Funeral home financing: preneed trusts and insurance assignments

A funeral home's balance sheet contains two things that look like money and behave nothing like it. The preneed backlog is a book of contracts already sold and largely already paid for, with the cash sitting in a trust or an insurance policy under state law. The at-need receivable is an amount owed by a family, often payable out of a life insurance policy that will pay when the carrier is ready.

Both matter for financing, and neither is available the way an owner expects.

So a business with 1,092,000 of preneed "in the bank" has about 98,280 a year of it becoming actual revenue, and a lender treats the trust corpus as belonging to the contract holders, not to you.

What the state rules do

Preneed funeral contracts are regulated at state level and the requirements differ substantially. Depending on the state, the rules may cover:

• The percentage of preneed funds that must be trusted, which ranges from a partial requirement to the whole amount in some states
• Whether contracts are guaranteed or non-guaranteed — a guaranteed contract locks the price and puts the inflation risk on the funeral home, and trust earnings may or may not be retained
• Cancellation and refund rights for the purchaser, and what share of the trust is returned
• Whether an insurance-funded alternative is permitted, in which case the funding is a policy assigned to the provider rather than a trust deposit
• Annual reporting, bonding and licensing for preneed sellers, sometimes separately from the funeral establishment licence

At federal level, the FTC Funeral Rule at 16 CFR Part 453 governs price disclosure — the general price list, the casket price list, itemisation and telephone price quotes. It is a disclosure rule rather than a funding rule, but compliance history matters to a careful lender because enforcement exposure is a real liability.

Confirm the current requirements with your state regulator. This area changes, and a rule you learned a decade ago may not be the rule now.

Why the trust is not collateral

Three reasons, each sufficient.

The at-need receivable and insurance assignment

Where a family funds a funeral with a life insurance policy, the funeral home is typically paid by assignment. The family assigns a portion of the death benefit, the carrier verifies the claim, and the funds are released — sometimes directly, often through an assignment funding company that advances the amount and takes a fee.

Suppose 210 at-need calls a year at 6,400 each, with 55 per cent insurance-assigned. That is 739,200 a year of insurance-funded revenue, and at a 45-day claim cycle roughly 92,400 sits outstanding at any moment.

Two things to know. First, the assignment funding companies that advance against verified claims are, in substance, factoring a receivable whose payer is an insurance carrier — a good payer with a slow, document-driven process. Price it as financing and compare the fee against your cost of waiting. Second, an assignment is only as good as the policy: lapsed policies, contestability periods, beneficiary disputes and policies smaller than the invoice are all routine, and the family remains liable for the balance.

What a lender will actually lend against

What no lender will lend against: the trust corpus, the preneed backlog as a number, or the community's expectation that you will handle their families.

The diligence points on an acquisition

1. Get the preneed trust report and reconcile it to the contract file. Underfunded trusts are the single largest hidden liability in this trade. Contract by contract, is the required amount actually on deposit.
2. Separate guaranteed from non-guaranteed contracts and model the cost to perform the guaranteed ones at today's prices.
3. Check whether the trust is pooled or individual, and who has been taking the earnings.
4. Review preneed regulatory filings for the last several years, and any examination findings.
5. Confirm licences transfer, including the establishment licence, the preneed seller registration and the funeral director licensing tied to individuals. Several of these attach to people, not to the entity.
6. Look at call volume by year, not revenue. Revenue can be held up by price increases while calls decline; the call count is the real trend.
7. Ask about cremation mix. A shift toward direct cremation reduces average revenue per call substantially, and a business whose call count is flat while cremation share rises is shrinking.

What to have ready and what to refuse

Have the trust reconciliation, three years of tax returns and financials, call volume by type, the preneed sales record by year, the vehicle schedule, an appraisal or at least recent comparable data on the property, and your FTC Funeral Rule price lists in current form.

Refuse to treat preneed cash as working capital. Several state enforcement actions in this industry come down to a provider using trust-designated funds to run the business in a slow year, and the personal consequences are severe. If the business needs working capital, the preneed trust is the one place it cannot come from — get a line secured on the real estate or the at-need receivables instead, and get it before the slow year rather than during it.