Cemetery Trusts: Law Changes to Address Impairment, 0319 KSBJ, 88 J. Kan. Bar Assn 3, 28 (2019)

• Author: By William Stalter
• Position: 88 J. Kan. Bar Assn 3, 28 (2019)

Cemetery Trusts: Law Changes to Address Impairment

88 J. Kan. Bar Assn 3, 28 (2019)

Kansas Bar Journal

March, 2019

By William Stalter

As with most states west of the Appalachian Mountains, Kansas allows for-profit companies to own and operate a cemetery. But Kansas was among the first states to require for-profit cemeteries to fund a maintenance trust with proceeds from grave sales. In 1901, the Kansas Legislature passed the Cemetery Corporations Act¹ and thereby mandated privately owned cemeteries to establish permanent maintenance funds. “It must be remembered that defendants operate as a business venture, for profit, and there are many possibilities whereby money received from the sale of lots might be diverted without adequate provision for maintenance and care of the cemeteries, which is exactly what the statute seeks to prevent.”²

By 1901, cemetery care and maintenance was already a significant problem for the I Northeastern United States. Cemeteries in the country’s largest cities no longer had I graves to sell. New York passed the Rural Cemetery Law in 1847 to foster a new era of I cemetery operations.^[3] New York City cemeteries were full, and had become a source of I public health concerns. Multiple burials in a single grave were common, and accidents I frequently exposed bodies. Local governments saw the need for more burial grounds, I but wanted to avoid the liabilities that accompanied burial grounds.

Outside of the east coast cities, population density was not an issue, and land was plentiful for cemetery use. The burgeoning death care industry thought itself to be immune from business cycles. Families would always need to bury their dead, and cemeteries could reliably predict future business from local demographics, mortality rates and available “inventory.”⁴ Acreage was often set aside to provide grave “inventory” that would last in to the next century. Cemeteries would forecast interment revenues not by years, but by decades.

However, the cost to develop and establish a cemetery can be significant. Beyond the purchase of land, Kansas law required a cemetery company to subdivide the land according to a plat that must be recorded with the county recorder of deeds.⁵ The cemetery is required to install roads and lot boundary pins before the first grave can be sold. The prospect of receiving income from a maintenance trust could be many years away for the operator of a new cemetery. As a profit venture, the cemetery corporation must recoup its up-front costs through grave sales.

The Kansas Legislature did not address oversight of the Cemetery Corporations Act until 1968. The vulnerability of cemetery trusts was first discussed in State Ex Rel. v. Anderson,⁶ and again in State Ex Rel. v. Commemorative Service Corp.⁷ In 1965, the Kansas Attorney General first sought to enforce the Act with a lawsuit against the owner of a Texas corporation that controlled nine Kansas cemetery companies. The Texas business venture established an aggressive sales program that sold graves and burial services using long-term installment contracts. The cemetery corporations deferred making deposits to the maintenance trusts until the installment contracts were paid in full. Per the terms of their pre-need contract, the cemeteries also promised to deposit the wholesale costs of burial merchandise to a trust. The Supreme Court decision provided detailed explanations of pre-need cemetery sales, and their potential for fraud and deception.^[8] The 1965 decision was followed by the 1968 amendment of the Cemetery Corporations Act, whereby cemetery companies were then required to register with the Secretary of State and to file an annual statement on the condition of their care funds.⁹ The 1968 law also gave the Secretary of State authority to examine a cemetery corporation’s books and records for compliance with the care fund requirements.¹⁰ However, the Act did not provide the Secretary of State any source of funding for enforcement.

Compliance with the cemetery Acts became an issue again in 2004.¹¹ Efforts to audit Memorial Park Cemetery in Lawrence and West Lawn Memorial Gardens in Topeka became protracted when the secretary of state sought trust fund records from the cemeteries’ Texas owner, Mike Graham & Associates. The Texas company was unresponsive to the state’s requests for records; after 4 years, both cemeteries were taken over by their local municipalities. Substantial amounts of care funds and consumer pre-need funds were found to be missing.¹² Shortly after the failure of Graham cemetery companies, the Kansas cemetery industry was also dealt a serious financial blow.

