Preneed Contracts and Trusts When Buying a Funeral Home
Many families choose to plan funeral arrangements in advance, sometimes years before they are needed. When they do, the funeral home makes commitments to provide specific goods and services in the future. Funeral home preneed contracts can represent an important part of a firm’s relationship with its community, and they are also among the most important items for a buyer to understand, because the obligations they create may continue after a sale.
This article explains what buyers should understand about preneed arrangements in an acquisition. Preneed contracts, preneed trusts, insurance-funded arrangements and related obligations are governed by state and jurisdiction-specific rules, which vary significantly. This is not legal, regulatory, tax, accounting or insurance advice. Buyers should work with qualified legal and accounting professionals familiar with the applicable rules.
What Preneed Arrangements Are
A preneed arrangement is an agreement made in advance for funeral goods and services. Depending on the jurisdiction and the contract, it may be:
- Funded through a trust, with payments held under applicable rules until services are provided
- Funded through an insurance policy or annuity designed to pay for future services
- Structured in other ways permitted by applicable rules
- Guaranteed or non-guaranteed as to price, depending on its terms
Some arrangements may be revocable or transferable by the family, depending on the contract and applicable rules.
Why Preneed Matters in an Acquisition
- The firm may be obligated to provide future services under existing contracts
- The funding available for those services may differ from the future cost of providing them
- Trust and insurance arrangements are subject to regulatory requirements and reporting
- Recordkeeping problems or compliance issues can create risk for a buyer
- Preneed relationships reflect families’ trust in the firm and may influence future service
Funds Do Not Simply Transfer With a Sale
Buyers should not assume that trust funds, insurance proceeds or other preneed funding automatically transfer to them in an acquisition. Whether and how preneed obligations and their funding are assigned, transferred or administered after a sale depends on state rules, the terms of the contracts, the trust or insurance arrangements and the structure of the transaction. Regulatory notices or approvals may be required in some jurisdictions.
What Buyers Typically Review
- A complete schedule of outstanding preneed contracts
- Contract terms, including what goods and services are covered and whether prices are guaranteed
- How each contract is funded and who administers the funding
- Trust statements, reconciliations and required reports, where applicable
- Insurance policy information for insurance-funded contracts, where applicable
- Any regulatory examinations, findings or complaints
- How the seller’s records match the trustee’s or insurer’s records
These records fit into the broader review covered in our funeral home due diligence checklist.
How Preneed Can Affect Price and Structure
The way preneed obligations and their funding are treated can affect what a buyer is willing to pay and how the transaction is structured. Buyers and sellers may address preneed matters through representations, indemnities, holdbacks or other terms negotiated with counsel. This article does not offer formulas or assumptions for valuing preneed obligations, which depend on the specific contracts, funding and rules involved. Our guide to funeral home valuation explains how preneed fits into the overall picture.
Cemetery Arrangements
Cemeteries may have their own preneed arrangements and perpetual-care or endowment-care funds, which are also governed by jurisdiction-specific rules. See our article on buying a cemetery.
How Lenders View Preneed
Lenders may ask about preneed obligations and how they are funded as part of evaluating a funeral home’s cash flow and risk. Trust funds and insurance arrangements held for families are generally not available to the business as collateral or working capital. Our guide to funeral home loan requirements explains what lenders review.
Planning for a Respectful Transition
Families who made preneed arrangements are trusting the firm to honor them. Buyers who understand these obligations and communicate thoughtfully with families, as appropriate and in compliance with applicable rules, help maintain that trust.
A Note for Sellers
Sellers who maintain accurate preneed records and reconcile them with trust or insurance records before marketing the firm can make diligence smoother. See our guide on how to sell a funeral home.
US Professional Funding helps buyers finance the acquisition of existing funeral homes and works alongside the buyer’s legal and accounting advisors on transactions involving preneed arrangements. Learn more about our funeral home acquisition financing.
