What you Need to Know about Preneed Trusts:  A Primer

What you Need to Know about Preneed Trusts:  A Primer

Individuals can purchase, in advance, some or all of their funeral and cemetery merchandise and services through what’s called a preneed contract. Some people choose to only pre-arrange and pre-purchase their cemetery property (interment rights), such as a plot, crypt, mausoleum or niche, while others choose their burial services and merchandise.

A preneed contract allows the consumer to purchase future services and merchandise at current prices. Services available for purchase on a preneed contract include grave openings and closings, marker and vault installations, and other services sold in advance of need. Merchandise available for purchase on a preneed contract include, but are not limited, to items such as caskets, burial vaults, granite bases, markers, benches, vaults, vases, and urns.

When someone enters into a preneed contract with a funeral home or cemetery, they agree to pay for the funeral and cemetery goods and services in advance of their need. This leaves many wondering how they can be sure that the money will be there upon their death to cover these expenses. This is where preneed trusts come into play.

What are Preneed Trusts?

When one decides to prepay for their funeral and/or burial arrangements and merchandise, there are typically two methods to ensure the cemetery’s performance. Their money is either (1) used toward a premium to purchase life insurance whereby the policy proceeds will pay for their arrangements; or (2) deposited—either the entire amount or a portion of it—into a preneed trust fund account to defray the provider’s costs at the time of need. If a customer chooses the second option, the cemetery must deposit a portion of the proceeds from the preneed sales into a preneed trust.

 

Fund Required for a Preneed Trust

The amount deposited varies by each states’ cemetery laws and regulations. For example, cemeteries in Maryland must deposit 50 percent of the proceeds from the sale of pre-need merchandise or service, and another 5 percent at the time the contract is paid in full, into the trust. They must also deposit 80 percent of the proceeds from the sale of caskets. If the merchandise is delivered within 120 days of the contract initiation, this trusting is not required. Additionally, Maryland cemeteries must deposit 10 percent of the proceeds from the sale of cemetery property, such as spaces, mausoleum spaces, niches, etc., at the time a contract is paid in full.

Ultimately, regardless of state, a third party—typically a trustee or an insurance company—assumes responsibility for managing the funds to ensure that they are entrusted properly. Upon the individual’s death, the funds are withdrawn by a representative of the funeral home or cemetery to cover the costs to provide the services and merchandise designated in the preneed contract. If the individual has a prearranged funeral or burial agreement that includes items that are to be performed by the funeral home or cemetery at no additional cost to the buyer, the interest is retained by the funeral home or cemetery to offset the rising costs of those specified goods and services over time.

 

Reporting on Preneed Trusts

Many states’ cemetery laws and regulations require sellers of preneed merchandise and services to provide an annual report on the preneed trust fund. Cemeteries may be required to prepare this report on forms provided by the respective state that shows the required and actual deposits made to the preneed trust fund during the year and the preneed trust account balance at market value at the beginning and end of the year. In Maryland, this report is referred to as Maryland’s Preneed Burial Trust Report. Some states require this report be accompanied by the trustee’s annual summary statement that shows the assets held in the trust (at cost and market value) at the beginning and end of the cemetery’s fiscal year, as well as the trust deposits and withdrawals made during the year.

Requirements for CPA reporting on Preneed Trusts

Additionally, some states require a report from an independent certified public accountant (CPA). The level of assurance provided by the CPA and the type of engagement the CPA performs vary by state. Some state cemetery laws, such as Maryland’s, require that an independent CPA audit and report on a schedule of required and actual deposits to the preneed trust fund. Maryland’s cemetery laws also require that the auditor’s report and accompanying audited schedule be included in the cemetery’s annual report to the state. The annual report including Maryland’s Preneed Burial Trust Report, the trustee’s annual statement, and the auditor’s report and accompanying audited schedule must be filed with Maryland’s Office of Cemetery Oversight within 150 days of the fiscal year end of the cemetery.

Preneed Trusts and Financial Statements

Preneed trusts are often reported as a separate entity on the cemetery’s combined financial statements, depending on the requirements set forth by the respective state’s cemetery laws. The combined financial statements of a cemetery often include two separate trusts established by the cemetery, one of which is the Preneed Trust.

As you can see, the laws and regulations governing the sale of preneed merchandise and services on contracts, trusting on those preneed contracts, and required reporting on the preneed trusts vary by state and can be increasingly complex. It is important that the cemetery owner and CPA work together to make sure that all required deposits and required reporting for the preneed trust fund are made properly and timely. If you have questions about your preneed trust, please contact the death care accounting experts at MKS&H.

 

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MKS&H

MKS&H is committed to providing personalized tax and accounting services while developing a deep understanding of you, your culture, and your business goals. Our full view of financial systems and the people behind them allow us create and evolve the best solution that will help you and your business thrive. The accounting experts and consulting professionals at MKS&H work together to help you achieve the financial results you want.

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