We all recognize the benefit of general laws dealing with unclaimed property, which facilitate reuniting people with property they've lost track of entirely appropriate when the property is money in a bank account. But the operation of those laws on preneed trust funds is not entirely appropriate and can put trustees and licensees in an impossible position.
Let's start by looking at the only two ways to fund a preneed contract. The first option is for the consumer to pay the funeral home, which must then deposit some or all of the money into trust. The other option is for the consumer to purchase a life insurance policy; the death benefit payable under that policy is assigned to the funeral home so that the firm will receive some or all of the money upon the death of the preneed contract beneficiary.
Only one of these funding mechanisms insurance is exempt from the reach of the unclaimed property laws in some states.
This is a good place to mention that the treatment of preneed contract funding mechanisms by the various states' unclaimed property laws is inconsistent. Some state laws don't treat the funding vehicles (trusts or insurance) at all, some address the abandonment of trust funds, some address the abandonment of insurance policies and some address the abandonment of both.
The imbalance in the treatment of the two funding vehicles is highlighted by the fact that some states have enacted a version of the National Council of Insurance Legislators Model Unclaimed Life Insurance Benefits Act, which expressly excludes from the definition of "policy" "any policy... used to fund a preneed funeral contract or prearrangement." Why would one funding mechanism be exempt and the other not be?
The way many state regulators seek to apply unclaimed property laws to preneed trust funds is as follows. Funds in trust are considered unclaimed when one of three circumstances occur: 1) the age of the contract is more than a certain number of years, 2) the age of the contract beneficiary exceeds a certain number of years, and 3) the beneficiary of the contract can be located in the Social Security Administration's Death Master File. Once deemed unclaimed, funds in the preneed trust must be sent to the treasury of the state in which the preneed contract was written.
Here's the problem with that. In the application of general unclaimed property laws to preneed trust funds in most states, the holder/trustee is actually prohibited from releasing the trust funds under any circumstance other than fulfillment, cancellation or default under the preneed contract. And most preneed trust agreements also limit the distribution of trust funds to those same three circumstances fulfillment, cancellation or default.
Thus, the trust funds are locked up by both law and contract, and they can only be accessed when one of the three conditions occur.
Few states include, within their preneed laws, direction to the funeral home or trustee on how to handle preneed trust funds that would be considered unclaimed. For those states that do, I say: "You got it right!"
For those that don't, I posit that including a reference to preneed trust funds in your general unclaimed property law falls short when the law fails to, more importantly, address the issue within the preneed trust law.
