Photo by Hugh Kretschmer

R.I.P. Off By Barry Yeoman, January & February 2008 A funeral-industry scandal that’s fleecing thousands of Americans

In 1975 Audrey and Carl Brewer purchased what they thought was peace of mind—both for themselves and their family—when they bought two pre-paid funeral plans from Forest Hill South, a mortuary and cemetery in Memphis. Their plans cost them a total of $1,298, which they paid off in monthly installments of $27. That included caskets, the funeral services, and two burial plots on Forest Hill South’s 80-acre grounds. The Brewers considered their pre-need contracts as protection against inflation and a way, when they died, to take the financial burden off their children. “They [Forest Hill] told me everything was taken care of,” says Carl, 89, a retired housepainter. “The only thing I would owe would be if I wanted some flowers on the casket.”

The Brewers had no reason to question the honesty of Forest Hill. Its three locations had been in business since 1888, serving the rich and the poor alike, including such luminaries as Elvis Presley and his mother, Gladys. Like the Brewers, thousands of customers from Tennessee, Mississippi, and Arkansas had also trusted the company’s reputation enough to buy pre-need policies. Then in July 2006, one of Forest Hill’s new owners, Oklahoma oilman Clayton Smart, called a press conference to announce he was invalidating 13,500 pre-paid funeral contracts, including the Brewers’. While police stood by to prevent a customer riot, Smart explained that any contract holder who wanted to use his or her pre-need policy would have to pay an additional $4,000, more or less, at the time of death, even if the plan was already paid in full. “Obviously, things were a lot cheaper in 1965,” Smart explained. “I wouldn’t have bought the business if I thought I’d have to honor those contracts.”

Officials with the Tennessee attorney general’s office offer a different explanation for why Smart wasn’t honoring the contracts. They allege Smart and his partner, attorney Stephen Smith, drained the company’s pre-need trust funds of $20 million shortly after they purchased Forest Hill in 2004. Those funds, which were part of the purchase and were earmarked to pay for the pre-paid funerals and cemetery care, “were supposed to be in very conservative investment vehicles,” says Martha Davis, a senior counsel in the state’s bankruptcy division. Instead, she says, Smart and Smith diverted the money to risky hedge funds and unsecured loans owned by Quest Minerals and Exploration, an oil-and-gas company controlled by Smart’s family. The attorney general’s office says the Quest loans ended up being worthless.

People believe that if they have a pre-paid funeral, everything’s fine. It’s a dangerous delusion.

Smart’s staggering announcement was just one more chapter in what is becoming a growing national scandal: pre-paid funeral contracts that don’t deliver. Industry watchdogs say that while most funeral directors operate honestly, the problems associated with pre-need policies have become too widespread to ignore. “This is not every once in a while, and it is not just a few bad apples,” says Joshua Slocum, executive director of the Funeral Consumers Alliance. “People want to believe that if they sign a check now for a pre-paid funeral, they can close their eyes and say, ‘La, la, la, everything’s going to be fine.’ It’s a dangerous delusion.” A delusion because too often funeral companies change hands, close their doors, or simply raid the trust funds where their customers’ payments are supposed to be securely collecting interest. As a result, when the services are needed, there’s no money left. Even worse, because of inconsistent state regulation and enforcement, there’s often no recourse for distressed families who thought everything was taken care of.

It’s not just consumers who are outraged. The funeral industry itself has warned that pre-need abuses are ruining their profession’s reputation. “We funeral directors should never have been able to take money for pre-need,” says Michael Tod Good, a mortician in Reamstown, Pennsylvania. “It’s just too tempting.”

Carl Brewer, the housepainter, discovered the dangers of pre-need last year when his wife, Audrey, died suddenly of an aneurysm. Six months earlier, just before Smart’s announcement, Carl had talked with Forest Hill employees, who assured him his contract was still valid. So he was surprised when, after Audrey’s death, the staff at Forest Hill South informed him he’d have to pay an additional $3,510 before they would honor his wife’s pre-need contract. “There’s nowhere we could go to come up with that much money,” says daughter-in-law Shirley Brewer. Forest Hill finally accepted $194 in cash as a down payment on the extra fee. Then, Carl, not knowing what else to do, signed a contract promising to pay the rest even though he knew he couldn’t. “We did what we had to do to lay Mom away,” says Shirley.

The notion of pre-need funerals dates back to the 1930s, when local morticians informally began allowing customers to pay for their services in advance. The deals were often sealed with little more than a handshake. “It was a matter of trust,” says Ron Hast, publisher of the industry newsletters Mortuary Management and Funeral Monitor.

