The Iowa had not one, but two personal preference bills pending before its Legislature for the 2007/08 term: SF 473 and HF 2088.   The Senate version, SF 473, was backed by Iowa’s attorneys, and the House version, HF 2088, was backed by the Iowa Funeral Directors Association. 

What caught my attention about these bills was the IFDA statement published by the Des Moines Register on February 22nd. The death care industry would have been better served if the IFDA had given more thought to their position against SF 473. The IFDA statement started with the following:

I must clarify your Feb. 14 article, "Bill Gives Deceased Control of Remains." Iowa funeral directors have always believed funerals are about loved ones gathering to commemorate the deceased person’s memory. Funeral ceremonies are not about the dead forcing their intentions on loved ones.

There’s no argument that funerals have been for the living. It is a ritual that is meant to help survivors to take the next step on life without the individual who just died. But how can the IFDA reconcile the highlighted statement with the preneed transaction that most funeral homes endorse.  Yet, I believe the IFDA correctly identified the issue that should be addressed before a preneed contract is ever signed:

If someone has specific requests for his or her funeral, those must be communicated to their loved ones. Funeral directors bring families together to decide how to remember the dead. SF 473, backed by the Iowa State Bar Association, allows a "final disposition directive," which forces everyone to listen to a document, and not to the emotional needs of survivors.

The [attorneys bar] association’s proposal could conflict with other legal instruments. What if the decedent’s will, pre-need funeral contract and final disposition all request burial, but in different cemeteries? What if the final disposition designates some distant cousin to be in charge?

The IFDA is asking the right questions, but failing to look in the mirror to understand how the death care industry is contributing to the problem. 

First of all, each individual should have the right to control the disposition of his or her body. Period. But in contrast to our ‘inalienable’ rights, we are powerless to defend the right to control our own disposition.   After we cash in our chips (pardon the pun), we are completely dependent on someone else respecting our ‘instructions’. Most individuals seem to have a strong personal preference for what should be done with their body. In a sense, there seems to be a certain selfish aspect to one’s last act or wish being one of “this is what I want”.   Unfortunately, many preneed programs seem to cater to this self-indulgence. 

What may be galling some funeral directors is that the written document, whether it is disposition directive or a preneed contract for cremation, may not be in the best interests of the surviving family members.

First preneed, and now enforceable disposition directives, are underscoring that the role of the funeral ritual needs to be for both the deceased and the living. But to accomplish such a goal, the individual must overcome the reluctance (or denial) that precludes the discussion of mortality with family or friends. 

Preneed introduced our older generation to the issue of their own mortality, but hasn’t provided them the resources to share fears and values with the next generation.  And now the death care industry is being forced to redefine the preneed transaction from being about “me”, to being about “us”. To incorporate family members into the process, key decisions about the funeral must be deferred. Individuals will continue to want to address the financial burdens of the funeral, but the industry needs to become receptive to allowing the family the freedom to reach a common decision about what ritual is best for everyone. 

Bill Tammeus, a Kansas City Star columnist on issues of spirituality, addressed these issues from a theologian’s perspective in a September 2, 2006, column titled “The Cremains of the Day”.  

So which Iowa bill should be favored? In this situation, the attorney’s version provides a lower hurdle for the individual wishing to establish an enforceable disposition directive, and therefore I would endorse it over the IFDA bill. SF 473 should better protect the interests of the elderly and the gay community. 

One of the many issues facing regulators in the Clayton Smart debacle was the surrender of thousands of Forethought life insurance policies by a Forest Hill preneed trustee. New light will probably be shed on this issue with revelations that Robert Nelms and Clayton Smart may each have been using the same financial management company: Security Financial Management Company. One needs to consider whether an investment advisor looked at the insurance being held by the preneed trust and boasted ‘we can do better’.

Preneed funeral contracts are generally funded by either insurance or trusts.  Each has its advantages and disadvantages.  However, the respective advantages are generally lost when the preneed trust holds insurance products as investments.  (I will exclude cemetery preneed trusts from this discussion because cemetery merchandise is often delivered prior to the purchaser’s death, thus making life insurance impractical.)

 Insurance gets the nod as the preferable funding vehicle for portability, tax consequence (to the purchaser) and consumer savings (if you’re under the age of 60-something and in relatively good health).  Trust funding gets the nod for universal availability, long-term performance (if the trust has sufficient assets to permit diversified investments) and refund rights (okay, okay, put the state law variations aside for a minute).  However, each type of funding has its unique ‘costs’, and combining them may cost the funeral home and consumer in the long run. 

