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Multistate Tax Commission Adopts ICFA Model Law on Funeral Trusts
by Robert M. Fells, Esq., general counsel
The Multistate Tax Commission (MTC), a professional association of tax departments from 44 states and the District of Columbia, has adopted a model law on the taxation of funeral trust income that was proposed by the ICFA. Last year, the MTC Uniformity Subcommittee on Income Tax had proposed that state income tax due on funeral trust earnings should be determined by the state of residence where each purchaser lives when the trust elects to pay the tax. The ICFA pointed out the difficulties in attempting to keep track of hundreds or perhaps thousands of customers' domiciles for state taxation purposes (see the March 2000 Washington Report column for details). The model law proposed by the ICFA resolves this problem by determining the domicile as the state where the trust is located, or where a state does not require a trust, the state where the funeral home or cemetery providing the services or merchandise is located.
This issue developed when Congress passed Section 685 of the Internal Revenue Code in 1997. This new section, which was supported by the industry, permits trustees of qualified funeral trusts (QFTs) to elect to pay the federal tax on earnings. If this Sec. 685 election is made by the trustee, then the preneed purchaser is relieved from reporting and paying any federal income tax on the trust income.
However, using this election raised an issue from the viewpoint of the state income taxation of QFT income. If the trust assumes responsibility for preneed purchasers' state income tax liability, then in which state(s) is the trust income taxable? The original language developed by the MTC Subcommittee sought to impose a state income tax filing requirement for each qualified funeral trust based on the residence of the customer. This language was developed because the Subcommittee felt it was the method least susceptible to manipulation. However, the ICFA expressed its concerns with the administrative burdens this approach imposed on the industry and proposed that the state of the trust's residence should determine the state of taxation.
The MTC Subcommittee was concerned that under the ICFA approach some funeral trusts might "forum shop" and relocate to states having no income tax. For this reason, MTC Subcommittee members initially reasoned that the domicile state should be determined by the purchaser's resident state. This distinction is an important one impacting both local and national operations by potentially forcing trustees to compute trust earnings based on a customer's state of residence at the time of each installment payment. This would add a substantial administrative burden to an already complicated process.
To address this concern, the ICFA recommended that the seller providing the merchandise or services would also be considered the resident or domicile state in the event a particular state had no trust requirement. The MTC subsequently met and approved this approach on July 27. The model law will now be evaluated by the individual states to determine whether each wishes to adopt it. The ICFA proposal was developed through its Government and Legal Affairs Tax Subcommittee, chaired by Irwin Shipper. Members who would like a copy of the MTC model law should contact the ICFA offices at 1-800-645-7700.
The ICFA has responded to an August 12 article in The New York Times titled, "The Perils of Planning One's Own Prepaid Funeral." While the article praised both the ICFA and NFDA Web sites for providing consumer information, the story ignored the considerably greater "perils" of at-need funeral purchases.
In its response, the ICFA stated: "The Federal Trade Commission said it best when it documented the severely disadvantaged position of consumers when making at-need arrangements. These include emotional trauma, guilt, dependency and suggestibility, ignorance, and time pressure. Prearranged or 'preneed' funeral plans can substantially reduce, and may eliminate, all these factors."
The ICFA pointed out that the Times article missed a number of opportunities to help consumers become informed preneed shoppers. For example, consumers can tell unwanted phone callers to place them on a "don;t call" list mandated by federal law. Also, industry codes of ethics and model guidelines prohibit calls to hospitals, nursing homes and hospices. "If your readers had this type of information, they could easily detect the bad apples," the ICFA response stated.