Highlights of Michigan's New Prepaid Funeral and Cemetery Sales Act

The revisions enacted in the Prepaid Funeral Contract Funding Act were the most significant changes in preneed regulation in Michigan in almost 20 years. When the new amendments take effect next January, all preneed transactions involving merchandise or services-- no matter whom the seller or what the product or service-- will be regulated under one law. This stands in sharp contrast to existing law under which cemeteries selling "cemetery merchandise" or "cemetery services" are regulated under more lenient standards in the Cemetery Regulation Act, while funeral directors-- and everyone else for that matter-- is subject to the requirements of the Prepaid Funeral Contract Funding Act.

The new law-- hereafter to be called the "Prepaid Funeral and Cemetery Sales Act"-- will apply to all preneed transactions involving funeral or cemetery merchandise or services. Cemeteries selling "cemetery merchandise," i.e. vaults, grave memorials and urns, and "cemetery services" such as cremations and grave openings and closings will no longer be subject to a different regulatory law. While trusting and refund standards will be somewhat different for cemetery merchandise sold by cemeteries, all sellers will be subject to identical regulatory, disciplinary, disclosure, and trust administration requirements. The net effect will be tougher standards for cemeteries, better protection for consumers, and more parity in the marketplace for all sellers.

The purpose of this article is to provide an overview of the changes made by the new law. These changes are in the following categories, each of which will be discussed below: (1)trusting; (2)cancellation and refunds; (3)warehousing; (4)regulatory requirements; (5)prohibited and required practices; and (6)enforcement.

1.Trusting . There will be no change in the 100% trusting requirement for funeral directors. Cemeteries, on the other hand, will be required to utilize third-party escrow accounts established under the Funeral and Cemetery Sales Act for all transactions involving cemetery services and merchandise. Trusting levels for cemetery services will be 100% of the retail price, with all income remaining in the escrow account until death or cancellation of the contract. Rules for trusting of funds received by cemeteries for cemetery merchandise (defined as vaults, urns, and grave memorials) will be as follows: at the option of the cemetery, funds may be trusted as they would be if the merchandise were sold by a funeral director, or , alternatively, at 80% of the retail price, ratcheted up from 60% over a four-year period beginning in 2005. (This compares with effective trusting levels of approximately 40% under the existing Cemetery Regulation Act.) Cemeteries selecting the second option will be allowed to receive income from the escrowed funds once per year, but only to the extent that the income exceeds the rate of inflation.

2.Cancellation And Refunds . Under the new law, cancellation and refund rights prior to death will remain as they are now for funeral services and funeral merchandise. A buyer will be entitled to cancel a contract anytime before death and receive a refund of at least 90% of the amount in the escrow account-- more if a commission has been taken by the seller.

Cancellation and refund rights for cemetery services and merchandise sold by cemeteries will be governed by the new law instead of the Cemetery Regulation Act. Refunds for cemetery services will be the same as for funeral services and funeral merchandise. Refunds for cemetery merchandise sold by a cemetery will be 100% of the purchase price plus an amount equal to the rate of inflation since the inception of the contract.

In transactions in which a cemetery has sold both funeral merchandise or services and cemetery merchandise which is subject to the 80% trusting requirement, a buyer will be entitled to separately cancel those parts of the contract involving cemetery merchandise while leaving intact those parts pertaining to funeral merchandise or services. This rule is being established to discourage cemeteries from artificially manipulating prices in order to reduce the total amounts trusted. This could be accomplished, for example, by decreasing the price of a casket and increasing the price of a vault in order to take advantage of the lower trusting level for vaults. If a cemetery should engage in this type of practice, the buyer will be able to cancel the vault sale and receive a full refund while at the same time keeping in place the contract for the discounted casket.

The new law also makes a significant change in cancellation rights after the contract beneficiary's death. After the contract beneficiary's death, the contract will be subject to cancellation only if (a)there are no remains or the remains cannot be recovered; or (b)funds in the escrow account were not utilized for funeral and/or burial expenses because the family was unaware of their existence. This new limitation is intended to prevent family members from ignoring a decedent's funeral and burial wishes and "cashing in" a preneed contract. However, the new rule will not prevent upgrading services or merchandise or designating a new provider after the contract beneficiary's death.

