How Unclaimed Property Laws Impact Funds in Your Preneed Trust

BY WENDY RUSSELL WIENER

We all recognize the benefit of general laws dealing with unclaimed property, which facilitate reuniting people with MISMATCHEDproperty they’ve lost track of – entirely M appropriate when the property is money in a bank account. But the op- eration of those laws on preneed trust funds is not entirely appropriate LAWS and can put trustees and licensees in an HOW UNCLAIMED impossible position.

PROPERTY LAWS Let’s start by looking at the only two IMPACT FUNDS ways to fund a preneed contract. The first option is for the consumer to pay IN YOUR PRENEED the funeral home, which must then de- TRUST. posit some or all of the money into trust. The other option is for the consumer to purchase a life insurance policy; the same three circumstances – fulfillment, NOW THAT ACTION HAS BEEN TAKEN IN death benefit payable under that policy cancellation or default. SOME STATES, THEY'VE GONE ABOUT is assigned to the funeral home so that Thus, the trust funds are locked up the firm will receive some or all of the by both law and contract, and they can IT INCORRECTLY, AMENDING ONLY money upon the death of the preneed only be accessed when one of the three GENERAL UNCLAIMED PROPERTY LAWS contract beneficiary. conditions occur. WHILE IGNORING SPECIFIC PRENEED Only one of these funding mecha- Few states include, within their pre- nisms – insurance – is exempt from the need laws, direction to the funeral TRUST LAWS. BY DOING SO, STATES reach of the unclaimed property laws home or trustee on how to handle pre- HAVE LITERALLY ENACTED LAWS THAT in some states. need trust funds that would be consid- REQUIRE ILLEGAL ACTIVITY. This is a good place to mention that ered unclaimed. For those states that the treatment of preneed contract fund- do, I say: “You got it right!” ing mechanisms by the various states’ For those that don’t, I posit that in- the need to address the abandonment unclaimed property laws is inconsis- cluding a reference to preneed trust of preneed trust funds until recently. tent. Some state laws don’t treat the funds in your general unclaimed prop- And now that action has been taken funding vehicles (trusts or insurance) at erty law falls short when the law fails in some states, they’ve gone about it in- all, some address the abandonment of to, more importantly, address the issue correctly – amending only the general trust funds, some address the abandon- within the preneed trust law. unclaimed property laws while ignor- ment of insurance policies and some A preneed trustee should not be ing the specific preneed trust laws that address the abandonment of both. forced to violate the specific state laws expressly prohibit releasing preneed The imbalance in the treatment of limiting its disbursement of preneed trust funds to the state. the two funding vehicles is highlight- trust funds without fear that it will, at a By doing so, states have literally en- ed by the fact that some states have en- minimum, lose funeral home clients or, acted laws that require illegal activi- acted a version of the National Council at a maximum, lose its authority to act ty. Those laws leave deathcare profes- of Insurance Legislators Model Un- as a trustee. Likewise, a funeral home sionals in an impossible position and claimed Life Insurance Benefits Act, should not be forced to instruct its should not be followed. which expressly excludes from the defi- trustee to distribute funds to a state as Finally, you may also be thinking nition of “policy” “any policy… used to unclaimed property because the death- back to the beginning of this article, fund a preneed funeral contract or pre- care laws do not give the funeral home where it was pointed out that insur- arrangement.” Why would one fund- the right to issue that instruction. ance policies that fund preneed con- ing mechanism be exempt and the oth- Though many general unclaimed tracts are exempt from being deemed er not be? property laws include a provision that abandoned in some states. The way many state regulators seek to indemnifies a holder of property when You may wonder why there’s a differ- apply unclaimed property laws to pre- the holder turns the property over to ence in treatment. Good for you! Per- need trust funds is as follows. Funds in the state, that indemnification will not haps the relevant insurance legislators trust are considered unclaimed when protect a licensee or trustee that know- recognized there is more than just one one of three circumstances occur: 1) the ingly violates the law. Put another way, contract involved in a preneed transac- age of the contract is more than a cer- you and your trustee could face seri- tion: the preneed contract and the in- MISMATCHED tain number of years, 2) the age of the ous consequences if you release trust surance policy or trust agreement. That contract beneficiary exceeds a certain funds to the state based on the gener- realization and treatment should be number of years, and 3) the beneficia- al unclaimed property law when your carried over to trust agreements as well. ry of the contract can be located in the state preneed trust law doesn’t also au- If states seek to amend how to ap- Social Security Administration’s Death thorize it. Some of the consequences proach a preneed contract that won’t be Master File. Once deemed unclaimed, include losing your license or authority fulfilled, that direction should be giv- funds in the preneed trust must be sent to act as a trustee, as well as facing civil en in the preneed law and nowhere else. to the treasury of the state in which the and/or criminal penalties. The preneed law is the place in which preneed contract was written. Philosophically, you may wonder: both contracts – preneed and funding Here’s the problem with that. In the “Why would I want to keep money in vehicle – can be addressed. Referenc- application of general unclaimed prop- trust for preneed contracts I will nev- es to preneed trust funds or insurance erty laws to preneed trust funds in er fulfill?” policies in the general unclaimed prop- most states, the holder/trustee is actu- The answer is simple: Most state pre- erty laws in isolation are ineffective. ally prohibited from releasing the trust need laws just don’t allow for you to do funds under any circumstance other anything else. It’s not that the funeral Wendy Russell Wiener is a partner than fulfillment, cancellation or default profession is greedy and wants to keep with Nelson Mullins Broad and under the preneed contract. And most families separated from monies to Cassel law firm, general counsel preneed trust agreements also limit which they may legally be entitled, but for Funeral Services Inc. and a the distribution of trust funds to those rather, state lawmakers did not foresee regulatory consultant nationwide.