By the 1980s, as national chains began gobbling up family-run funeral homes, the industry realized there was profit to be made in pre-need sales. Pre-payment would guarantee a steady stream of business in the future, and the pre-need money could be invested to keep pace with the rising cost of funerals. The companies developed more aggressive marketing tactics to convince Americans that pre-payment was a gift to one’s survivors. “Your purchase price is frozen now,” Forest Hill wrote its pre-need customers. “You will not [have to] pay one cent more.”

Today, pre-need continues to be big business. A 2007 AARP survey of 1,087 Americans 50 and older found that 23 percent of them had made pre-payments on funerals, burials, or both. Dan Isard, founder of The Foresight Companies, a consulting firm for funeral homes, estimates that $18 billion is currently invested in pre-need accounts. He projects that will increase by about $2 billion a year. This money, however, isn’t being stuck in file cabinets as in the old days. Funds are now invested in sophisticated life insurance policies or state-regulated trusts.

Too often funeral companies change hands, close their doors, or raid trust funds. Then, when services are needed, there’s no money.

For many customers, their pre-need money is safe. Take the case of Donald Lavender, 82, a retired city administrator from Des Moines, whose wife, Delores, died unexpectedly in 2001 while the couple was flying home from a European vacation. The pilot radioed Des Moines’s Westover Funeral Home, which sent a representative to meet Donald at the airport. Delores’s funeral, purchased 11 years earlier, “went exactly the way we had anticipated,” says Donald. “There were no surprises. It was one of the best things I could ever have done.”

But even customers dealing with trusted funeral homes must study their policies. Otherwise, details—often buried in the fine print—can pop up to surprise at the worst moment.

Before You Buy…

Think it over
Both AARP and the Funeral Consumers Alliance advise against pre-need contracts in most cases. Instead, consider depositing money in a separate interest-bearing account at your local bank. On your death, the person you name as the beneficiary of this “pay on death” account (also called a POD account or Totten trust) has immediate access to the money. Just be sure to name a trusted relative or friend, not a funeral home, as the beneficiary.

Bring a magnifying glass
Check the fine print carefully so you can determine what’s covered. Some plans exclude flowers, clergy honoraria, death certificates, newspaper notices—even the opening and filling of graves. Prepare a list of uncovered expenses and inform your survivors.

Ask about refunds
Be certain the contract can be fully transferred to another funeral home, or the funds can be refunded to you—in case you move or change your mind. Find out if there’s a penalty for canceling the policy or for missing payments.

Follow the money
Know where your pre-need payments are being invested. If they’re to be used to buy an insurance policy, make sure the company writing the policy is highly rated. If payments will go to a trust account, find out what bank or institution will be holding the funds.

Plan for change
Ask what happens if your circumstances change. What if something you requested, such as a specific casket, is no longer available? What if the funeral home changes ownership? What if your family decides on a simpler, less expensive funeral?

Review your finances
If you are close to being eligible for Medicaid, you can put some of your money into an “irrevocable” pre-need funeral plan as a way of spending down your assets.

Talk to a lawyer
Most important of all, have an attorney or trusted adviser review any pre-need contract before you sign.

One of the most common complaints about pre-need involves the casket bait and switch: the customer asks for a specific casket, but when the time comes, it’s not available and the funeral home offers a lesser-quality model. In 1999 Katie Smith, a retired practical nurse, pre-paid a Chicago funeral home for her service. She chose a lavender casket. When she died in 2006, the mortuary insisted that a lavender casket had to be special-ordered and would take ten days to arrive. “I didn’t want to hold up the arrangements that long,” says Katie’s goddaughter, Alicia Hill, who reluctantly accepted an “iridescent pink” casket. Alicia believes her godmother would have been disappointed.

Another problem occurs when customers try to cancel their policies: many states don’t require that funeral homes make full refunds. Also, customers who try to transfer their policies to other funeral homes sometimes have problems. “We’re a transient society,” says Robert Biggins, past president of the National Funeral Directors Association. “There’s no reason a person’s pre-need funds shouldn’t [be able to] travel with them.”

When Pat Cairns bought her pre-need policy from a Cleveland funeral home in 1995—she and her husband, Arthur, 88, now live in South Carolina, but Arthur owned a burial plot in his home state of Ohio—she didn’t realize she was locking herself into using the services of only that one business. “They gave me the paper and said, ‘Check this, check this, check this,’” she says. “Stupidly trusting them, that’s what I did.” Eight years later, the couple realized how impractical their decision had been. “I don’t think either of us could handle—emotionally, physically, or financially—having our spouse’s body sent from Myrtle Beach, South Carolina, to Ohio,” says Pat, 82. But when she called the Cleveland funeral director to cancel the policy, “he said, ‘You know, these are noncancelable.’ ” It took more than a year’s battle just to get a partial refund.

