Fiduciary Risks for Death Care Trusts

Regulatory Negligence

National banks that administer death care trusts are subject to four distinct regulatory schemes:

Office of the Comptroller of the Currency - Applicable state laws do not dictate the content or form of death care trust instruments, and the OCC will review both the trust instrument and applicable law with regard to a bank’s administration of a death care account.

Internal Revenue Service - The diversity of state trusting requirements has precipitated Federal income reporting requirements unique to death care trusts.

Securities Exchange Commission - Death care trusts are pooled for administrative efficiency, implicating securities regulations.

State Death Care Regulator - The potential for fraud and abuse to an older consumer population has resulted in an extensive state regulatory system with multiple agencies that may have overlapping jurisdiction of the funeral/cemetery transaction.

Regulatory negligence will most likely result in expense to the institution defending administrative proceedings and rectifying documentation and procedures to a regulator’s satisfaction. In some situations, regulatory negligence can result in damages for income reporting inaccuracies or investment losses resulting from required divestitures.

Fiduciary Breach

As a general rule, state death care laws require a trust or fiduciary relationship between the bank, the death care company and the consumer. Although the relationship does not ‘vest’ until funds are actually received by the bank, liability can be found when the bank fails to discharge the fundamental duties imposed by state law. The fundamental fiduciary duties include the following:

Investment - While many state laws allow the delegation of the trust’s investment authorities, these laws generally impose on the trustee the duty to reject imprudent investments or unauthorized investments, and to provide periodic review.

Distribution Supervision - Most state laws require documentation supporting all death care trust distributions.

Income Reporting - There are two permissible methods for reporting income on preneed trusts established since 1988, and both are dependent upon contract information maintained by the death care company. A special complex trust return is also required of perpetual care trusts.