Preneed Trust Accounting

Regardless of whether your business has one funeral home, or ten funeral homes, proper preneed administration is a necessity.  Otherwise, your preneed program will become a financial liability, and a drain on the resources of your personnel.  

Maintaining adequate individual purchaser records.

At a minimum, preneed records should reflect certain information regarding each preneed account: purchaser/beneficiary name, social security number, contract number, sales date, date of birth, sales price(s), aggregate payments, aggregate trust deposits, contract status, income allocations (by character), expense allocations, termination date, and, in some states, statutory trust requirement.

Reporting income to purchasers.

Income tax regulations for Rev. Rul. 87-127 require the preneed trustee to report income to purchasers by grantor tax letter.  The IRS rules require the trustee to allocate to each purchaser his or her proportionate share of each type of trust income (dividends, interest, capital gains, etc.) and expense.  The IRS rules aslo require preneed trusts to report each purchaser’s share of the trust’s tax exempt income.  Tax exempt income must be included by purchasers to determine whether their Social Security benefits are taxable. 

Allocating income on an annual basis; no allocation to deceased or canceled accounts.

Rev.Rul. 87-127 and IRC Section 685 both require income and expense allocations at reasonable intervals (monthly or at least quarterly).  Income must be allocated by character.  Also, income and expense items must be allocated to purchasers who died or canceled during the year.  Each individual’s share of trust expense items must be allocated between that individual’s share of taxable and tax exempt income.

Relying exclusively on book value accounting.

Book value accounting does not allocate a trust’s unrealized gains and losses.  State and federal regulators have come to understand that book value accounting can be used by a trust’s asset manager to hide the trust’s true performance and value.  Book value accounting also leads to short term investing because fund managers are forced to sell an asset in order to “benefit” the individual preneed accounts.  And in the current prolonged down market, book value accounting can lead to the depletion of the trust’s assets.  In contrast, market value accounting allows the fund manager to invest for the long term, and ensures every preneed account will be funded.