'Ponzi-Like' Scheme Highlights Risks of Prepaid Funerals

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Charles Ponzi gave his name to the brand of scam in which "investors," promised lavish returns, are paid with the funds of those snookered after them. Bernie Madoff raised it to a high art, stealing billions of dollars and making a mockery of regulation and compliance. And a group of enterprising Midwestern swindlers allegedly applied the Ponzi model to the grim and expensive business of burial, bilking up to 150,000 people out of as much as $600 million and casting lurid light on the shady business of prearranged funerals.

A former officer of a company called National Prearranged Services pled guilty last week in connection with what the government says was a scheme to siphon off customer funds. Sharon Nekol Province, 69, entered her pleas as part of a deal with the U.S. Attorney's Office in the Eastern District of Missouri. She was charged with six counts of mail fraud, wire fraud and misappropriation of insurance premiums, and could spend up to three years in prison when she is sentenced on November 7. (The terms of her agreement allow her to ask for probation, however, in light of poor health.) According to the suit, for a decade and a half, starting around 1992, National Prearranged Services peddled contracts for prearranged funerals in states including Missouri, Illinois and Ohio. ABC News describes its offer as follows:

Customers typically paid a single sum of money up-front for the contract. Insurance companies affiliated with the company issued life insurance policies related to the contracts. National Prearranged Services informed customers the money would be kept in a secure trust or insurance policy as required under state law.

But according to the U.S. Attorney's Office, "customer funds were neither kept safe in bank trusts or insurance policies but instead were utilized for unauthorized purposes and the personal enrichment of NPS' officers and others." In classic Ponzi fashion, the government says, "new businesses became the source of funding for funerals that prior customers had previously paid for in advance." The company stopped selling funeral policies in 2008 after multiple states began investigations and was forced to liquidate that same year by the Texas Department of Insurance.

This case is far from the first such scam. In 2010, also in Missouri, funeral home director Thomas Brandtonies, Jr. pled guilty to stealing $123,273 in pre-need funeral scams. These crimes are of interest because of the wide popularity of prearranged funeral packages. According to the Federal Trade Commission's ominously-headlined webpage Planning Your Own Funeral, "millions of Americans have entered into contracts to arrange their funerals and prepay some or all of the expenses involved."

It's obvious why paying for one's funeral in advance appeals to people. The cost of a sendoff from this earthly plane is high -- "$10,000 or more for a traditional funeral and burial," according to Money Magazine -- and many are loath to leave this burden on their loved ones. With prices rising, some are drawn to so-called guaranteed plans, which promise to lock in costs. But non-guaranteed plans don't provide this benefit, so survivors can end up having to pay extra when the time comes for burial.

That's one way prepaid funerals can be problematic even when the company selling them isn't a criminal enterprise. There are also reports of "redemption clauses" that require a claim within a certain period -- in some cases as short as 30 days! Joshua Slocum, executive director of Funeral Consumers Alliance, told Kiplinger that those who purchase prearranged funeral contracts often think "that they've magically waved away any potential problems for their survivors, when in fact usually the opposite is true." He estimated that prepaid funerals account for one-third of the complaints his group receives.

Lax oversight is probably to blame for many difficulties. The FTC notes that regulation is left to individual states, and that laws on the matter "vary widely," with "some state laws offer[ing] little or no effective protection." Consumers are advised to pay close attention to exactly what a contract promises to pay for -- just the trappings of burial (casket, vault), or the funeral service as well? -- and to make sure they know whether their plan can be canceled (if they change their mind) or transferred (if they move). And what happens if there's money left over once everything's been paid for? Anyone thinking of purchasing a prepaid plan has to ask these questions.

People should also consider a simpler alternative: a Totten trust, set up at a bank or credit union, is an account that pays a beneficiary, designated by you, upon your death. So you've got total control: You can deposit money, collect interest, close the account or transfer the balance if you change your mind. And when you buy the farm, your beneficiary collects the funds and pays for your funeral. No third parties to trust.

In any case, morbid as the discussion may be, people should be sure to explain any plans they've made to their families. Otherwise, survivors could wind up paying for something that the deceased already bought, thus stiffing their loved ones from beyond the grave.

The Death Tax Is Alive and Well
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'Ponzi-Like' Scheme Highlights Risks of Prepaid Funerals

New Jersey imposes both estate taxes and inheritance taxes. Estates greater than $675,000 have to pay state estate tax, with rates on the assets in excess of that amount going as high as 16 percent. That tax comes directly out of the estate of the deceased person, reducing the amount heirs eventually receive.

In addition, inheritance taxes impose a hit on those who receive money from an estate. Certain family members are exempt from the tax, including the spouse, parents, grandparents, children, and grandchildren of the deceased. But siblings and more distant relatives generally have to pay tax at rates between 11 percent and 16 percent, and the tax can apply to transfers as small as $500.

Maryland also has a dual estate tax and inheritance tax system. For assets in excess of $1 million, estates are subject to graduated tax rates of up to 16 percent, and inheritance taxes of 10 percent are charged to non-exempt heirs. Maryland has somewhat broader family exemptions, including siblings, spouses of children, grandchildren, and other direct lineal descendants. But the exemption amount for others is only $150, and the inheritance tax is a flat 10 percent.

Rhode Island only has an estate tax, which it imposes it on estates larger than $910,725. For assets in excess of that amount, the same set of tax brackets applies as in New Jersey and Maryland, up to a 16 percent maximum rate.

Indiana doesn't have an estate tax, but it does have an inheritance tax with a wide range of rates. Real property gets taxed at rate ranging from 1 percent to 10 percent, but most financial assets have higher rates of 7 percent to 15 percent, and rates on business interests start at 10 percent and go as high as 20 percent. Exemptions differ depending on your relationship to the deceased person. Your spouse has an unlimited exemption, and parents, grandparents, children, and grandchildren have $100,000 exemptions. But other family members only get between $100 and $500 before the taxes begin to take effect.

However, Indiana is phasing out its inheritance tax by reducing the tax by 10 percent for those receiving bequests in 2013. That reduction will gradually get bigger in the coming years, but the tax is not slated to disappear until 2022.

Nebraska also has a sole inheritance tax, with rates that go as high as 18 percent. Spouses are exempt, but parents, grandparents, children, grandchildren, and siblings have to pay tax of 1 percent on any asset they inherit in excess of $40,000; more distant relatives like aunts and uncles or nieces and nephews pay 13 percent of what they get above $15,000; and others pay the 18 percent of any inherited amount above $10,000.

Photo: O'BrienDigital, Flickr.com

On the other side of the coin, Ohio repealed its estate tax effective Jan. 1. That's obviously good news for potential heirs. But it will cost local governments more than $200 million in revenue that they've come to rely on, especially in areas with substantial numbers of elderly citizens.

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