Trustees were first induced to accept insurance products in the late 1980s when annuities were purchased for trusts that could not comply with the retroactive application of Revenue Ruling 87-127.   Many of these trusts lacked the information required to report income to the purchasers.  As a grantor trust, preneed trusts could hold an annuity and have the contract’s increase be deferred for tax purposes until the contract’s maturity.    

Once the camel’s nose was in the tent, insurance companies began to market life insurance and annuities to death care companies as solutions to lagging trust performance.  Corporate trustees often consign smaller preneed trusts to fixed income investments in a conservative approach to avoid market fluctuations. In this era of relatively low interest rates, insurance products can offer a better return than conservative bonds and government securities. And, there is the temptation of a commission on the conversion of the trust’s assets to insurance. 

However, insurance products represent problems to the corporate trustee.  As demonstrated by Clayton Smart’s short-sighted actions, cashing in life insurance before the purchaser’s death will have a significant adverse impact on the trust’s value.  Cash surrender values on 70-something year old insureds are typically low.   And if the trustee does hold the policy to maturity, how are the insurance proceeds to be taxed?  Annuities simply defer the income aspect of the contract until maturity.  Life insurance proceeds are not taxable to an individual beneficiary, but are those proceeds taxable to the trust?   More than likely, the answer is yes.  The proceeds must generally flow through the trust, thus adding time and cost to the administration. 

Funeral directors need to consider that rolling a preneed trust into insurance is probably a one-way transaction. Once it has been done, it will be a matter of a few years before an investment advisor recommends that its time to cash those policies in. Two wrongs do not make a right.   In many states, it would be difficult to justify a rollover in the first place.  Funeral directors will only compound any error made if they change their minds and cash the policies in. 

Kentucky’s city administrators claim that with House Bill 369 they can now see the light at the end of the tunnel. For the past 20 years, municipal cemeteries in the Blue Grass State have been forced to operate under the same rules that apply to commercial cemeteries when it came to perpetual care funding. For that period, some municipalities built up some sizeable PC trusts. But as tax revenues declined over the past few years, those PC trusts became enticing to city administrators looking for ways to cover mounting cemetery expenses. These municipalities are telling the Kentucky legislature that not only should they be allowed to tap these funds for cemetery improvements, but that their cemeteries should be exempt from perpetual care requirements. The first objective makes sense, but the second does not.

Generally, state perpetual care laws restrict what the trust can invest in, and limit distributions to interest and dividends. These laws seek to impose conservative standards that will ensure the longevity of the fund. However, these restrictions also handcuff cemetery operators that must plan for the long term when facing capital improvements such as streets, lights and drainage. When the circumstances warrant improvements, cemetery operators and trustees should be afforded a mechanism to seek extraordinary distributions. HB 269 provides municipal cemeteries that mechanism. However the bill does not address the needs of other cemeteries, or to provide trustees the latitude to diversify trust investments so as to better fund projected improvement needs. 

HB 269 also takes a wrong turn when it comes to exempting municipalities from Kentucky’s perpetual care requirements. If municipalities do not require perpetual care fund contributions, the expense of cemetery maintenance will eventually be borne by taxpayers. Cemetery corporations understand perfectly the problems municipalities are having with revenues and expenses. Cemetery corporations have been forced to raise the price of burial spaces, expand the sale of merchandise and to become more proactive with preneed. It is no secret that the cost of a municipal grave space lags far beyond that charged by a corporate cemetery. Rather than avoid the discipline required by a properly funded endowed care fund, municipalities need to consider the revenue side of the equation. A recent American Cemetery article suggests that municipal cemeteries need to adopt the preneed business strategies of corporate cemeteries. I don’t think that advice is practical, but municipalities do need to explore options other than their taxpayer base. For those of us who choose cremation, or who purchase a burial space at a corporate cemetery, why should our taxes subsidize a municipal cemetery? 

About a year ago, a funeral director wrote to the Funeral Monitor to complain that corporate cemeteries are driving up the costs of burials. In support of his complaint, the funeral director made a price comparison between the burial spaces at corporate cemeteries and those at the municipal cemetery. As demonstrated by the Kentucky legislation and the comments of municipal administrators, these comparisons are not of apples to apples. Using distorted facts to blame a competitor for the rising cost of funerals and burial does a disservice to the entire death care industry.  

