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The Honolulu Advertiser
Posted on: Sunday, May 20, 2007

Funeral trusts take 30% off the top

 •  Halting plan, seeking refund can be an ordeal
 •  Problems stem from plan to redirect trust funds

By Jim Dooley
Advertiser Staff Writer

Local funeral companies take 30 percent of pre-paid plans off the top, unlike other states that require them to put the entirety into a trust.

DEBORAH BOOKER | The Honolulu Advertiser

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Have you had serious problems with a "pre-need" funeral plan? Tell us what happened in an e-mail and send it to hawaii@honoluluadvertiser.com. We may contact you for a future story.

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Hawai'i laws regulating the pre-paid funeral business are among the weakest in the country, according to national consumer and industry groups.

In Hawai'i, when a customer pays $10,000 in advance for his or her own funeral, the funeral company keeps $3,000 to cover administrative costs. The remaining $7,000 is put in a trust and used to pay for the funeral once the customer dies.

These "pre-need" plans, usually paid in monthly installments over years, are popular in Hawai'i with more than 100,000 customers signed up and more than $150 million held in trust.

What troubles consumer advocates is that Hawai'i allows the funeral company to take 30 percent off the top, whereas 32 states require funeral companies to deposit the full 100 percent into a trust and use all of it to pay for the funeral.

Only two states Florida and Alabama have laws as generous to funeral companies. Like Hawai'i, Florida allows 30 percent of pre-paid funds to go to the company, and Alabama has no law on the subject.

Hawai'i funeral operators say the 30 percent they keep is needed to cover costs, primarily sales commissions.

But the 100 percent standard is becoming the norm nationwide.

The oldest and largest U.S. trade organization representing more than 20,000 funeral operators, the National Funeral Directors Association, supports the 100 percent trusting standard.

"One hundred percent of the monies placed in a prefunded funeral account should be used for the purpose intended and funeral homes should not be able to legally use any percentage of that fund until it provides the at-need service," said John J. Hogan Jr., president of the NFDA.

Local funeral operators say that changing the Hawai'i law to the 100 percent standard would result in some companies no longer offering pre-paid plans.

"To change it to 100 percent, many of our companies would just stop selling," said Beverly Dodo of Dodo Mortuary on the Big Island and head of the Hawaiian Allied Memorial Council, an industry group.


Funeral companies still offer the pre-paid plans in states with the 100 percent standard and still make a profit, said Joshua Slocum, national director of the Funeral Consumers Alliance, an industry watchdog group.

The pre-paid plans lock a future customer in and make it easier for companies selling them to predict future revenue and expenses.

"A pre-need program guarantees companies some of their market share in the future," said Shaun Myers, an at-large member of the executive board of the NFDA.

Sarah Robinson, the local representative of the national non-profit Funeral Consumers Alliance, has been trying for three years to get Hawai'i lawmakers to adopt a law requiring that all money paid by the purchaser of a "pre-need" funeral services plan be placed in a trust account to be used when the customer dies.

Bills backed by Robinson's group for 100 percent trusting and other consumer protection improvements failed at the Legislature in 2005, 2006 and again this year.

Oren Chikamoto, a lobbyist who has worked for funeral companies for years, worked with the Lingle administration on a measure passed this year that improves consumer protection but still retains the 70/30 ratio.

The 100 percent trusting bill never got out of committee. Amendments Robinson suggested to the administration/industry bill were not adopted.

Hawaiian Memorial Life Plan, a pre-need funeral plan provider owned by Service Corp. International, has employed Chikamoto's law firm to represent its interests at the state Capitol for several years.

Hawaiian Memorial Life paid $34,760 in lobbying fees in 2005 to the firm Torkildson Katz Fonseca Moore & Hetherington and another $11,000 so far this year, according to records filed with the state Ethics Commission.

Another client, Ballard Family Mortuary, paid Chikamoto's firm $11,000 in lobbying fees last year.

Chikamoto referred questions about his lobbying work to Dodo of the Hawaiian Allied Memorial Council.

Dodo said the 30 percent Hawai'i companies take for administration is justified.


Consumer advocates differ.

