IBA Compliance Connection

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If a customer has money invested in a funeral trust (with the funds invested in a certificate of deposit) and wants to cash it in, can we assess an early withdrawal penalty? The trust beneficiary is still alive, and it is not our practice to waive early withdrawal penalties unless the owner has died. The funeral home that owns the account is saying that we cannot assess a penalty. The CD states on its face that there will be a penalty for early withdrawal, along with the amount of the penalty.

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We believe you may assess an early withdrawal penalty for the certificate of deposit (CD) held for the funeral trust, because the penalty is one of the terms of the CD account.

The provisions in the Illinois Funeral or Burial Funds Act (which governs both the funeral home and funeral trust beneficiaries) on which the funeral home apparently is relying do not apply to your bank.  The law permits living funeral trust beneficiaries to terminate their contracts, in which case the seller of the funeral merchandise and services (the funeral home) must refund “the entire amount held in trust attributable to undelivered merchandise and unperformed services plus any amounts held in trust attributable to the contract . . . .”  This language does not cover the fees paid by the funeral home for holding the funeral trust funds in a trust account at a bank.

Notably, the funeral home (the seller) is required to disclose any penalties for terminating the account in its pre-need contract with the beneficiary.  This is the funeral home's responsibility, not the bank's.

For resources related to our guidance, please see:

  • Illinois Funeral or Burial Funds Act, 225 ILCS 45/4(c) (“After final payment on a pre-need contract, any purchaser may, prior to the death of the beneficiary and upon written demand to a seller, demand that the pre-need contract with the seller be terminated. The seller shall, within 30 days, initiate a refund to the purchaser of the entire amount held in trust attributable to undelivered merchandise and unperformed services plus any amounts held in trust attributable to the contract or the cash surrender value of a life insurance policy or tax-deferred annuity.”)

  • Illinois Funeral or Burial Funds Act, 225 ILCS 45/1a-1(a)(6)(C) (A pre-need contract for a funeral or burial trust must disclose “(iii) penalties to be incurred or moneys or refunds to be received as a result of cancellations; . . .”)

This is just for the purpose of a definition in a rule addressing reserve accounts at the Federal Reserve:

  • Regulation D, 12 CFR 204.2(c), Footnote 1 (“A time deposit, or a portion thereof, may be paid during the period when an early withdrawal penalty would otherwise be required under this part without imposing an early withdrawal penalty specified by this part: . . . (d) Upon the death of any owner of the time deposit funds; . . .”)