The Plight of Cemetery Care Funds: Is the Fiduciary to Blame?
Cemetery owners have two choices for their care fund trust: the local bank or the national bank that solicits death care trusts.
When the local bank is used, the care fund is typically administered like an estate planning trust. The bank’s compliance office may be unfamiliar with the applicable state cemetery law and its restrictions or authorities. Those restrictions include whether capital gains are defined as income or whether fixed distributions are permitted. The trustee will probably delegate the trust’s income reporting to a local CPA who uses generic tax reporting software that does not include a Section 642i option. Investment management may also be delegated. That asset management will be very conservative with a heavy emphasis on government bonds. Equity allocations are kept to a minimum. For trusts under $500,000, income may not exceed the trustee fees, fund management fees and tax prep fees.
Some cemetery owners search the internet for banks that offer cemetery trust services. When using Google, the search finds four banks that hold themselves out as providing fiduciary services for care fund trusts. Click here to see that search result. The search result also suggests another list of “banks with trust services that may be suitable”. When a bank holds itself out as having expertise with care fund trusts, the OCC has warned the bank that they are assuming risks that may require the use of pooled investment vehicles and third party administrators. (OCC Handbook: Personal Fiduciary Activities, see page 67) Per the OCC guidelines, the national bank should have written policies regarding the acceptance criteria, specialized investment policies, and guidelines for fund managers and administrative vendors.
For cemetery care funds, the bank’s acceptance criteria should state when the trust can be administered as stand-alone trust vs being required to be administered as part of a master trust. There are two major considerations: diversification of investments and the expenses of the stand-alone trust. The days when a care fund could invest exclusively in bonds have long-since passed. Care funds need to be diversified, and the degree of diversification depends on whether distributions are based on net income or based on a fixed percentage. Or put another way, is the trust an income trust or a total return trust. Some trusts are too small to adequately diversify the investments for a comfortable balance between risk and return. One major bank client set the minimum diversification threshold at $1 million.
The bank’s acceptance criteria should also consider when expenses become prohibitive to the care fund. At least one of the big 4 banks charges a de minimis fee regardless of the trust’s size. That bank also delegates tax reporting to a CPA firm that also charges a flat fee regardless of size. For a $300,000 care fund trust that transferred in 2024, aggregate expenses exceeded the trust’s income. Perhaps this bank no longer accepts small care funds, but it has not responded to inquiries about providing their remaining clients an alternative.
Trust expenses are one side of the ledger. If the bank can’t control trust expenses, then the bank should be exploring investment solutions for cemetery care funds. The OCC has advised that offering death care fiduciary services may render pooled investment structures a necessity. What was once true for preneed trusts is now true for care funds. If you are going to solicit care funds, you must have the means to pool assets for investment. Otherwise, clarify your solicitations to disclose you can only accept care funds of $5 million and larger.
Another investment solution that can benefit the care fund trust would be private credit. Care funds have the same investment needs as foundations and large pension plans, who have been flocking to private credit markets. But the private credit funds have entry points that are too high for all but the largest care funds. This leads the bank back to using a pooled investment structure to overcome the high entry points.
With regard to the four banks found by Google, their websites do not reference master care fund trusts or pooled investment structures. Consequently, the cemetery operator is forced to make a direct inquiry. All of the banks will respond with an acknowledgement that they provide trust services for care fund trusts. But the owner must persist and ask whether the bank currently sponsors a master care trust and/or pooled investments. A promising answer would be “that depends”. Starting a care fund program in a new state may require a de minimis amount of business that may be dependent upon the support of the state cemetery association. Accordingly, we turn our attention to the state cemetery associations in our next post.
