WW Files Case on Behalf of Funeral Directors Against Illinois Funeral Directors Association
On January 29, 2009, WW filed a derivative complaint in Cook County (Case No. 09 CH 03624) on behalf of six funeral directors, alleging that a trust fund run by the Illinois Funeral Directors Association (“IFDA”) has been mismanaged and improperly invested, resulting in a huge deficit. The lawsuit is brought derivatively on behalf of the IFDA, and names as defendants several current and former IFDA presidents, executive directors, Officers, board members, and officers, along with the IFDA’s financial advisor Merrill Lynch and its agent.
The trust fund is paid into by Illinois residents who chose to enter into a “Preneed Contract” with the funeral home of their choice. These contracts are a common practice in the industry, and enable people to plan and pay for their funerals in advance of their death, thus eliminating many of the difficult decisions and financial burdens facing family and friends when a loved one passes away.
A vast majority of funeral directors in Illinois are members of the IFDA, and many of them use the IFDA’s Tax-Exempt Pre-Need Trust (“the trust” or “Preneed Trust”), which allows consumers to invest their money and have it grow on a tax-free basis. This option was and remains the preferred choice for approximately 75% of preneed funeral planning customers.
Funeral directors who had invested their clients’ money into this trust were told repeatedly by IFDA Services (the branch of the IFDA that manages the trust) that the funds invested in the Preneed Trust were invested in safe and tax-exempt investment vehicles such as municipal bonds. However, instead of investing money to preserve principal and provide a safe return, IFDA Services invested over $190 million, constituting a substantial majority of the total Preneed Trust funds, recommended and sold to the trust by Merrill Lynch, in complex life insurance products issued by at least seven insurance companies.
These insurance polices do not comport with the IFDA Services’ promises of using safe, high-grade, and tax-exempt investment vehicles. Among other problems, some of these policies are modified endowment contracts (“MECs”), which are not liquid investments because of the substantial adverse tax consequences incurred if a MEC policy’s proceeds are borrowed or withdrawn prematurely. Moreover, there is no connection between the expected life spans of the insureds and the need for funds with which to pay the funeral expenses of preneed funeral planning customers.
Not only were the investment practices contrary to what had been promised, but IFDA Services engaged in a pattern and practice of deceit which involved periodically sending IFDA Members statements reflecting the prospective rates of return for taxable and tax-exempt Preneed Trust funds for an anticipated period of time. The interest rates reflected in these statements, however, were systematically inflated and had absolutely no relationship to the actual Preneed Trust earnings or performance. Consequently, participants in the Preneed Trust program were led to believe, falsely, that the Preneed Trust was performing well and as expected, when it was not.
Eventually, as the true financial condition of the Tax-Exempt Preneed Trust came to light, an investigation believed to have begun with the Illinois Office of the Comptroller in 2006 revealed that, as of May 31, 2005, the tax exempt portion of the Preneed Trust had a deficit in excess of $38.0 million. The situation has only become worse since then, with the current deficit being approximately $ 59.0 million. Additionally, after a review of IFDA Services’ trustee license was revoked by the state comptroller’s office, who said that the license never should have been issued in the first place. A state audit further found that the IFDA had take $8.5 million in excessive management fees over a five-year period.
Because of the deficit, funerals directors are now paying funeral costs out of their own pockets for pre-need customers, because there is not enough money in the trust. Ed Wallace, who was quoted in the Chicago Tribune, sums it up by saying “Funeral directors are still honoring the contracts at a significant loss to them because they want to do right by these customers.”
For a copy of the complaint, please click here.
To view news articles about the case and current situation, please see below: