Are you Missing Out on the Extra Money in your Pre-Need Trust?

If you own a cemetery that sells pre-need contracts, you are familiar with the regulations that require you to place the funds into a trust. But did you know that several states allow you to distribute any surplus from the trust to your business? The regulations, which differ by state, refer to this situation as “excess income within the trust.”

Proper accounting of pre-need contracts for financial reporting often clouds the picture of the operations of a cemetery. Typically, management needs to review other metrics, such as cash flow, pre-need, sales volume, and call volume, to assess the true health of the business. An excess income audit could let you know if an excess income distribution is an option to alleviate your cash flow constraints. Or, it could be useful if you have plans to expand by acquiring another property or building a new mausoleum, by letting you know if you have the funds for these investments.

What is an excess income audit?

Some state statutes allow for “income in excess of the greater of (1) the cost of the obligations to be delivered or (2) the required statutory amount required to be in trust for obligations to be delivered, to be distributed to the cemetery as of the cemetery’s year-end after an audit by an independent certified public accountant.” After completing the audit, the seller will know how much excess income is available for distribution. Then, he receives any income from the trust account which, when added to the amount of the trust account, is in excess of the current cost requirements for all undelivered property, goods, or services for all of the outstanding pre-need cemetery contracts the company has entered into.

What is the purpose of an excess income audit?

The focus of an excess income audit is to verify the amount of the trust assets, test the completeness of the principal, and determine the accuracy and completeness of the estimated cost to deliver on the outstanding pre-need merchandise and service contracts. These all factor into estimating the amount of excess income that can be distributed.

This audit is very different from what most people envision an audit to be. It involves an onsite visit to review contract files, but does not typically require a significant amount of time from employees. They can remain focused on their day-to-day responsibilities of running the business. The independent CPA does all of the work, outside of gathering some initial information from the client. When the CPA is done, he issues a report of his findings, indicating the amount of excess income you can withdraw from the trust account.

What are the benefits of an excess income audit?

The luxury of this type of audit is that no regulators require it. Cemetery management can choose to conduct this audit based on its preliminary assessment that the trust fund has excess income it can withdraw. There are occasions where management believes that there is excess income to be withdrawn, but excess income audit results indicate otherwise. There are also no strict rules about the timing of this type of audit. Excess income audits have to be conducted after fiscal year-end and are typically completed prior to the end of the next fiscal year. The audit can completed at a time that best fits your schedule. Finally, there are no restrictions on how often an excess income audit can be conducted. They can occur as often as you feel they are necessary.

The single largest factor that defines whether excess income audits should be performed is the strength or weakness of the stock market. When markets are up, there tends to be more excess to distribute and put to use in other parts of the business. When markets are down, the volume of these audit decreases because a lot less income is being generated.

If you are interested in learning more about excess income audits or have questions about your pre-need merchandise and service trust accounts, contact MKS&H today.