Preneed trust shortfall: what causes it and how to measure it

Most preneed trust shortfalls were not caused by anyone doing something wrong. They were built slowly, one legal retention, one modest year of returns, and one price increase at a time. That is why owners are often surprised by the number and buyers rarely are.

What is a preneed trust shortfall?

It is the dollar gap between verified trust funds and the current cost to deliver the guaranteed contracts those funds back. Contracts with no deposit at all add their full re-priced cost to the gap.

The guarantee is what makes it a shortfall. On a non-guaranteed contract, the family pays any difference when the death occurs, so the funeral home carries no gap. On a guaranteed-price contract, the firm must deliver the selected funeral whatever it costs. Insurance-funded contracts can have a similar gap, but this page is about trusts.

Why do preneed trusts fall short?

Five causes account for nearly every shortfall we see. Three are legal and expected; two are compliance problems.

Retention is the one owners forget. Colorado, for example, requires a deposit of not less than 75% of the total contract price, so a seller may keep up to 25%, under C.R.S. § 10-15-107. That retained cash often paid for selling the contract years ago. The trust still has to cover the full funeral.

Returns and fees depend on investment rules and trust size. Large pooled trusts can do well: SCI’s FY2025 Form 10-K reports returns on its preneed funeral trust funds of 14.7% in 2025, 12.3% in 2024, and 16.5% in 2023, “excluding certain fees.” A small trust held in insured deposits rarely comes close.

Price growth is specific to each firm. NFDA’s 2023 price study, as reported by Funeral Director Daily, put the median funeral with viewing and burial at $8,300 in 2023, up 5.8% from 2021, while inflation over the same two years was 13.6%. Your own GPL history, not a national figure, sets your obligation.

Some states build in protection. Nebraska requires that trust income equal to principal times the annual CPI increase stay in trust before anything is distributed, under Neb. Rev. Stat. § 12-1114. Colorado’s § 10-15-109 bars disbursing excess trust assets to the seller until trust value exceeds all funds paid by buyers.

How is a preneed trust shortfall calculated?

Shortfall equals the re-priced cost of every guaranteed contract, minus the verified trust funds allocated to those contracts, plus the re-priced cost of any contract with no funding found. Dividing funding by re-priced cost gives the funding ratio.

The rigorous version is contract by contract: re-price each contract’s selections at today’s GPL and compare it with its own sub-account balance. That is the work of the Preneed Reconciliation Ladder. A quicker version grows total deposits at the trust’s net return and total contract prices at the firm’s average price increase. Our preneed shortfall calculator runs that quick version, which is good for direction and for checking the detailed result.

The trusting rules behind each deposit are on our preneed trust page.

Where does a typical shortfall come from?

Breaking one shortfall into its causes shows which ones matter. In this illustration, the legal retention is the largest piece.

The smallest line is the one to bring to a lawyer. The missed deposits are a compliance issue, whatever their size, while the three largest lines would have appeared in a perfectly run trust.

Does a shortfall grow or shrink over time?

It grows in any year when the firm’s price increases outpace the trust’s net return, and it shifts as contracts mature and new ones are sold. The direction matters as much as today’s figure.

Maturities tend to remove the oldest contracts, which are usually the most underfunded, so a firm that stopped selling preneed years ago may see its gap per contract fall even as prices rise. A firm selling many new guaranteed contracts adds funding close to today’s prices, which improves the ratio at first. A buyer will ask for the shortfall at two or three past dates to see the trend.

What should a shortfall schedule show?

One line per guaranteed contract, with every input a buyer’s accountant needs to re-perform the math. A total without the schedule behind it will not be accepted.

Is a preneed trust shortfall a legal violation?

Usually not. A shortfall built from retention, returns, fees, and allowed withdrawals can sit inside a fully compliant trust. Missed deposits, late deposits, and unauthorized withdrawals are different, because regulators can require the money back.

Kansas shows the enforcement side. Under K.S.A. 16-310, the Secretary of State audits preneed accounts and trusts and can require redeposit of improperly paid moneys. A seller who finds that kind of problem should read our situation guide on selling after discovering preneed underfunding and call counsel before calling buyers.

How do sellers, buyers, and lenders deal with a shortfall?

Sellers decide whether to fund it or price it, buyers convert it into a price reduction, escrow, or indemnity, and lenders treat it as a future cash cost the business must carry.

Sellers gain most by measuring early, because a known number is negotiated calmly and an unknown one gets padded. Buyers deduct the measured gap and often hold back more for contracts they could not trace. The negotiation mechanics are in our guide to how preneed shortfalls change the purchase price, and a full case is in the underfunded preneed backlog example. Lenders read it the way SCI describes its own exposure: if trusts fall short, “we may be required to cover any shortfall with cash flows from operations.” That is cash that cannot service debt.

What mistakes make a shortfall look smaller than it is?

Comparing the trust with contract face value instead of today’s prices is the classic one. A trust can exceed every original price and still be hundreds of thousands short.

• Blending in non-guaranteed contracts. Their funding is not available to cover guaranteed gaps.
• Using the trust’s best year. Price increases compound every year; returns do not.
• Ignoring retention history. Old contracts may have been sold under a different statutory share.
• Leaving out orphan contracts. A contract with no deposit is the most underfunded contract of all.

Measured carefully, a shortfall is just a number to negotiate. Measured late, it becomes a reason to doubt everything else in the file. The broader pricing framework is on our funeral home valuation hub.