Who had to report the annual income earned in a revocable pre-need funeral trust: the funeral-home trustee or the customer and beneficiary?

Plain-English summary

South Carolina Private Letter Ruling 88-8 concluded that the customer and beneficiary, not the trustee, had to report the annual income earned in a revocable pre-need burial-contract trust account.

Each customer could terminate the contract at any time and receive the account balance, including accumulated earnings. Under the federal grantor-trust rule incorporated into South Carolina income tax, that power to recover the property caused the customer to be treated as the trust owner.

The customer therefore had to include interest and other account income in gross income for the year the income accrued.

How the pre-need arrangement worked

XYZ was a funeral home that sold funeral services and some inventory before the customer's death. The customer paid in advance, and the proceeds were held in constructive trust. Interest and other earnings were added to the account.

At the customer's death, the amounts paid and accrued were applied against the contract's fixed price. Any remaining balance was returned to the customer's estate.

The customer also could end the contract during life and receive the account balance, including accruals.

For administration, XYZ arranged for ABC Bank to act as trustee. The accounts were held in one master trust, with each customer receiving a subaccount's pro rata share of earnings, income, and expenses. At year-end the bank would account to the customer and provide the required tax forms for income earned in that account.

The conflict between the statutes

Section 32-7-20, addressing pre-need burial contracts, said that the trust fund itself was solely liable for taxes on the fund and its interest, dividends, increases, and accretions.

But sections 12-7-410 and 12-7-425 determined individual and trust income under incorporated federal income-tax rules. One incorporated rule, Internal Revenue Code section 676(a), treated the grantor as owner when the power to revest title in the grantor could be exercised by the grantor or a nonadverse party.

The ruling cited IRS Revenue Rulings 73-140 and 87-127 as applying that rule to pre-need burial contracts and placing tax on accrued earnings with each customer.

Why the later income-tax statute controlled

The Commission found the burial-trust provision and the incorporated grantor-trust rule irreconcilable on these facts.

It applied the "last legislative expression" rule from Jolly v. Atlantic Greyhound Corporation: when two statutory provisions cannot be harmonized, the later enactment controls.

Section 32-7-20 dated from 1962. Section 12-7-410 was enacted in 1985. The Commission therefore applied the later income-tax rule and treated each customer as owner of the customer's account.

What this means for you

Funeral homes offering pre-need contracts

PLR 88-8 did not place the annual account income with the funeral home or bank trustee. The reporting followed the customer because the customer retained the power to terminate the contract and recover the funds and earnings.

Trustees and trust departments

The bank held a master trust but allocated earnings, income, and expenses among customer subaccounts. It was expected to account to each customer and deliver the required tax forms.

Customers and beneficiaries

The ruling required annual inclusion of interest and other income as it accrued, even though the funds remained in the pre-need account for future funeral services.

Accountants and tax professionals

The ownership analysis turned on revocability and the power to revest title, not simply on who held legal custody of the funds.

Readers applying the ruling today

PLR 88-8 applied state and federal tax rules from 1988 to a specific revocable contract and master-trust arrangement. Current pre-need funeral laws, grantor-trust rules, reporting requirements, contract terms, and state conformity provisions must be checked independently.

Common questions

Q: Who owed tax on earnings in the customer subaccount?

A: The customer and beneficiary had to include the interest and other income in gross income for the year it accrued.

Q: Why was the customer treated as owner?

A: The customer could terminate the contract and recover the account balance and accruals, bringing the arrangement within the grantor-ownership rule described in the ruling.

Q: Did the bank trustee pay the income tax instead?

A: No. The bank administered the master trust, allocated income and expenses, and provided tax forms, but the ruling placed the income with the customer.

Q: What happened to the funds when the customer died?

A: The account balance was applied to the fixed contract amount, and any remainder was returned to the customer's estate.

Q: Why did section 32-7-20 not control?

A: The Commission found it conflicted with the later income-tax incorporation rule and applied the later legislative expression.

Q: Can another funeral home or customer rely on PLR 88-8?