It has been almost 18 years since I drafted my first perpetual care bill. That initial effort took the tack of required disclosures about perpetual care funding, but allowed certain types of cemeteries to opt out of perpetual care.   Today, I think perpetual care funding should be required of all cemeteries.  

The Funeral Monitor and the Funeral Service Insider write to different segments of the death care industry, and rarely report on the same topics.  So when each makes National Prearrangement Services their lead story in late January, readers should take notice.

NPS is a company that has always pushed the envelope.  With preneed laws as ambiguous as they are, there is plenty of room for wiggle when it comes to compliance.  In the past, competitors would point a finger in NPS’ direction and complain about a level playing field.   Funeral directors generally stayed out of that fray because they were being paid by NPS.  With the issues being reported by trade journals about NPS, funeral directors need to reevaluate their agreements with the third party seller. 

To NPS’ credit, they can bring economies of scale to bear on a casket company that small funeral homes can not.  But what about the funeral home’s existing agreements with casket vendors?   What happens if NPS’ relationship with the Chinese sours in five years?   Does the NPS proposal put funeral homes at risk in satisfying the terms of the preneed contracts?  In one perspective, NPS has put the funeral director and the preneed purchaser in the same boat, that being dependent on NPS and its casket vendor being able to perform at some point in the future.

Funeral directors should heed the advice that Josh Slocum gave consumers after the AARP published its notorious RIP Off article:  take your contract to an attorney for advice about your rights. 

Death Care trade publications such as the Funeral Service Insider and the FuneralWire advocate that funeral homes revisit the non-guaranteed preneed contract.  I agree that funeral homes should reconsider the non-guaranteed preneed contract, but for reasons different from those expressed by other authors.

The non-guaranteed preneed contract affords flexibility and portability to the individual who wants to do more than preplan, but is not prepared to make all of the decisions that go into planning the final disposition.  The guaranteed preneed contract often ties the hands of the consumer’s survivors and the funeral home.   While many families take satisfaction knowing the prearranged funeral, some survivors feel they have been deprived the final opportunity of taking care of a loved one.    

Rather than espouse one form of preneed over another, funeral homes need to provide a viable non-guaranteed arrangement that can be selected in lieu of a guaranteed contract. There is a place for both types of contracts.  However, there are a number of hurdles to the non-guaranteed preneed transaction.  In this post, I will identify those issues briefly, and provide expanded discussions in subsequent posts.

  • Most state preneed laws have been written with the guaranteed contract in mind.
  • Marketing – proactive vs passive
  • Efficient trust management
  • Finding a sponsor

 

Whether it is because of state law restrictions or preneed purchaser demographics, death care trusts have unique requirements when it comes to investments.  Consequently, it is fairly common for a death care trust to utilize an investment advisor who has experienced with the industry.  However, the deductibility of the fees paid to outside advisors by death care trustees will now be more closely scrutinized in light of a January 16th decision handed down by the US Supreme Court in the case titled Knight vs. Commissioner.   

The conflict over the deductibility of investment advisor fees developed within the context of estate planning trusts, and has been brewing since 1993 when the Sixth Circuit rejected the IRS’ position in O’Neill vs. Commissioner of Internal Revenue, 994 F.2d 302.  In subsequent cases in other circuits, the IRS prevailed in its application of IRC Section 67(a) and the 2% floor.    Like side catch in a commercial fishery net, death care trusts are being pulled into a controversy based on estate planning facts. 

The impact of this issue on some death care trusts is felt not so much by the 2% floor, but by a collateral issue: the alternative minimum tax.  For maintenance trust returns, the characterization sought by the IRS renders the advisory fees fully taxable. And, the arguments forwarded by the IRS in its briefs to the Supreme Court and the lower courts suggest that the Service may look at other types of services outsourced by the fiduciary.   

The Supreme Court left the door cracked for the full deductiblity of fees paid to trust service providers, but the death care companies will have to work with their fiduciaries to justify the deduction of such fees.  To defend the deduction, the parties have to start with their trust instrument and administration documents to define the services and justify their need.   

The Clayton Smart debacle has been, and will continue to be, the subject of articles calling for preneed reform. A recent AARP article titled R.I.P. Off  will be one of the more controversial (leading to frequent citations by consumer advocates).   While the article is biased and should be rebuked by the death care industry for its various flaws, the industry should examine the Smart affair and the public’s reaction to Mr. Yeoman’s issues (including the comments posted to the AARP website). 

