneed abuse. The couple also has the perception that the cemetery has been earning interest on the funds paid for the burial crypts. However, the story is misleading, and one can question whether Mr. Swain is responsible.

It is not clear from the facts whether the couple even purchased their burial spaces through a preneed contract. If the couple went to the cemetery, paid the purchase price and then received a deed to the spaces, that does not constitute a preneed transaction. If the spaces were purchased through a preneed transaction, the news report indicates the couple own the spaces, and therefore, one can conclude they received the property they contracted to purchase.  Consequently, Mr. Swain’s statements are misleading, particularly when you attempt to reconcile the 3rd statement from above with the FFCCA website:

Friends and Neighbors: The Governor signed SB 528, "The Sen. Howard Futch Memorial Act," into law!! We win!!! Whee!! Thank you, ALL of you, both industry and consumerr reps, for the support you gave our good cause. NOW…(you knew this was coming, didn’t you?), we have to stay on top of the process by which the new regulatory structure will be put in place. Please stay alert. The effective date to implement "our" legislation is October 2005. There are lots and lots of critical dates between now and then, and we (FFCCA) will keep you informed. Let’s all take a few deep breaths and yell: "Yeeeee-haw!! Bill Swain

Putting the preneed issue aside, another question is whether Mr. Swain is suggesting that cemeteries should refund a burial space purchase price whenever the owner changes his mind. If so, then it’s fair for the Florida death care industry to question whether Mr. Swain has made the necessary effort to become informed, and whether he can be objective in responding to consumers and reporters.

Part of the bad rap against preneed stems from the salesman who is prepared to say anything to close the sale. While, reputable companies build safeguards into their programs to check this behavior, there will be individuals who are prepared to bend the rules. Who should be held accountable when the agent intentionally violates the company’s safeguards? That question was raised, but not answered, during Missouri’s Chapter 436 Review Committee hearings. For some Missouri funeral directors, the issue is being presented in a context that they do not yet appreciate.

NPS’ sudden demise left an aggressive sales force scrambling to find new jobs. Some of the NPS salesmen joined established insurance companies, and others established their own insurance agencies. While some of the former NPS employees were also victims of the company’s misrepresentations, funeral directors need to appreciate that NPS did not think enough of compliance to teach it to its employees. Consequently, funeral directors should be asking whether these salesmen are receiving proper oversight from their new insurance companies.

Some of the former NPS salesmen signed on with a national insurance company that offers a ‘funeral expense trust’. That trust represents a product the insurance company can offer to consumers who cannot purchase the company’s insurance product directly through a licensed agent.

Some preneed sales entities have taken the concept a step further, and are marketing the trust in states where the insurance can be purchased as a preneed product that is independent of the funeral home. Innovative NPS salesmen now seem to have taken the concept even further, marketing the concept as a vehicle available to funeral directors who are not licensed insurance agents. It is not clear whether the sponsoring insurance company has approved of either of these modifications to the funeral expense trust.

One of the persistent rumors regarding NPS’ business practices in 100% trust states, was that the company circumvented insurance licensing requirements by effecting insurance purchases through a trust. The rumors also suggested that NPS found ways to split commissions with the funeral directors even though they are not licensed insurance agents. Funeral directors are beginning to relay similar stories, but with new insurance company names.

So, if these salesmen have formed preneed marketing programs that violate applicable preneed laws, is the insurance company responsible to the funeral director if disciplinary actions are brought against the funeral establishment license? Most state regulators will likely find the funeral director has a duty to understand the licensing requirements and commission restrictions imposed by applicable state insurance laws. Funeral directors are putting their livelihood at stake when they do not question a salesman’s explanation about how ‘we have a way around that problem’.
 

While the Wall Street bail out plan has many flaws, one of its proposals has wide-based support: the concept of increasing the limit on insured deposits to $250,000.  According to the New York Times, the driving force behind this proposal wasn’t the mega-banks, but rather our local banks.  

The Independent Community Bankers of America represents approximately 8,000 local banks, and employed a grassroots approach to prevail over the proposals of the larger financial institutions.  The organization’s president stated that "we might be small, but we’re pretty nimble."   Words funeral directors may want to keep in mind when they attempt to respond to legislative efforts this winter.  

If the Wall Street bail out passes with the $250,000 FDIC limit, small funeral operators will have more flexibility in using deposit accounts as preneed funding. 

During the long and tedious Chapter 436 hearings, some Missouri funeral directors joined consumer advocates in using the NPS failure as reason for recommending that legislators impose 100% trusting on the preneed transaction.  Those funeral directors generally advocated the use of insurance or joint accounts as safer methods of preneed funding.  During regulatory meetings, comments were also made about how the insurance policies or joint accounts were ‘guaranteed’.   The realities are that each of these forms of funding has its advantages and disadvantages, and that there are no absolute guarantees.

The AIG failure underscores that even the largest of insurers may be vulnerable to the current financial crisis.   While most life insurers are safe, the only guarantees offered by insurance are the rates of return promised by the policy terms.  As witnessed by the Texas insolvency proceedings for Lincoln Memorial life, the insurer’s promises are only as good as the assets held in its reserve accounts.  After that, the policyholder must look to guaranty funds for assistance.  Consequently, funeral directors should periodically review the financial statements of the insurance companies they use for preneed funding.

With regard to keeping those preneed funds at the local bank, the funeral director is assuming risk (and liability?) when he exceeds the FDIC insurance coverage.   By holding the consumer’s payments in a joint capacity, the funeral director is also exposing the funds to the claims of the funeral home’s creditors.   Losing a lawsuit for damages that exceed the firm’s casualty insurance put the consumers at risk. 

