Funeral trust scam in Illinois costs Merrill Lynch Life $18M

Merrill Lynch Life Agency Inc. will pay the Illinois Division of Insurance $18 million to settle a state investigation into the firm’s role in an imploded trust that was supposed to cover consumers’ funeral expenses. Between 1986 and 1999, the Seattle-based subsidiary of Merrill Lynch & Co. Inc. of New York marketed and sold tax-exempt variable universal life insurance policies as investments inside a pre-need trust managed by the Illinois Funeral Directors Association in Springfield. The trust held the proceeds from about 49,000 consumers’ purchases of prepaid funeral contracts. However, the trust’s value tanked, falling from more $300 million at the end of 2007 to about $250 million in less than two years and attracting scrutiny from the state’s Department of Financial and Professional Regulation. A three-year investigation by the department revealed that the association — the trustees of the fund — had used variable universal life policies, purchased on the lives of its members, as investments inside the trust. The association is already in hot water with state comptroller Dan Hynes, whose office said in 2005 that the trust was underfunded by $39 million and who now demands that the association cough up $10 million that it allegedly took from the trust in excess management fees. Edward L. Schainker, the Merrill Lynch Life registered representative who sold the variable universal life policies to the association members and recommended this corporate-owned life insurance investment plan, violated insurable-interest laws in Illinois, according to license revocation documents from the state. He also didn’t determine whether his investment plan would provide the revenue necessary to cover the trust’s liabilities, according to the documents. As punishment, Mr. Schainker has been stripped of his insurance license and fined $100,000 in civil penalties. Meanwhile, Merrill Lynch Life, while not admitting to the state’s allegations, will pay the $18 million into a special fund held by insurance director Michael T. McRaith and Mr. Hynes. The money will help offset any losses that association members experience as they deliver on their funeral contracts to the affected consumers. “We're participating in this resolution so we can be part of ensuring that the families get the services they paid for,” said William Halldin, a spokesman for Merrill Lynch.