Contracts entered into between members of the public and funeral homes to provide for funeral goods and services in the future upon death of the contract beneficiary.
Typically prefunds the contract either through a payment made to the funeral home at the time the contract is entered into or by the purchase of an insurance policy upon the life of the contract beneficiary.
The Purchaser of the Preneed Contract
The funeral home carries out the terms of the contract and provides the promised funeral goods and services.
When the Contract Beneficiary Dies
- Guaranteed fixed price contracts
Preneed Contracts May be:
The funeral home guarantees to the purchaser that the price for the funeral to be provided in the future will not exceed the amount of funds paid on the contract plus any accruals thereon.
Guaranteed Fixed Price Contracts
THe funeral home is only agreeing that amounts paid on the contract, plus accurals, will be applied toward the price of the future funeral. In the event that the price of the future funeral exceeds the amounts set aside to pay for it, the purchaser of the decedent's estate will have to make up the balance.
May be terminated by the purchaser at any time proior to the death of the beneficiary with the purchaser receiving a refund of all or some part of the funds paid on the contract, plus all or some of the accruals thereon. The amount that is returned is often determined by state law.
There purchaser may not cancel it. However approximately two-thirds of the states allow the purchaser an unconditional right to transfer an irrevocable preneed contract to another funeral home.
Although preneed contracts have existed for many years, it is only in the past _____ years that their use has been widespread.
- Funeral homes actively promoting preneed arrangements
- Emergence of national marketing programs sponsored by large insurance companies, funeral home chains and state funeral home associations.
Made the Trend Towards Preneed Explosive
By the year ____ funeral directors wil be writing two and one-half million preneed contracts per year. If this number holds up, the number of preneed contracts written on an annual basis will soon surpass at-need contracts.
With the emergence of preneed funeral contracts, state legislatures became concerned with the opportunity for _____ that was inherent in these arrangements.
The contractual obligations of the funeral director were often not performed for up to _____ years after they recieved payment, the legislatures enacted various provisions to ensure that sellers of preneed funeral contracts had sufficient funds in the future to furfill their contractual obligations.
Require the seller of preneed funeral contracts to place all or some part of the preneed funds in a trust. When the contract beneficiary died adn the funeral services were provided, the preneed funds could be withdrawn and paid to the funeral home.
Laws Enacted by the Legislatures
Now enacted in all 50 states and Washington DC.
- The trend is requiring an amount less that 100% of the preneed funds and interest thereon must remain in trust until the death occurs.
- Usually require the funds to be deposited in insured banks, trust companies, or savings and loan accounts.
- Some states permit funeral directors to commingle the preneed accounts into one master account to that greater returns can be realized.
Preneed Trust Laws and/or Regulations
- Nearly one-half of the states require a business selling preneed funeral services to be a licensed funeral home.
- Nearly every state allows businesses to sell funeral goods on a preneed basis without the necessity of having a funeral home license.
- In most states, the market is open to third party sellers, especially cemeteries which seek to sell caskets and vaults to consumers on a preneed basis.
- These sellers often use aggressive marketing programs to promote their preneed contract sales.
Funeral Service License and Preneed Contracts
- Direct mail
- Door-to-door solicitation
Aggressive Marketing Techniques
- These laws have been attacked by third part sellers as unconsitiutional deprivations of property and the right to contract.
- Some states which limit or restrict door-to-door and other means of direct solicitation have been challenged as unconstitutional infringements of free speech.
Trusting Laws (Particularly 100% Trusting Laws) Deprive Preneed Sellers of Available Income
For the most part, the courts have upheld the validity of state preneed laws as:
Legitimate Exercises of Police Power
Third party sellers challenged the 95% trusting requirements of the Illinois preneed statute. Noting that the average time lapse of 29 years between payment and performance invited fraud, the court upheld the law as a reasonable regulation enacted in the public interest.
Memorial Gardens Assoc., Inc. v. Smith
The court upheld a 100% trusting requirement. The decision held that the Idaho preneed law was not unconstitutional even if it did deprive legitimate businesses of operating funds since it was a reasonabe measure taken persuant to the state's power to prevent fraud and deceit.
Messerli v. Monarch Memorial Gardens
Have also upheld challenges to state licensing laws which require funeral directors to sell preneed funeral services.
Federal Appellate Courts
The appellant argued that it was irration for the state to require an individual to have the training and education required of a funeral director in order to simply sell pre-need funeral services. The court refused to second guess the Virginia General Assembly's licensing law's requirement. It held that the legislature may have rationally determined that keeping the arrangements of funerals in the hands of licensed funeral directors would benefit the public by insuring competence in funeral arrangements. It therefore upheld the law.
Guardian Plans Inc. v. Teague
- A federal district court has upheld a West Virginia preneed law against claims that it violated the right of free speech.
- Law in question banned door-to-door and telephone solicitation of preneed funeral contracts.
- The court, noting past incidents of fraud and undue influence by third-part sellers held that the state has a significant governmental interest in protecting the public from improper solicitation practices.