In contrast, the funds placed in a preneed trust are not the assets of the bank or the funeral home.   By virtue of the terms of the preneed contract, the funeral director usually has the risk of investment performance (and under the current circumstances, that’s more risk than what some funeral directors want).  But in contrast to insurance and joint account contracts, the trust provides the death care operator some say in how investment risk should be handled.

Who do you turn to when grass isn’t being cut, or the grave marker falls over? Or, who can approve the transfer of the ownership of my mother’s grave space?

Ultimately, the answer depends on who owns the cemetery. But, determining who owns the cemetery can often prove confusing to both the public and the cemetery regulator.

A recent Manteca Bulletin article about the ‘friends’ of the East Union Cemetery would seem to be just another story about a pioneer cemetery that has no funds for care and maintenance. But a closer examination suggests a situation where concerned citizens signed on to serve on a cemetery association board without understanding the accompanying responsibilities.

East Union Cemetery is located in Manteca, California, a community of 50,000 that is located 80 miles east of San Francisco. As with most “public” cemeteries, East Union Cemetery is required by state law to file reports for authority to continue operations. But apparently, East Union Cemetery failed to file those reports a few years ago and the California Cemetery and Funeral Bureau began to send out notices.   When no one responded, the state began to investigate, and issues of ownership, missing funds and accountability began to surface.

News reports indicate the cemetery had an endowment fund of $800,000 as recently as ten years ago. But then, one member was accused of embezzling funds and the cemetery association board membership dwindled down to two members.

With the state still conducting its investigation, Manteka’s citizens responded to the situation by forming a new and expanded cemetery association board. However, reports and regulator press releases suggest that the new board may have exceeded its authorities in the zeal to address the cemetery’s needs. Subsequent to the appointment of the new board, the state seized the cemetery’s remaining funds and submitted a proposed agreement to the cemetery association. Shocked by this turn of events, the new board resigned, and pointed a finger at the cemetery regulators. 

The facts suggest the cemetery association board did not appreciate the laws governing cemetery care funds. It may be that the new board followed a course of action that had transpired over the past ten years. Endowment care (or perpetual care) funds are intended to provide income to subsidize the cemetery’s maintenance expenses. Most states’ cemetery laws prohibit the fund fiduciary from invading principal to meet the cemetery’s needs.

The California Cemetery and Funeral Bureau is caught between a rock and a hard spot. Well-intended citizens stepped up to a situation that demanded attention, but acted without knowing the rules.   The Bureau’s press release and Q&A posting help tell its side of the situation.

Individuals who have an interest in serving on a cemetery association board need to appreciate the responsibilities that accompany that service.   Those responsibilities will be defined in part by the association articles and bylaws, applicable state cemetery laws and the agreements and documents that bind the association.   As witnessed by a lawsuit filed recently in Brooklyn, New York, those legal documents have life beyond the grave.

Dear Donna,

Once the liquidation plan is finalized, and the procedures for paying claims are implemented, could we please revisit the issue of the Missouri installment contracts?

Yes, you have been patient and polite regarding my inquiries.  But, until this past Monday, I did not know how significant an issue these contracts were.  If I am interpreting Note 3 from the Statement of Assets – Explanatory Notes correctly, Missouri consumers owe $23 million on outstanding NPS preneed contracts.  As I explained in my May letter, these consumers are paying too much. 

Thanks, again.

Bill

Why did you agree to that?

That’s the question I have been getting to the Chapter 436 Working Group recommendations regarding i) the deposit of all purchaser payments to trust, and ii) some form of periodic statement to the consumer.   One answer would be that we see too many news reports like this one.  

The primary objective for these two recommendations is the establishment of an audit trail.  Require all payments to go through the fiduciary’s hands, and require the fiduciary to give the consumer some form of notice.  If the regulator does not have the resources to monitor the transaction, give the consumer the opportunity to do so.  The recommendation does not deny the seller the right to recover sales expenses.

Yes, the procedure is burdensome, will add cost to the transaction, and will require change.   What are the alternatives?

Concurrent with the hearing held on her Liquidation Plan, the Special Deputy Receiver posted a financial report to the Lincoln Memorial Life/NPS website. As with most financial statements, explanatory notes at the end of the report provide some insights to the failed NPS empire. While prior documents have disclosed that the companies have a deficient of nearly one billion dollars, the SDR report breaks that number down in terms of trust funded contracts and insurance funded contracts. 

Insurance funded preneed contracts account for almost $600 million of the unfunded deficit, twice the number of that for trust-funded contracts ($289 million).   The explanatory notes identify six trusts maintained by NPS. The notes identify Trust VI as that of Iowa, and the size of Trust IV would suggest that it was for Missouri. One of the other trusts may be a special account, and if one were to assume the other three are other ‘state trusts’, that would leave the other 15 NPS states as exclusive insurance funded states. There is no doubt that NPS exploited Missouri’s laws regarding trust funded contracts, but a greater harm was done to consumers through NPS’ exploitation of state laws governing insurance funded contracts.

 

Of the NPS trusts, the Missouri deficit is the largest by far ($248 million). This number has been isolated to Missouri regulators as justification for raising the state’s trusting requirement to 100%. That argument ignores the fact that Iowa also has an 80% trusting requirement, yet only has a deficit of $23.5 million (a tenth of Missouri’s). The difference can be attributed to the difference in oversight and regulatory requirements. The argument also ignores the fact that Kansas, a state with a 100% trusting requirement, has a deficit of approximately $22 million (all of which is based on insurance-funded contracts).

 

Another explanatory note that may suggest that Missouri’s oversight is lacking is a note payable of $10 million owed by NPS to the Missouri preneed trust.  

 

Missouri’s Chapter 436 problems will not be fixed by going to a 100% trusting requirement. Oversight should be the state legislature’s top priority, and Missouri preneed sellers need to begin providing ideas and answers.