3.Warehousing . When the existing Prepaid Funeral Contract Funding Act was enacted in 1986, language was included that was intended to prevent warehousing of caskets as a means of avoiding trusting and refund requirements. Nevertheless, a number of sellers, particularly cemeteries, have engaged in this practice. To prevent this practice once and for all, the Legislature has significantly tightened the anti-warehousing language in the new law. Henceforth, it will be even more clear that a seller cannot avoid trusting and refund requirements by arranging or inducing a buyer to arrange for a casket or other merchandise to be warehoused until needed.

4.Regulatory Requirements . The new law will tighten regulatory requirements-- now fully applicable to cemeteries-- in several respects. First, reports by a certified public accountant (henceforth a Michigan CPA) will be required annually instead of once every three years. Second, the new law imposes certain additional record-keeping requirements on preneed sellers. As under the current law, a seller will be required to keep copies of all preneed contracts for at least three years after the contract has been performed or cancelled. In addition, a seller's records must reveal, at minimum, the following information: the amounts of payments made and accepted under each preneed contract, the name and address of each contract buyer and beneficiary, the name and address of each escrow agent utilized, the date and amount of each deposit with an escrow agent, the total price of each contract, exclusive of commission, the amount of any commission, the date each contract is performed, cancelled or revoked, the date and amount of any refund paid to the contract buyer, and any other records required by the Department of Labor and Economic Growth. In addition , beginning April 1, 2006, sellers must have available for inspection by the Department of Labor and Economic Growth the following information for each unperformed preneed contract current as of the preceding December 31st the date and, if available, the contract number, the face value of the contract, whether the contract is a guaranteed or non-guaranteed contract, the names of the contract buyer and beneficiary, and information on the means taken to insure performance of all of the provider's obligations (MFDA members utilizing the Master Escrow Plan(TM) will be able to comply with this requirement simply by identifying the escrow agent and the specific investment plan or plans into which the funds have been placed). Finally, the Department of Labor and Economic Growth will be authorized to assess a fee of up to $1,000.00 in connection with a departmental audit of a preneed seller's records.

5.Prohibited And Required Practices . By bringing all preneed sales by cemeteries under the same law that previously was applicable to funeral directors, cemeterians will henceforth be subject to all of the same disclosure and regulatory requirements as funeral directors. Perhaps the most significant of these is the requirement to comply fully with the price disclosure rules of the Federal Trade Commission with respect to both preneed and at-need sales of cemetery services and merchandise.

6.Enforcement . Cemeteries will also be subject to the same enforcement and penalty provisions as funeral directors with respect to all preneed service and merchandise sales. Included among them are the citizen-enforcement provisions MFDA has utilized in actions aimed at preventing warehousing.

Conclusion

Michigan has been a recognized leader in the protection of preneed funeral consumers since 1986 when the Prepaid Funeral Contract Funding Act was enacted. The newly adopted Prepaid Funeral and Cemetery Sales Act extends those protections to preneed consumers of cemetery goods and services as well. Its enactment is a major victory for Michigan consumers.

Sales of cemetery lots or interests in mausoleums and columbariums will continue to be regulated by the Cemetery Regulation Act. The law does not regard these as preneed transactions because they involve a conveyance of interests in real estate in which legal title passes to the buyer at the time of the sale.

Markers and urns which have been inscribed with the name of the person being memorialized are not subject to trusting and refund requirements.

Over the years, MFDA has filed a total of four lawsuits against cemeteries engaging in warehousing. One of those lawsuits is still pending. Of the other three, one was settled when the cemetery voluntarily agreed to stop engaging in the practice, and the other two resulted in court orders stopping the practice.

Participants in the Master Escrow Plan(TM) will be able to comply with this requirement simply by keeping a copy of their year-end annual statement on hand.