Illinois Funeral Directors Association faces questions over trust's shortfall, management

State comptroller's office continues 3-year investigation

By Ameet Sachdev | Tribune reporter

March 1, 2009

Consumers throughout Illinois thought they were being prudent in planning for their last days by buying a pre-paid funeral plan that would be held in trust.

But now their trust accounts, more than 49,000, have lost as much as a third of their values, and state regulators and funeral home owners are taking heat for not moving fast enough to protect consumers in what was supposed to be a safe investment. In total, the funeral trusts, which at the end of 2007 held more than $300 million, have lost more than $50 million.

Lyn Canger of Lake Zurich said she only learned a few weeks ago that her father-in-law's account had fallen in value after calling the funeral director that sold the contract. The balance in his account dropped from a high of $5,522.46 in September to $3,772.25, a 32 percent decline. While her contract guarantees the original deposit of $4,731.16, Canger is afraid the final funeral bill will be more than that.

"We were told that setting up this trust would ensure that the fund would keep up with the cost of inflation and that no other funds would be necessary," said the 49-year-old piano teacher. "Now I'm told to have the same funeral that we purchased will be at least an additional $3,000. I am so weary and confused."

The fund's trustee, the Illinois Funeral Directors Association, blames some of the losses on last year's meltdown on Wall Street.

But the Illinois comptroller said the trust's decline is not a natural byproduct of market gyrations. In the course of a three-year investigation that included the Department of Financial and Professional Regulation, regulators found a series of questionable investment decisions by the funeral trade group. The fund's directors, for example, invested heavily in sophisticated corporate-owned life insurance policies taken out on themselves and other insiders, according to the state comptroller's office, which regulates the funeral industry. The policies have "severely impaired" the liquidity of the trust, regulators said.

Board members also used the trust as a personal piggy bank, borrowing money from it to make loans to association members, according to documents provided by the comptroller's office.

Finally, the association for years was paying out higher interest rates than its investments earned. The unusual practice benefited funeral home owners because they are allowed to keep up to 25 percent of the earnings on consumer deposits, but regulators said it led to a deficit.

The problems with the funeral trust received attention in a lawsuit filed at the end of January by six Illinois funeral directors against their own professional association. In response to questions from the Tribune, the comptroller's office and others have disclosed aspects of a controversy involving a product that made explicit promises about services to be rendered in the future. The promises are now in question.

The state investigation, which continues, led state regulators last May to order the association to stop operating the trust and transfer the funds to a new trustee, Merrill Lynch Trust Co. Regulators also froze the assets of the trust, except to pay death benefits, to prevent funeral directors from removing funds before the financial condition of the trust could be determined.

As part of the transition, the association marked down the value of every consumer's account to eliminate the deficit of more than $50 million. Regulators are working with the funeral directors association and the new trustee to determine the value of the life insurance policies and whether they will generate any future proceeds for trust participants.

In a statement, the IFDA said that despite the losses, the funeral contracts contain consumer protections. "Consumers who have purchased pre-need funeral contracts should understand this transition has very little, if any, impact on them."

But Joshua Slocum, a consumer advocate in the funeral industry, said the IFDA is being irresponsible by asserting that everything will be OK.

"The whole thing is awful," said Slocum, executive director of the Funeral Consumers Alliance in Vermont. "There's not enough money in the trust, and some people will suffer the consequences."

Regulators urge trust participants not to panic.

More than 70 percent of the prepaid plans have a price guarantee, meaning consumers will receive the goods and services at the price they originally paid, no matter what is left in their trust accounts, Carol Knowles, a spokeswoman for Illinois Comptroller Dan Hynes, said in written responses to questions from the Tribune.

However, consumers who stand to suffer financially are those who purchased contracts that weren't guaranteed. Those people make up about 30 percent of the trust's participants and include people like Canger's 92-year-old father-in-law. Although their principal is guaranteed, they will have to shell out more money in the future or cut back their original funeral arrangements.

Canger can't bear to tell her father-in-law, a 92-year-old decorated World War II veteran, the truth about his funeral trust fund. "I don't want the poor guy to worry," she said. "He shouldn't have to worry about this last step."

Funeral home owners throughout the state advertised prepaid funeral plans, also called pre-need trusts, as a protection against inflation and a way to take the financial burden off children. The director's association promised to invest the money predominantly in safe investments like U.S. Treasuries and bank certificates of deposit, according to the suit.

Now, the funeral directors themselves face financial hardship. For guaranteed contracts, they have to absorb inflationary increases in the cost of funeral services they contracted to provide, in some cases years ago.