The Great Recession of 2008 caused an unforeseen acceleration in societal acceptance of cremation.¹³ Many families could no longer afford to spend $12,000 for a funeral that included a casket and a grave space. Families cited the economic downturn as justification for spending $2,000 on a cremation and taking Mom’s ashes home in an urn. Crematory operations allowed funeral homes to salvage some revenue from cremation services, but cemeteries were frequently left completely out of the family’s decisions about the disposition of cremated remains.

The Great Recession also undercut cemeteries’ reliance on trust revenues. Both pre-need merchandise trusts and permanent maintenance care fund trusts had been income oriented, and invested primarily in fixed income securities. Kansas law permitted cemeteries to withdraw income from merchandise trusts once the funding requirement was met.¹⁴ Mortgage-backed securities were an investment staple for both types of trust, and most cemeteries were accustomed to pulling all net income from their trusts. This resulted in many cemetery trusts being maintained at their minimum statutory requirement.¹⁵ When the home mortgage bubble burst, many cemetery trusts experienced a decline in value. Bond rates also dropped dramatically when the Federal Reserve stimulus plan reduced interest rates to below one percent.¹⁶ The financial impact on cemeteries and their trusts was immediate.

In 2010, Fairlawn Burial Park, a Hutchinson cemetery, was found to have used more than $600,000 of trust assets to fund day-to-day operations. The cemetery owner had obstructed the secretary of state’s investigation, was eventually convicted of fraud and served time in prison for embezzlement from the cemetery’s trusts.¹⁷ The secretary of state used public response to the Fairlawn Cemetery failure to lobby the cemetery industry and the legislature for reforms to the Act. While the first reform bill was blocked, the legislature amended the Act in 2011 with House Bill No. 2240,¹⁸ and again in 2012 with House Bill No. 2172,¹⁹ to establish new reporting requirements for both cemetery corporations and their trust fiduciaries. The cemetery corporation’s reporting was expanded significantly, and changed from annual reports to quarterly reports. To confirm the accuracy of the cemetery reports, the Act also requires quarterly trustee reports. The new re porting requirements will enable the secretary of state to more quickly identify noncompliant cemeteries and trustees, and take the appropriate enforcement actions. Tis article will next review which cemetery corporations are subject to the Act and its reporting requirements.

Cemetery Corporations Subject to the Act

Kansas cemeteries maintain two types of trusts: pre-need merchandise and permanent maintenance care funds. While each is governed by different chapters of Kansas law, both chapters rely on the same definition of “cemetery corporation.” K.S.A. 17-1301c(a) defines cemetery corporation to mean “any individual or entity required to maintain permanent maintenance funds under the provisions of K.S.A. 17-1312f….” K.S.A. 17-1312f states that it shall apply to “every individual, firm, partnership or other organization hereafter selling or conveying land for cemetery purposes….” The section exempts four classes of entities from the Act:

1. Municipalities and quasi-corporations with the power to issue bonds are the first class of exempt cemetery corporations.²⁰

2. Cemetery corporations that are nonprofit organizations formed primarily for religious purposes and that constitute an established church are exempt if the cemetery restricts grave sales to church members and their relatives.²¹

3. Nonprofit corporations that own and operate a cemetery in a county designated as an urban area on or before March 1, 1968.²²

4. Small cemeteries that were organized prior to January 1, 1900, have operated continuously from such date and have a care fund of less than $10,000.²³

From a practical perspective, few cemeteries other than those owned by churches, municipalities, townships and counties qualify for exemption from the Act. With regard to ‘church cemeteries’, practitioners should confirm whether the cemetery is owned by the entity that ‘constitutes an established church”. It is common for churches to establish a separate corporation for purposes of owning and operating the cemetery.

The third exemption class is a grandfather clause intended to shelter secular nonprofit corporations that have operated a cemetery in a county that was designated urban in 1968. Johnson County is the only Kansas county that was designated as an urban area prior to 1968.²⁴ Wyandotte,²⁵ Shawnee,²⁶ Greeley^[27] and Sedgwick²⁸ counties were each designated as urban areas subsequent to 1968. The fourth exemption class is also a...