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When Larry and Deborah Yoakum agreed to hand over $1,098 to a large and reputable Memphis mortuary and cemetery 24 years ago to pre-pay for their own funerals, they thought they'd made a sensible decision.

They'd selected the caskets and vaults they wanted to be buried in and were assured that other facets of their funerals would be covered. They had saved their family an emotionally wrenching task and locked in their final farewells at current – almost certainly lower – prices.

Or so they thought.

In the summer of 2006, two years after Oklahoma oilman Clayton Smart became the principle new owner of the Forest Hill mortuary, he announced he had no intention of honoring any of the 13,500 prepaid legal contracts held by the company, including the one signed by the Yoakums.

The reaction was public outrage – and within months, the Yoakums filed a class action against Forest Hills and its new owners. The turmoil then attracted the attention of the attorney general's office, and today Smart faces a variety of criminal charges connected to his handling of customers' money.

Abuse is common

The Forest Hill case has attracted national attention because of its size and the criminal charges, but it is far from an isolated case of pre-need funeral plans gone awry.

"It's happening all the time," said Joshua Slocum, national director of the Funeral Consumer Alliance, an advocacy group based in South Burlington, Vt. "Funeral directors dip into the prepaid pot and steal the money."

"What we see from time to time are misappropriations and misallocations of money that's gone into prepaid funeral plans," said Sally Hurme, a lawyer with AARP's (the American Association of Retired Persons) consumer unit. "These are the class actions and headline cases you see. People go to collect on a prepaid plan and the money isn't there."

The funeral industry is regulated by the Federal Trade Commission and its Funeral Rule, which places a number of requirements on funeral home operators. The Rule states, for instance, that funeral homes must provide a price list upon request, and cannot require consumers to buy a package of services or misrepresent the law.

But prepaid funeral plans are not covered by the FTC or any other federal entity, according to Slocum. Prepaid plans are regulated by the states – and, according to Slocum, the result is a patchwork.

"The consumer protection and the rules about depositing and safeguarding the money vary from quite good in a state like New York, to criminally negligent in states like Florida, Hawaii and Missouri," he said.

Estate planners should know risks

While lawyers who practice elder law and estate planning provide advice to clients on end-of-life decisions, they typically don't counsel them on funerals per se. But Slocum and Hurme contend that there's sufficient evidence about the risks of prepaid funerals that lawyers should be aware of them and counsel their clients accordingly.

"While we encourage people to do funeral planning, we encourage them to go into prepaid plans with their eyes open," Hurme said. "And I would think it would be something that the elder law attorney or estate planning attorney would want to be able to discuss with them as to the pros and cons, or at least that it be considered with a whole raft of other things."

Clients can use a variety of methods to set aside money for their own funerals. Hurme said a straight life insurance policy can do the job; so can a "pay on death" or "transfer upon death" bank account earmarked for funeral expenses and including instructions to a designated beneficiary for use of the money.

Barry Zimmer, a solo estate planning lawyer in Cincinnati, is a strong proponent of "funeral trusts," which are single-premium life insurance policies – meaning that they must be paid for in full before they are issued. The policy is then placed into an irrevocable funeral trust and, according to Zimmer, it provides tax-free benefits, protection from inflation and immunity from Medicaid "spend down" requirements.

In addition, he said, the money can be used for more than funerals and burials. "We like it to pay for family travel expenses and lodging," he said.

"A lot of people like the convenience of planning their funeral when they do their estate plan," Zimmer said. "But if you're not in the funeral home business, how can you do that for people? This way, you can set aside the money and all they have to do is go to the funeral home and pick out what they want."

Use is widespread

The allure of signing a pre-need contract with a funeral home is a strong one.

While prepayment for funerals has always existed, it became a trend in the 1980s, when the funeral industry began pushing it as a way for consumers to lock in price and provide a gift to their families. Today, the money in pre-need accounts is estimated to be about $20 billion.

Hurme said that AARP did a survey of more than 1,000 Americans over 50 and found that 23 percent of them had prepaid at least a portion of their funeral and/or burial expenses.

According to Hurme, that doesn't mean that buyers of prepaid plans have made a mistake. But they may be taking unnecessary risks, she said.

The wisdom of a consumer's decision to pre-pay for her funeral depends greatly on where she lives, according to Slocum.

For example, he noted that many states allow "constructive delivery" of caskets or other items – meaning that the product is never actually taken out of inventory after a person provides advance payment for it. If pre-payers change their minds – for example, if they decide they want to be cremated – the funeral home can legally refuse to honor the request on the grounds that the casket has been "delivered."

"This means they get to keep the money and sell the same phantom casket to the next customer," Slocum said.

The funeral industry has largely seen pre-paid dollars as a pool to fund expansion, Slocum said.

But in Memphis, the class action plaintiffs allege that the new Forest Hill owners used it in more devious ways. The complaint states that the total face value of the 13,465 prepaid policies it held was nearly $22 million; the plaintiffs charge that nearly $11 million of that money was invested in a company called Quest Mineral and Exploration, Inc., "ostensibly owned by defendant Clayton Smart's mother-in-law and stepdaughter."

The complaint also alleges that the defendants invested $6.7 million of the money in "high risk" hedge funds.

Kevin A. Snider of Snider & Horner in Germantown, Tenn., one of the lawyers representing the plaintiffs, said that "basically, we're saying that they stole the money."

Snider said that the position of principle owner Smart was that "because he purchased the cemetery and its assets, somehow he's entitled to the trust funds."

After the plaintiffs filed suit in January 2007, Attorney General Bob Cooper launched an investigation. At the same time, revelations of similar activity by Smart in Michigan were surfacing, and in April 2007 prosecutors in Tennessee and Michigan brought criminal charges against him.

According to Snider, the civil suit has been stayed, pending the resolution of the criminal charges against Smart. Meanwhile, the state has seized Forest Hills assets and is honoring policyholders' claims and issuing reimbursements.

Questions or comments can be directed to the writer at: dick.dahl@lawyersusaonline.com