Mr. Smart exploited the Tennessee laws to divert millions of dollars of trust assets.  While Forest Hill’s new owners should be applauded for taking steps to minimize the loss to consumers, the industry should not ignore the magnitude of the fraud committed.  Over the next few months, I plan to revisit the Smart affair and the issues it spawns.  But for this post, consider the missing fiduciary.

In its April 2007 edition, the American Funeral Director reported in detail about Mr. Smart, including his appointment of a small Indiana institution as Forest Hill’s preneed trustee and the revision of the governing trust instrument.   While another of Forest Hill’s trustees discharged its duties to consumers by refusing Mr. Smart’s distribution instructions, the Indiana institution followed Smart’s instructions to terminate life insurance policies that would result in millions of dollars of loss to the trust.  Too frequently, funeral directors exhibit the similar business ethics by shopping for a trustee that will do what it is told.   

Many of our country’s larger banks now refuse to accept death care trusts either because the laws are ambiguous or because of the industry’s reputation.   Death care companies need to develop procedures and controls to ensure compliance, accountability and transparency.  Restoring the confidence of  financial institutions and consumers will take time.   

A Wisconsin bill that would establish a right of sepulcher looks bound for passage (AB 305).   There are several things to like about this bill.  It would establish an individual’s right to control the disposition of his or her body, and to designate an agent authorized to carry out that directive.  The bill also provides the hierarchy of kin who may control the disposition in the absence of a directive from the deceased.  In the event of a dispute between kin, the bill requires all concerned to be prepared to assume the financial responsibility for the disposition (avoiding the potential for a disgruntled family member from acting as a ‘spoiler’).

The bill also defines those individuals who may not serve as an designated agent for disposition.  Funeral directors and cemeterians are precluded, as are hospice workers and clergy.   I am puzzled by the exclusion of clergy and hospice workers from those who may be designated (unless related by blood.  I have prepared estate planning documents that included a minister as the individual’s fall back choice for implementing his disposition directives.  I could also see where individuals have established relationships with hospice workers and would trust them to carry out plans for disposition.

Perhaps the Wisconsin legislature was concerned about individuals who might have an undue influence on the terminally ill, but I do not understand the need to restrict an individual’s rights with regard to either clergy or hospice workers.  I would welcome comments regarding these limitations.

But in any event, the bill will benefit Wisconsin citizens by providing the right to control one’s own disposition.    If the bill is signed into law, funeral homes and crematories should evaluate their forms with regard to this bill and the Crematory Authority Act passed in 2005.  Preneed contracts that contemplate cremation may want to include an authorization form that addresses both laws.

The National Funeral Directors Association has taken the lead in getting legislation introduced to eliminate the dollar cap imposed on qualified funeral trusts.  While I hope the NFDA succeeds, it won’t be without a fight from the IRS. 

As the death care industry inches towards the non-guaranteed preneed transaction, the IRS will express its concerns over abusive trusts.  While funeral directors ponder whether consumers will embrace a preneed transaction that does not provide price guarantees, the IRS will question whether the transaction will be abused as a tax shelter. 

The Section 685 needs to be increased substantially, but I anticipate the Service will pull no punches while fighting the NFDA’s efforts.   

For the second time in 7 years, the Delaware legislature is taking up the issue of cemetery oversight. As with most death care legislation, Delaware’s Cemetery Study Committee faces two hurdles: finding answers for aging cemeteries that lack revenues for maintenance, and reconciling the conflicting goals of cemeterians, funeral homes, monument vendors, local governments and the public.  

Neglect is already a problem for cemeteries established before perpetual care was a requirement, and it will become an issue for cemeteries that are not proactive in enforcing existing PC requirements.  In a sense, there are two different problems and finding a way to provide care for the older, "public" cemetery will be the greatest challenge.  Frequently the answer to this situation is more taxes and county/municipality control over the cemetery.   

With regard to cemeteries that have ‘inventory’ to sell, enforcement of perpetual care requirements is the priority.  However, with the costs of funeral and burials on the rise, the death care industry will be reluctant to accept requirements that drive up the cost of a grave space. 

While many cemetery operators have embraced the need to properly fund and administer perpetual care trusts, laws need to better enforce PC funding requirements and afford fiduciaries more flexibility in how PC funds are invested.