New Legislation for Endowed-Care Cemeteries - Unitrust

Introduced in the 2017 Legislative Session was HB2203, which allows for Cemeteries in Arizona to utilize a Unitrust to maintain their property. Bill Text

Main Points

The goal is to provide enough revenue to provide for the perpetual maintenance of cemetery properties, current limitations make that increasingly difficult in a persistently low interest rate/bond yield market.
There are many necessary safeguards in place to ensure prudent expenditures.
The use of a Unitrust is not mandatory.

The Unitrust Distribution Method, also known as the Total Return Method

Please review this presentation by Funeral Services, Inc., better known as FSI, explaining the Unitrust Distribution Method.

FSI Trust Presentation

Talking Points

To Provide Adequate Care & Consumer Protection – A More Consistent & Reliable Investment Option is Needed

What is a Perpetual Care Trust Fund? Cemeteries are in existence forever, and therefore require care and maintenance forever (i.e., lawn mowing, weed trimming, maintaining walkways and common grounds). Whenever someone buys a plot in a cemetery, the law requires a small portion of that purchase to be added to that cemetery’s Perpetual Care Trust Fund. The idea is that the income from this small portion would be sufficient to cover the maintenance needs of that particular plot and some common space.

What Can a Virginia Perpetual Care Trust Invest in Today? Today a cemetery wants to focus on income producing investments in order to keep up the cemetery which typically results in a portfolio geared more toward bonds vs. equities. Under the current rules none of the principal can be used for cemetery upkeep and maintenance; whereas using the total return method, capital gains would be reclassified not as principal but rather as income.

How Will the Makeup of a Portfolio Likely Change Using the Total Return Method?

Instead of looking at two separate “buckets” of principal & income, total return makes distributions made on the total value of the account.
Total return allows for the creation of broader diversification (which reduces volatility and spreads out market risk) by owning various asset classes, market capitalizations (large, mid, small) and investment styles (value versus growth). The trust can take advantage of market growth when equities are rising in value while the excess is utilized when markets are down in value – see below.
The proposed legislation makes it only optional to use the Total Return method – NOT mandatory.

Are There Safeguards to Protect Families and the Public in a Downturn? Absolutely. Distributions are calculated based on the % of the total return election (typically 3-5%). Distributions are paid from Income with a transfer from principal on any amount over available Income and when income exceeds the Total Return election, the excess income remains in the endowment care fund.

Current law requires that you can never go below 80% of the original principal at a set day and time.
A rolling average for withdrawals keeps trustees from taking an excessive amount in good years or low amounts in bad years.

Have Other States Implemented a Total Return Method for Cemetery Perpetual Care Trusts? Yes – Iowa, Tennessee, Florida & Oklahoma. As the industry and consumer groups work together on the issue, more states are likely to consider legislation in 2017. Meetings with the Death Care Regulators Association have shown that many regulators want this legislation to make certain funds are available to properly care for cemeteries.

Why is The Change Needed Now? Ultimately the total return approach allows cemeteries the ability to extract enough income from their trust to provide for the ongoing care & maintenance of the cemetery without sacrificing quality & diversification of investments. Passing this legislation would create a consistent, predictable distribution approach to assist in cemetery planning and not allow inflation to erode the future value.