- Since the ban only limited the time, place and manner of speech and not the content of the speech, and since the preneed sellers had ample alternative means of soicitation (direct mail, mass advertisement), te court found that the solicitation restrictions were rationally related to a legitimate state purpose.
With Regard to First Ammendment Claims: National Funeral Services, Inc. v. Rockefeller
This kind of insurance, which was especially popular in the South, is payable in services or merchandise or as a credit toward services or merchandise. The insurance is usually in the form of a contract in which the purchaser is to be provided a funeral and the proceeds cannot be used otherwise.
Burial Insurance Policies
Life insurance which is used to fund a separate preneed contract. It is typically a life insurance policy with the funeral home being designated as the beneficiary or the asignee of the policy.
The growth of funeral insurance as a funding mechanism for a preneed contracts has increased dramatically in recent times as large ___ ____ ____ ____ have established national preneed programs.
Large Life insurance Companies
- Most preneed insurance products offer some type of face amount escalator which increases the insurance payoff to meet inflation.
- The recepit by the funeral home of upfront income to cover the cost of its preneed marketing program.
Preneed Funding Through Insurance Rather Than Trusting Offers Two Distinct Advantages:
Unlike preneed trusts where the interest or income earned by the trust is taxable, the accrual in the face amount of the insurance policy is tax free. Not only does this result in tax savings, but it also relieves funeral directors and trustees of administrative costs.
Most preneed insurance products offer some type of face amount escalator which increases the insurance payoff to meet inflation.
Since the funeral director serves as the insurance agent, he or she is usually able to obtain a commission upon the execution of the policy. Unlike those situations where a funeral home has to trust 100% of the funds until a future date, this feature of insurance preneed funding provides the funeral home with immediate compensation to help meet the cost of operating a preneed program.
The recepit by the funeral home of upfront income to cover the cost of its preneed marketing program.
In every state, life insurance must only be sold through a ___ ___ ____ ____. In most states a funeral director may obtain such a license. A few states prohibit a funeral director from becoming one of these. Other states restrict the dollar amount of the policies, the proceeds of which are intended to be assigned as payment for preneed goods and services.
Licensed Life Insurance Agent
These are not taxed.
Accruals on Preneed Insurance Policies
Deposited in banks or elsewhere is subject to federal income tax.
Interest or Income Paid on Preneed Trust Funds
There was a great uncertainty on who paid the tax:
- The funeral director
- The purchaser of the preneed contract
- The trustee of the preneed contract
Prior to 1987
The Internal Revenue Service issued Ruling 87-127 to clairify the tax status of preneed trusts.
In Late 1987
The consumer purchasing the preneed contract should pay the interest tax on the interest earned by the preneed trust fund, regardless of whether the preneed contract was revocable or irrevocable.
- This ruling caused considerable consternation for some consumers who bristled at having to pay taxes of funds they would never recieve.
As a result of ruling 87-127, this was enacted in section 685 of the IRS code which allows a trustee to elect Qualified Fund Trust Status (QFT).
Congress in 1997
If this election is made, the trust pays any tax rather than the consumer.
- Originally had dollar limits that started at $7,000 and were indexed to inflation.
- In 2008, Congress eliminated the dollar ceilings
Qualified Fund Trust Status (QFT)
- When the funeral services are performed and the funeral home recieves the preneed funds and accruals thereon
- If the funeral home is permitted by law to retain part of the preneed funeral payments or interest thereon prior to performing the service, these receipts of principal interest are also reported as this.
Ordinary Income to the Funeral Home
To determine edigibility for these two things, the government examines the resources and income of applicants. If those resources and income are below certain levels, the applicant is eligible for assistance.
Medicaid/ Supplemental Security Income (SSI)
The Medicaid or SSI caseworker eill exclude or not count certain assets. Preneed funeral funds may be viewed as one of the excludable assets if the preneed contract is properly constructed.
Determining the Value of the Applicant's Resources
Under current Medicaid and SSI regulations, all funds placed in a preneed trust by a funeral home to find this kind of contract which is specifically identified to cover future funeral expenses are excluded from the applicant's resources.
- In most states there is no dollar limitation on this exclusion.
- SSI and Medicaid applicants who are purchasing preneed funerals should be encouraged to enter into this kind of contract so that the funds are paid for the preneed arrangements will be excluded from there countable resources.
Irrevocable Preneed Funeral Contracts
In those states that prohibit or restrict the use of irrevocable preneed contracts, it is still possible to exclude all or part of the preneed funds from being counted as a resource. Current law provides this, which excludes the value or gravesites, crypts, mausoleums, urns, vaults, caskets or other repositories which are customarily and traditionally used for the remains of a deceased person from an applicant's resources. This exclusion appied in both revocable or irrevocable situations and it has no dollar limitation.
