Faulty Trust Fund Slashes Funeral Savings For Thousands

Investment choices made by the Illinois Funeral Directors Association are being called into question after an ongoing three-year review by the state comptroller's office revealed the association has a more than $50 million deficit - which the association sought to eliminate by slashing consumers' trust accounts by up to a third of their values.

The more than 49,000 trust accounts, known as "pre-need trusts," were purchased by families looking to set aside money for their loved ones' funeral costs and protect their investments against inflation. But with 70 percent of accounts now guaranteed only at the values consumers initially paid -- and the other 30 percent standing to lose some of their investments -- thousands of families in Illinois are worried they won't be able to make up the difference. The directors association claims the deficit is a result of losses on Wall Street. But the state comptroller's review says otherwise.

From the Tribune:

"The fund's directors, for example, invested heavily in sophisticated corporate-owned life insurance policies taken out on themselves and other insiders. The policies have "severely impaired" the liquidity of the trust, regulators said. Board members also used the trust as a personal piggy bank, borrowing money from it to make loans to association members. Finally, the association for years was paying out higher interest rates than its investments earned."

According to a civil lawsuit filed by six Illinois funeral directors at the end of January, the directors association said it would invest the money mostly in safe places such as U.S. Treasuries and bank CODs, but did not. Unlike other states, Illinois state law does not specify the kinds of investments a pre-need trust can make.

Consumer advocates say they have never heard of a funeral trust purchasing corporate owned-life insurance and say it was an irresponsible way to fund the accounts. The pending lawsuit accuses the directors association of operating a Ponzi scheme by taking new deposits to pay for existing customers' death claims. The state is continuing its investigation as local funeral homes scramble to guarantee at least initial investments.

"A contract is a contract," John Adinamis, a Chicago funeral director whose family has been in the business for more than 100 years, told the Tribune. "Our reputation is at stake here."