Even worse are cases involving outright fraud. Most states require that pre-need sellers deposit 70 to 100 percent of their customers’ pre-need payments into trust accounts, which are supposed to remain untouched until the money is needed to pay for the service. (In states that allow pre-paid funerals to be funded by insurance policies rather than trusts, those plans are regulated separately, under state insurance laws.) With industry profits on the decline, though, some morticians find it too tempting and easy to dip into pre-need funds for other purposes. “You’ve got this pile of money, and maybe you think, ‘I’ll take a little bit out and put it back later,’ ” says Slocum of the Funeral Consumers Alliance. “But, like a domino, that can knock down the whole pile.”

That’s what happened in Salem, Missouri, when Jane Spencer Turner inherited two debt-ridden funeral homes. Rather than depositing pre-need money into trust accounts, as she was supposed to do, Turner used the funds to try to stabilize the business, according to her attorney, James Bowles. “She never intended to cheat anybody out of anything,” Bowles says. Missouri attorney general Jay Nixon, who prosecuted Turner as part of a larger crackdown on death-care-industry abuses, took a less charitable view. While Turner’s customers lost more than $200,000, Nixon says, “Turner was driving a Mercedes.” In 2006 she pleaded guilty to unlawful merchandising practices and received an eight-year prison sentence.

Depending on state law, customers often have little recourse when their pre-paid funeral policies disappear. Lawsuits are an option. But, as in Turner’s case, if the funds are gone, they’re gone. In Russellville, Kentucky, funeral director Tim Hanna took off in 2005 with more than $300,000 in stolen pre-need funds. Until then, Hanna was a respected citizen of the town. “We’d see each other in the drugstore; we’d stop and have a conversation,” says Ashley “Cocoa” Kees, whose disabled mother, Sheila, 54, had prepaid her funeral with Hanna’s company. Hanna is now behind bars, but Cocoa’s family has received only $32—their share of proceeds from the sale of Hanna’s automobiles—in compensation for Sheila’s policy, which cost her $3,000.

And big funeral chains don’t necessarily offer more protection than the smaller family-run businesses. In Hawaii, state officials accused RightStar, a conglomerate of cemetery and funeral companies, of bleeding at least $20 million from pre-need accounts. “Money was wired or taken out or transferred,” alleges Attorney General Mark Bennett. In addition, he claims, RightStar illegally canceled $2.8 million worth of pre-need contracts. “The people weren’t informed,” he says. “Many were still sending money.” (RightStar’s attorney didn’t return calls.)

Even with mounting evidence of widespread abuse, the federal government has done little to regulate pre-paid funerals. Senator Christopher Dodd (D-Conn.) and then-Representative Mark Foley (R-Fla.) twice introduced legislation to protect pre-need consumers, including giving them the right to transfer their policies from one funeral home to another. But Congress never took up the measures.

The only federal agency currently concerned with protecting pre-need customers is the Federal Trade Commission. And it’s not doing much. The FTC focuses mainly on funeral homes’ compliance in providing itemized price lists to customers. But price lists can’t protect customers against pre-need fraud: “At this very moment some cash-strapped funeral director is diverting pre-need funds for his personal use,” declared the industry newsletter Funeral Monitor in April 2007. FTC attorney Monica Vaca says the agency is privately reviewing possible rule changes.

The resulting lack of federal oversight leaves regulation of pre-need policies up to the states. A few take a tough stance. New York, for example, requires funeral directors to deposit 100 percent of pre-paid money in interest-bearing trusts that are refundable to customers at any time. The only exception: irrevocable contracts, designed to shield the assets of consumers who are spending down their assets to qualify for Medicaid. Such contracts are not refundable in New York but can be transferred to another funeral home. New York’s tough oversight, though, is an exception. Most states “operate with a loosey-goosey patchwork of regulations” that enables “unscrupulous” behavior, writes Chris Raymond, editor of the National Funeral Directors Association’s newsletter.

Funeral-industry leaders say they support consumer-friendly laws, though their definitions of friendly vary wildly. Service Corporation International, a $1.7-billion-a-year empire based in Houston that owns 2,000 funeral homes and cemeteries, insists it should be allowed to withhold and keep a certain percentage of the cost of each contract—rather than depositing that money into a trust account—even if a consumer chooses another funeral home. “When a customer makes arrangements with us, they’re essentially saying, ‘My plan is to do business with you in the future.’ That’s an implied commitment,” says Tom Reichert, the company’s managing director of North American sales.