Burial Space Exclusion
The applicant must own the gravesite, casket, vault, etc.. It is not, however, necessary that the applicant have physical possession of the burial space items. It is sufficient if the preneed contract shows the applicant's ownership of the burial space items. The contract should state that the applicant has purchased the particular burial space item and it should list the separate price of each item. It is not necessary that the item be in existence at the time of the purchase as long as the purchase iteself is evident from the contract.
In Order for a Burial Exclusion to Apply:
Can exclude up to $1,500 that is designated to pay for funeral expenses. Funds set aside for burial include revocable burial contracts, burial trusts and separately identifiable assets which are clearly designated to cover expenses connected to the individual's burial, cremation, or other funeral arrangements. This exclusion can be used to cover the cost of funeral services such as embalming, professional services fees, hearse costs, cremation fees, etc. which are not covered by the burial space exclusion.
Burial Funds Exclusion
It is necessary that the value of those items not covered by the unlimited burial space exclusion be no more than the $1,500 exclusion available under the burial fund exclusion. To the extent that these items exceed the $1,500 limitation, the excess will be counted as a resource of the applicant for Medicaid/SSI eligibility purposes.
If a Revocable Preneed Contract is Used, and the Applicant Wishes to Exclude all of the Preneed Funds as a Resource:
If a preneed sale takes place outside of the funeral establishment, it is very possible that the preneed sales activity is subject to:
Federal Trade Commission's Cooling-Off Regulation for Door-to-Door Sales
This regulation mandates that all door-to-door sellers must notify their customers that they have the right to cancel the door-to-door transaction at any time prior to midnight of the third business day after the date of the transaction.
- Has a broad application because of the expansive definitions of the terms "door-to-door sales" and "consumer goods and services."
FTC's Cooling-Off Regulation or Door-to-Door Sales
Defined as a sale of consumer goods or services exceeding $25.00 in which the seller personally solicits the sale and the sale is made at a place other than the seller's place of business. This term applies regardless of whether the seller initiated the solicitation or whether he responded to the invitation of the buyer.
Any goods or services purchased, leased or rented primarily for personal, family or household purposes. According to the FTC, funeral transactions are included in this definition.
Consumer Goods and Services
Given the broad definitions of door-to-door sales and consumer goods and services, it is clear that preneed funeral sellers who conduct business in this way would be subject to the regulation.
Away from Their Established Place of Business
Applies if the door-to-door sales are made persuant to prior negotiations which took place when the consumer visited a retail business establishment where the goods and services are offered for sale.
- Only available if the initial negotiations are made pursuant to an in-person visit to the funeral establishment; a phone call is not sufficient.
The One Exception Under the FTC Door-to-Door Regulation
If a consumer visited the funeral establishment to make the initial contact and later the preneed arrangement was made at the consumer's home, the FTC's Door-to-Door Regulation would not apply.
Example of the Exemption
- Fails to provide the consumer with a copy of the contract, or if a contract does not exist, a receipt which is dated, contains the seller's name and address, and a discloure in 10 point bold type
- Fails to furnish the consumer a fully completed copy fo the Notice of Cancellation which must be attached to the contract or receipt and must be in 10 point bold-faced print. Seller must also retain a completed copy for himself.
- Includes in any door-to-door contract or receipt a confession of judgement or a waiver of the consumer's right of cancellation.
- Fails to orally inform the consumer about his right of cancellation or misrepresent that right in any way.
- Fails or refuses to honor a valid notice of cancellation. If a valid cancellation is received, all payments signed by the buyer must be cancelled within 10 business days after the notice of cancellation.
- Transfers, sells or assigns a negotiable instrument signed by the buyer to any third party within 5 business days of the transaction.
- Fails, within 10 days of cancellation, to notify the buyer whether the seller intends to repossess any shipped goods.
If the Door-to-Door Regulation Does Apply, the Funeral Director Will be Committing an Unfair or Deceptive Act or Practice if He does Any of the Following:
"You, the buyer, may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See attached noticed of cancellation form for an explaination of this right."
- Must be in close proximity to the signiture line for the buyer.
- If a receipt is given, the disclosure must appear on the front of the receipt.
Disclosure- 10 point bold type.
Or if a contract does not exist, a receipt which is dated, contains the seller's name and address, and a discloure in 10 point bold type
Fails to Provide the Consumer With a Copy of the Contract
Which must be attached to the contract or receipt and must be in 10 point bold-faced print. Seller must also retain a completed copy for himself.
Fails to Furnish the Consumer a Fully Completed Copy of the Notice of Cancellation
A confession of judgement or a waiver of the consumer's right of cancellation.
Includes in any Door-to-Door Contract or a Receipt:
About his right of cancellation or misrepresent that right in any way.
Fails to Orally Inform the Consumer
If a valid cancellation is received, all payments signed by the buyer must be cancelled within 10 business days after the notice of cancellation.
Fails or Refuses to Honor a Valid Notice of Cancellation
Signed by the buyer to any third party within 5 business days of the transaction.
Transfers, Sells or Assigns a Negotiable Instrument
To notify the buyer whether the seller intends to repossess any shipped goods.
Fails, Within 10 Days of Cancellation