People look for answers in funeral trust case

By Jamey Dunn
Millions of dollars entrusted by Illinois citizens to pay for their funerals is at stake in an investment scandal that has been marked by confusion and finger-pointing. A lawsuit now poses funeral directors against an association that was supposed to protect their interests.

A pre-need funeral trust fund allows people to make their final arrangements in advance for the cost at the time of purchase. The money is then invested into the trust, and the investment returns help cover inflation costs between the time customers buy their plans and the time they pass away.

Illinois’ pre-need fund, which held about $300 million at its highest point, began losing money in 2001 and is now mired in controversy, as the Illinois Funeral Directors Association faces investigations and a lawsuit filed by some of its members.

Funeral homes are still on the hook for guaranteed pre-need plans, regardless of whether the trust has enough money to foot the bill. Rep. Dan Brady, a Bloomington Republican and licensed funeral director, said that his fellow directors are “caught in the middle. They are left holding the bag … because of investment problems and questionable dealings.” Some directors say the association that is supposed to protect their interests has hung them out to dry by making bad investments and failing to give them accurate information about the pre-need trust.

The Illinois Funeral Directors Association began taking out life insurance policies on funeral directors as an investment, but the insurance policies did not pay out quickly enough to cover the funeral costs of the people with pre-need plans. When a funeral director dies, a portion of the insurance payout would go to his or her beneficiaries. But the majority of the money would go to the trust.

According to a complaint filed by the Illinois secretary of state’s office, the association sunk about $200 million from the trust into life insurance policies.

However, a statement on the Funeral Directors Association’s Web site pegs the economic downturn as the primary reason for the trust’s losses.

The association was licensed to control the trust in 1980 by then-Comptroller Roland Burris, now a U.S. senator. The license has come under scrutiny because Burris became a lobbyist for the association after he left office. Current Comptroller Dan Hynes has said the license shouldn’t have been issued in the first place. Burris has declined to comment about why he awarded the license, saying too much time has passed and he doesn’t remember.

Hynes’ office pulled the association’s license to manage the trust in September 2007 and ordered the organization to repay almost $10 million in fees it collected for managing the trust. Carol Knowles, spokeswoman for Hynes, said the comptroller’s office is prepared to take the association to court if the money is not returned.

Also as part of the fallout, a Merrill Lynch agent who sold the life insurance policies to the association has lost his investment adviser’s license from the secretary of state’s office and his insurance broker’s license from the Illinois Department of Insurance. The agent, Edward Schainker, is contesting both decisions.

Knowles said the comptroller’s first goal going forward is to protect individuals who purchased pre-paid funeral plans and then to help funeral directors who were unaware of their association’s investments. However, Knowles said she thinks some funeral directors knew what was going on. “They received personal insurance policies free of charge. Many of them sat on the [Illinois Funeral Directors] board at one time or another, and they participated in an investment that was, as they say, ‘too good to be true.’”

Many association members, in turn, claim that the comptroller’s office failed to protect them by waiting too long to alert them of the fund’s losses.

In an attempt to prevent the situation from repeating itself, Hynes backed state legislation aimed at protecting the money that is still in the fund and creating more transparency for investors. Senate Bill 1682, which passed both chambers of the General Assembly this spring, would require the fund to be administered by a third-party trustee that would be legally bound to make decisions that were in the best interest of investors. The bill also would require the trustee to send reports directly to individuals with money invested. The bill’s sponsor, Democratic Rep. Lisa Dugan of Bradley, said that measure is just a starting point for reform and would make changes that are urgently needed. “We can’t take $40 million that’s been mismanaged and not have something in place to make sure that — any money from here on out — the same thing doesn’t happen. … That part of the issue needed to be put under regulatory control now.”

However, it’s difficult to pinpoint the amount the fund has lost because the Funeral Directors Association gave its members inaccurate statements on the trust, according to Michael McRaith, director of the Insurance Department and acting secretary of the Department of Financial and Professional Regulation. He said it may not even be a matter of the fund loosing a lot of money; it may be that the association told members that the fund was doing better than it actually was. That difference now appears to be a large loss.

The Department of Financial and Professional Regulation worked out an $18 million settlement with Merrill Lynch, which sold the insurance policies to the association. McRaith said the figure was based on premiums that Merrill Lynch received for insurance policies and an additional amount that was tacked on to “bring the matter to closure.”

Funeral directors criticized the settlement by saying Merrill Lynch would be returning pennies on the dollar of the original investments into the trust. Some association members are, instead, opting to sue the Funeral Directors Association and Merrill Lynch. If individual members refused Merrill Lynch’s offer to settle, then their portion of the money would go to their customers who bought the pre-need funeral arrangements, instead.

Brady said the settlement is a well-intentioned effort to restore some faith in the trust, but, in the end, it has just created more “frustration and confusion” for funeral directors. He said the directors do not know if they should settle because they are unsure about how much money they actually lost. Brady said he thought $40 million was a conservative estimate but added, “I don’t think anybody truly knows.”

Confusion and frustration seem to be recurring themes surrounding the future of the pre-need funeral trust, and, so far, solutions are nowhere in sight. The Illinois House voted to create a task force that will look into the issue. The panel will consist of legislators and representatives from the comptroller’s office, the Department of Insurance and the Department of Financial and Professional Regulation. Both McRaith and Knowles said their offices wanted to wait for the task force’s recommendations before proposing any other changes to the way the trust is regulated.

Brady, who sponsored the resolution that created the task force, said that the group’s goals include holding accountable whoever is responsible for the problems with the trust and creating a comprehensive reform package that addresses problems in all areas of pre-need funeral sales. The task force must submit the report to the governor by the end of the year.

With all the negative attention on the trust, Brady said that he hopes reforms could help get it back on solid ground. “When you have a multifaceted problem like that, you have a consumer that is becoming very suspicious and skeptical when all they have been told over the last several years is that the whole idea is piece of mind.”

Knowles said that people should not be afraid to invest in the fund just because some individuals made irresponsible investments and took “advantage of the system.” She added, “People rob banks every day, but that doesn’t and shouldn’t stop people from putting their money in banks.”

See The State-Journal Register for a timeline of events associated with the pre-need funeral trust.