"I'm very, very disturbed at the situation in Hawai'i," said Slocum of the Funeral Consumers Alliance. "For three years in a row now, the Legislature has failed to pass meaningful reforms to protect consumers. It looks to me like legislators are voting where the dollars are coming from from the industry," he said.

Myers, of the national industry group, said he understands why states like Hawai'i don't want to change the trusting ratios.

Under 100 percent trusting, companies for the most part aren't paid "until services are used," he said.

"What's happening around the country is that when you switch to 100 percent trusting, a lot of companies are moving out of pre-need plans entirely and starting to use insurance companies," Myers said.

In Utah, where Myers operates a group of funeral homes, "only a few companies still offer pre-need plans." Utah law requires 100 percent trusting, but companies can keep from 1 to 33 percent of trust interest earnings to cover expenses and recover sales commissions, he said.

Still Myers said the 70/30 ratio in Hawai'i "is a pretty liberal figure. Thirty percent for commissions and expenses is pretty high."

In February testimony about the Hawai'i bill that retained the 70/30 ratio, Robinson, the consumer advocate, complained that the state Department of Commerce and Consumer Affairs, which regulates funeral companies and proposed the new legislation, consulted with industry personnel about the measure but not with consumer groups. Gov. Linda Lingle backed the bill with the 70/30 split.

"It is derelict on DCCA's part to have consulted with industry on this bill and not to have included Funeral Consumers Alliance Hawaii, or a similar consumer group, in those consultations," Robinson said.

Jo Ann Uchida, head of the Regulated Industries Complaints Office of DCCA, said the administration decided to concentrate on other improvements to state law this year in light of past opposition from the funeral industry and legislators to changes in the 70/30 trusting ratio.

She said government officials "typically will consult with industry representatives" on proposed legislation, "but it is not standard practice to roundtable it, to get feedback from everybody ahead of time."

Other interested parties can and do participate in the discussions about the bill when the Legislature is in session "and that's what happened this year," Uchida said.

While not overturning the 70/30 ratio, the bill passed this year would outlaw one practice in the local industry that consumer advocates have long complained about, Uchida pointed out.

In the past, if the purchaser of a pre-need funeral plan failed to make monthly payments, companies could cancel the contract without notification to the customer and keep all the money collected to that point.

Under the new bill awaiting Lingle's signature companies must notify delinquent customers of the intent to cancel the contract and give purchasers the opportunity to cure the delinquencies. And customers who can't continue making payments or who want to cancel a contract are entitled to a refund of 70 percent of the money collected, according to the new law.

The bill passed by the Legislature this year would increase the financial penalty for violations of the pre-need trust fund law from $1,000 to $5,000 per violation.


Mark Recktenwald, director of the Department of Commerce and Consumer Affairs before his appointment earlier this year to a state judgeship, warned last year that there's only so much a regulator can do to prevent illegal activities.

Since 2004, the state has been trying to recover between $40 million and $50 million allegedly removed improperly from customer trust funds held by the RightStar group, Hawai'i's largest cemetery and funeral needs company with 40,000 to 50,000 clients statewide.

Four other Hawai'i cemetery operations collapsed in the late 1980s and early 1990s after millions of dollars in "pre-need" and "perpetual care" trust funds went missing.

Right now, there is $139.12 million belonging to more than 82,000 customers in pre-need trust accounts held by seven different companies in Hawai'i, according to annual reports filed with the DCCA. Those figures exclude the RightStar trusts, which haven't filed annual reports since 2002.

"In the RightStar case, wrongdoers simply ignored the existing laws and rules regarding the impermissible withdrawal of monies from trust and (the) investment of trust monies," Recktenwald said.

State laws regulating the operation of funerals and cemeteries were broadened and deepened in the mid-1990s after pre-need funds disappeared from trust funds on O'ahu and the Big Island.

But having those laws on the books didn't stop the problems at RightStar, Recktenwald said.

"We may never be able to completely shield the public from unscrupulous business practices," Recktenwald said. "What we can do is to make those practices more difficult to conduct, and to make punishment of violations as certain as possible."

Reach Jim Dooley at jdooley@honoluluadvertiser.com.

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