One might argue with this logic, but then one would be up against the vast power of the funeral industry, a formidable lobby and a generous contributor to political campaigns. As a result, state-level reform efforts have faced stiff resistance. Consider what happened in Hawaii, which has some of the weakest pre-need regulations in the nation. Outraged by the RightStar scandal, a group of Hawaii lawmakers introduced a bill raising the mandatory percentage of pre-need funds to be deposited in a trust account above the current 70 percent. The bill never received a hearing: it was killed by the committees overseeing consumer protection.

Instead, the Hawaii legislature passed a bill written by Governor Linda Lingle’s administration in consultation with members of the funeral industry. Lingle’s measure did include some consumer protections. But it didn’t increase the percentage of funds required to be deposited in trust funds, a key point of industry contention. Jo Ann Uchida, a Lingle administration official, explains that the tougher trust requirement was omitted from the legislation to stave off industry protests, which would have killed the measure.

Sarah Robinson, Hawaii state president of the Funeral Consumers Alliance, offers a blunter explanation. “Basically, [the funeral] industry wrote this bill,” says the consumer advocate. Robinson notes that funeral companies and their lobbyists gave $11,000 in contributions to Governor Lingle in 2005, and lesser amounts to key legislators.

Uchida insists campaign donations had no influence on the bill-drafting process. “Our usual practice is to try to unveil an initiative with the industry.” The administration does not, however, extend that courtesy to consumer groups, she says.

Meanwhile, back in Memphis, customers of Forest Hill are still reeling from owner Clayton Smart’s summary cancellation of those 13,500 funeral contracts that were supposed to be guaranteed. Some clients paid the extra cash that Smart demanded. Others, like Donna VanDyke Tacker, 63, were so ticked off that they went elsewhere rather than pay Smart’s company any more money. Just before Christmas 2006, Donna’s mother, Viva, died unexpectedly. Forest Hill demanded an extra $4,600 before the company would bury her. “I’m not paying y’all another penny,” the retired florist recalls telling an employee. Instead, Donna walked away from the pre-need plan completely and paid $5,440 to another funeral director in Mississippi for her mother’s funeral.

Some Tennesseans wonder why owners Smart and Smith couldn’t have been stopped earlier. “Had the state exercised a little more oversight, I don’t think we’d be in the position we are in now,” says attorney Kevin Snider, who has filed an unresolved class-action lawsuit on behalf of Forest Hill customers. State officials did spot the risky investments in 2005. But it took another year to complete an audit, which the attorney general’s office says was hampered by its being short-staffed and Forest Hill’s poor record keeping. “Sometimes we’re hamstrung by due process,” says Assistant Attorney General Gill Geldreich. Last January the state finally filed a lawsuit to freeze Forest Hill’s assets and appoint a receiver.

Almost a year after Smart canceled the contracts, the law caught up with him. Last April he was arrested in Oklahoma; then he was extradited to Tennessee to face theft, conspiracy, and money-laundering charges. He also faces criminal charges in Michigan, where officials seized control of 28 cemeteries he owned, after an audit showed that $70 million was missing from trust funds. (Smart and Smith declined to be interviewed. But Smart did leave a brief phone message just before his arrest saying, “The truth will eventually bear out.”)

Now under the control of the state of Tennessee, Forest Hill has agreed to honor future pre-need contracts, and it plans to refund the additional fees Smart demanded from his customers. But that doesn’t help people like Donna VanDyke Tacker, who is out the extra $5,440 she paid to a different funeral home. And there are the countless other pre-need victims across the nation who paid thousands of dollars for policies that are now or will end up being worthless.

For Carl Brewer, the retired housepainter who was asked to pony up an additional $3,510 on a supposedly fully paid policy for his wife’s funeral, the final insult came in the mail. In March 2007 he received a standardized customer-satisfaction questionnaire from Forest Hill asking him to rate his experience. “Would it have been helpful for you to have planned this funeral in advance?” the survey asked.

Enraged, Carl tossed the form aside. Even today, he seethes when he thinks about that time. He was supposed to be grieving for his companion of 63 years. Instead, he was forced to sign away a good portion of his future earnings to pay for the funeral he thought was already paid for. “They get people in their moments of sorrow, when they can’t think straight,” he says. “That is highway robbery without a gun.”

Barry Yeoman, based in North Carolina, is a regular contributor. His last article, “Katrina: The Untold Story,” appeared in the September & October 2007 issue.

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