Developed in 1998 by the Government and Legal Affairs Task Force of the
International Cemetery and Funeral Association
In lieu of establishing a prepaid contract fund, alternative means to assure the seller's performance can be secured by the seller through a.) a performance bond, b.) an irrevocable letter of credit, or c.) a certificate of deposit for the wholesale liability of the merchandise and services to be provided.
High trust deposit requirements can unnecessarily restrict the sale of merchandise and services on a preneed basis. Alternative financial instruments in lieu of trusts can be used for avoiding these anti-competitive consequences while providing a resource to protect the purchaser in the event of the seller's default.
In addition to providing the purchaser and the regulatory authority with a similar level of security as that obtained by placing the funds in trust, there are numerous advantages to these alternative methods because they avoid the administrative expenses and paperwork created by trusts. These alternate vehicles offer assurance of performance without concern over adequate investment growth of a trust fund or the potential for deficiencies created by inappropriate investments or misuse of the trust funds.
Reporting procedures are streamlined with these alternatives, since there are no trust accounts to maintain, and no need to issue 1099s or K-1s to the purchasers for interest earned on the trust deposits. The legal obligation of having to pay tax on the trust earnings is eliminated. When the seller is permitted to recover up-front expenses associated with the sale, proceeds that are not available with high trusting requirements, the seller has more flexibility to use the funds received for productive business purposes. For example, the seller will be enabled to make capital improvements to the cemetery or funeral home, to purchase merchandise from the manufacturer in advance of need, or to recruit and retain specialized and skilled personnel.
Other alternatives to trusting, such as constructive delivery and insurance-funded prearrangements, are reviewed under separate guidelines.
- In lieu of trusting requirements, the face value of an alternative instrument (such as a performance bond, irrevocable letter of credit, or certicate of deposit) should be based on the gross wholesale replacement cost of the outstanding liabilities for prepaid contracts for the previous calendar year, as determined by annual report submitted to the regulatory authority.
- The amount of the alternative instrument should be annually increased or decreased, as necessary to correlate with the outstanding liabilities for prepaid contracts.
- The alternative instrument should be vested in favor of the state, for the benefit of all purchasers of prepaid contracts, and submitted to the regulatory authority.
- In the case of a performance bond, the surety company should be an independent entity, unaffiliated with the seller.
- The surety company should be required to give the regulatory authority and the seller adequate written notice if the surety company does not intend to renew the performance bond at the time of expiration.
- The seller should agree that if it receives notification that the performance bond will not be renewed, it will, within a specified time, do at least one the following in an amount sufficient to assure performance:
- purchase another performance bond;
- secure an irrevocable letter of credit:
- establish a certificate of deposit; or
- establish a prepaid contract trust fund in accordance with the trusting requirements prescribed by law.
- If at any time the seller fails to maintain either an alternative financial instrument or a prepaid contract trust fund, the seller shall cease the sale of merchandise and services on a preneed basis.
- The purchaser of a prepaid contract who does not receive merchandise or services due to non-performance of the seller, would then make a claim with the regulatory authority against the performance bond, irrevocable letter of credit, or certificate of deposit.