Regulatory Negligence 

Death Care trusts are required by state statutes having an express public policy to protect the consumer.  In contrast to conventional trust principals, the trustee must look outside the controlling trust instrument to ensure proper administration of the Death Care trust.  There are three classifications of Death Care trusts, and often a separate state statute governs each classification.  Ignorance of the requirements imposed by these laws poses the greatest liability risk to the bank that administers the death care trust account.   

At a minimum, regulatory negligence can result in expense to the institution to rectify oversight lapses, inadequate documentation and procedures.  In more serious situations, regulatory negligence can result in the bank’s liability for damages to the client for tax reporting deficiencies or investment losses resulting from required divestitures.   

Enforcement of death care laws vary substantially from state to state, with some states having very comprehensive oversight (Florida and Texas).  However, most states do not have proactive enforcement programs for their death care laws.   

Due to a growing dissatisfaction with oversight provided at the state level, Federal agencies have responded to consumers by taking a more active role in death care regulation.[1]  In 1988, the Internal Revenue Service issued Revenue Ruling 87-127 to impose a single method of income reporting on preneed trusts.  In the late 1980’s and early 1990’s the FDLIC issued a number of advisory interpretations regarding the application of insurance requirements to death care trusts.  In 1999 and 2003, the GOA issued reports assessing state efforts to regulate the death care industry.

Office of the Comptroller of the Currency 

With a few exceptions, state death care laws define the bank’s role as fiduciary to the consumer.  Failing to appreciate the purpose of these state laws, banks may attempt to use the trust instrument to define their role as custodial in nature.  However, the OCC appreciates the higher duties imposed by state law, and audits these accounts for compliance with those statutes.  The main areas of exposure for the bank in an OCC audit are the following: 

• Trust Instrument (inadequate authorities, instrument contradictions with state law regarding delegation of functions or responsibilities)
• Investment compliance (Failure to conduct Reg 9 annual reviews; deviation from applicable state law investment requirements or failure to provide reasonable oversight pursuant to Uniform Prudent Investor Act)
• Distribution Procedures/Documentation (Failure to provide oversight required by state statute)

Internal Revenue Service  

For income tax purposes, two types of death care trusts are recognized: preneed versus perpetual (endowed) care.  With regard to perpetual care, a hybrid complex trust return is required pursuant to Section 642.  For preneed trusts, Revenue Ruling 87-127 establishes a universal grantor reporting approach for most trusts established after 1987.[2]  Preneed trustees may elect out of the grantor trust method pursuant to Section 685.  Death care trustees face tax liability exposures from the following: 

• Section 6722 accuracy reporting penalties for failure to send grantor statements to preneed contract holders
• Improper preparation of the Form 1041qft attachment (Section 685)
• Reporting income to the funeral home as the trust grantor
• Inadequate documentation for perpetual care distributions (IRC Sec. 642(i) certification)

Securities Exchange Commission 

As state mandated trusts, death care trusts are afforded exemptions to permit pooling for investment and administration.  The bank may face investment company violations for the following: 

• Inadequate documentation for pooling arrangements
• Multiple entity pooled arrangements

State Death Care Regulator 

State regulators have successfully challenged federal preemption arguments raised by federally chartered institutions seeking to avoid death care requirements imposed on trustees.  Consequently, death care trustees must determine if any of the following requirements apply to avoid state regulatory proceedings: 

• Document Approval
• Trust Transfer Documentation (and Approval)
• Distribution Documentation
• Account Verification and Reporting

PRC Preneed Resource Company
9300 Metcalf, Suite 202
Overland Park, KS 66212
(913) 378-9922 or (800) 449-0030
(913) 378-9924
wastal@swbell.net

http://preneedresource.com/Regulatory Negligence.htm