A: No. The ruling states that it applied only to XYZ's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 32-7-20 (1976) — pre-need burial trust tax provision
• S.C. Code sections 12-7-410 and 12-7-425 — South Carolina incorporation of federal individual and trust income rules
• Internal Revenue Code section 676(a) — grantor ownership where a power to revest title is exercisable
• IRS Revenue Rulings 73-140 and 87-127 — pre-need burial-contract grantor-trust treatment cited in the ruling
• Jolly v. Atlantic Greyhound Corporation, 207 S.C. 1, 35 S.E.2d 42 (1945) — later legislative expression rule
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR88-8.pdf

Original ruling text

SC PRIVATE LETTER RULING #88-8

TO:

XYZ, Inc.

SUBJECT:

Taxation of Pre-need Burial Contract
Service Trust Arrangements

REFERENCE:

S.C. Code Ann. Section 12-7-10 (Supp. 1986)
S.C. Code Ann. Section 12-2-410 (Supp. 1986)
S.C. Code Ann. Section 32-7-20 (1976)

AUTHORITY:

Section 12-3-170
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
Whether the customer/beneficiary of a pre-need burial contract service trust arrangement is
responsible for the payment of taxes on income earned by his/her account in said trust or whether
such tax liability rests with the trustee of the account?
Facts:
XYZ, Inc., a funeral home, provides pre-need burial contract services to its customers. Under
these contracts, customers purchase services and some inventory of the funeral home in advance
of actual use. The proceeds are then held in constructive trust by the funeral home, and any
interest, earnings, etc. which accrue on the account are added to it. Upon the customer's death,
the amounts paid in and the amounts accrued are applied to the fixed amount agreed upon in the
contract. The balance remaining is then returned to the deceased's estate. The customers may
terminate the contract at any time and receive the balance of the account, including accruals.
To aid in administration of these contracts, XYZ, Inc. has arranged for ABC Bank to act as
Trustee. The accounts are held in a master trust and each account will receive, as a sub-account,
its pro rata share of earnings, income and expenses. At the close of the year, ABC Bank will
account to the customer and deliver to him/her the required tax forms regarding the income
earned on the individual's account.

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Discussion:
South Carolina Code Section 32-7-20 which addresses pre-need burial contracts, states that the
"trust fund itself shall be solely liable for all taxes on the fund and its interest, dividends,
increases and accretions." Contradicting this are Sections 12-7-410 and 12-7-425 which state
that the gross income and taxable income of individuals and trusts are determined under the
Internal Revenue Code. (IRC Sections 665 through 668 relating to taxation of certain
accumulation distributions from trusts are specifically not adopted.) One of the incorporated
federal statutes, Internal Revenue Code Section 676(a), states that "the grantor [of the trust] shall
be treated as owner...where at any time the power to revest in the grantor title to such portion is
exercisable by the grantor or a non adverse party, or both."
The Internal Revenue Service has interpreted Section 676(a) in Revenue Ruling 73-140, and
more recently in Revenue Ruling 87-127, to mean that the customer in each of these pre-need
burial contracts is responsible for the taxes owed on the accrued earnings.
The issue then is which of the two conflicting statutes is controlling in the instant case. The
South Carolina Supreme Court said in Jolly v. Atlantic Greyhound Corporation et al, 207 S.C. 1,
35 S.E. 2d 42 (1945), that where two sections of a statute are irreconcilable, the subsequent
section, or the "last legislative expression," prevails over the prior one. This rule is used only
where it is impossible to harmonize the two sections or statutes in some acceptable way. Such is
the case here where the two statutes are in conflict.
As for the enactment dates of the two statutes, South Carolina Code Section 12-7-410 is the more
recent of the two, having been enacted in 1985. South Carolina Code Section 32-7-20 was
enacted in 1962.
Applying, then, the "last legislative expression" rule, Section 12-7-410 is the controlling statute.
As previously stated, Section 12-7-410 requires the grantor of the trust to be treated as owner of
it and therefore liable for taxes arising from accretions to his/her account.
Conclusion:
The customer/beneficiary of a pre-need burial contract in which the proceeds are held in trust
until the death of the customer or revocation of the contract is the owner for income tax purposes
and must include interest or other income to the account in his/her gross income for the year of
accrual.
SOUTH CAROLINA TAX COMMISSION
Hunter Howard, Jr., Chairman
John M. Rucker, Commissioner
Crawford Clarkson, Jr., Commissioner
Columbia, South Carolina
March 30

, 1988

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