Are Prepaid Funeral Deposits Really Safe?
Although offered as an option, thousands of Canadians prefund their funeral or the funeral of a loved one annually. This is not a new practice. Canadian funeral homes have been offering prearranged and prefunded funeral services for over 20 years. Even though exact figures are not officially compiled, it is estimated that funeral homes in Canada have accumulated well over $1 Billion in prepaid deposits. With fears of funeral home bankruptcies, misappropriations and the ever changing investment climate, consumers are asking, ' Are prepaid funeral deposits really safe?'
As of 2000 every province has enacted comprehensive legislation governing the preneed sale of funeral goods and services. While each province has designed its own unique laws, each imposes a detailed set of procedures, requirements and safeguards to protect consumers and the integrity of prepaid funds. The following is a summary of some of the more prominent consumer protection features governing the sale of prepaid funeral deposits.
Trusting is the cornerstone of regulatory requirements. Trusts are legal instruments set up to handle and manage your property. If you put your assets in a trust, you transfer legal ownership of them to the trustee, who holds the property for you or for the benefit of anyone you designate. Funeral homes selling prearranged funerals are required to place all or some portion of the prepaid funds received from consumers into trust until the services are rendered or the contract is cancelled by the purchaser. The trust fund must be established with a financial institution and kept separate from all other money controlled by the funeral home.
In most provinces funeral homes are required to maintain individual trust accounts for each contract. However, in this province a bulk trust or one trust account for all contracts is permitted. The income earned in a bulk trust is distributed equally between each contract.
How monies are invested once in trust is governed by Provincial Trustee Acts. Most funds held in trust are invested very conservatively in fixed income guaranteed investments such as GIC's, treasury bills, government bonds, and mortgage backed securities. GIC's purchased from financial institutions which are members of the Canada Deposit Insurance Corporation (CDIC) are covered under this insurance. Any GIC's issued by a CDIC covered issuer are eligible for coverage. Currently, the CDIC insures depositors fully for deposits of up to $ 60 000 which includes accrued interest.
Under the Federal Income Tax Act, income earned on prepaid deposits used to cover funeral and cemetery expenses is permitted to build-up tax-free. Referred to in the legislation as 'eligible funeral arrangements,' the allowable contribution per individual is $15,000 for the provision of funeral services and an additional $ 15,000 for the provision of cemetery services for a total of $ 30,000.
In order to provide greater flexibility in how these funds are invested. Trustee Acts in most provinces have been amended to include the 'Prudent Investor Rule.' This allows trustees to invest in mutual funds and other types of securities.
To protect investors against losses of securities and cash balances due to the financial failure of a brokerage house or any firm in the self-regulatory system, The Canadian Investor Protection Fund (CIPF) was established. CIPF provides coverage up to a maximum of $500,000 on the aggregate of a client's general account. It does not cover customers' losses that result from changing market values regardless of the cause of such loss.
Also referred to as an Assurance Fund, Claims Fund or Guaranty Fund, it is used to compensate consumers that have paid preneed funds to a funeral home that is later unable to perform the contract. It provides a mechanism to reimburse the consumer or to pay a substitute funeral home to provide the goods and services purchased by the consumer. Contributions to the fund are made solely by funeral homes and sellers licensed to sell prepaid funerals. In this province the rate of payment into the fund is 1% of the net amount deposited in trust by a funeral home annually. For example, if a funeral home deposits $250,000 in its prepaid trust in one year, its contribution to the Compensation Fund is $2,500 (i.e., 1% of $250,000).
Funeral homes receiving prepaid funds generally must deposit them into a trust fund within a prescribed period of time. In addition, some provinces require the funeral home or financial institution receiving the trust funds to confirm the deposit of the funds in writing to the purchaser.
The purchaser many cancel the prepaid contract at any time with written notice to the funeral home. In most cases the funeral home must refund the full amount plus any accrued income, less a small cancellation fee, generally 10% of the principal amount, to a maximum of $250.
In the event a purchaser of a prepaid contract must relocate to another province or simply wishes to use another funeral home, funds may be transferred from the original funeral home to another without jeopardizing its tax-exempt status within the trust or triggering the cancellation of the contract. Another option is to leave the funds with the funeral home and have the new funeral home bill the original funeral home at the time of need. This assumes the funeral services arranged in the new location will be similar to those chosen at the original funeral home.
Each funeral home and satellite operation must submit an audited financial statement of its trust to the Minister or Regulatory Board overseeing the legislation annually. Also if requested, funeral homes must provide to a buyer a statement of the amount of prepaid funds including accrued income held in trust for the purchaser.
Prearranging and prefunding funeral services are integral components of every funeral home's daily operations. Over 30% of today's funerals have been prefunded. The funeral profession cannot afford to tarnish or jeopardize the integrity of this product. Notwithstanding the numerous consumer protection measures established under legislation and by self-regulated organizations, the industry members stand vigilant over the conduct of its members and will do all it can to maintain the trust bestowed upon our profession by the families we serve.
Geoff Carnell, President of Carnell’s Funeral Home and Crematorium in St. John’s, is the President of the Canadian Independent Group of Funeral Homes and Past President of the NL Funeral Services Association and the Funeral Services Association of Canada. He is also the author of “When The Sun Sets: A Guide to Funeral Service.”
Readers who may have questions or would like copies of previous articles are encouraged to call Carnell’s Funeral Home at 722-2730, or write to Geoff Carnell, Carnell’s Funeral Home, P.O. Box 8567, St. John’s, NL AlB 3P2.