Broker Check

Understanding Escheatment

June 24, 2016

Escheatment ain't what it used to be! The legal theory of escheatment dates all the way back to feudal England where land that was held by a person with no heirs or by someone committing a felony could revert back to the King. Over time, common law evolved and escheatment became the right of a government to claim abandoned and/or unclaimed property. You might think of them as a government-run financial asset lost and found.

Unfortunately, in recent years, many states have turned escheatment from a process intended to make sure abandoned and unclaimed property does not lay stagnant forever, to a process intended make up for a budget gaps and shortfalls. To that end, many states have changed the laws governing their escheatment process to make it easier to classify funds as abandoned. This has been done in a variety of ways by states, including:

  • Changing the definition of abandoned - For years, the typical definition of "abandoned" centered on whether mail sent to an account holder's address of record was returned as undeliverable by the post office. However, many money-hungry states have changed this definition to be entirely, or in some cases, potentially, driven by "inactivity." But what constitutes inactivity? That is something that must be addressed on a case-by-case basis, but in some cases even accounts set up to automatically reinvest dividends or have those dividends sent directly to a bank account may be deemed "inactive" if other actions are not taken within a specified period of time.
  • Shortening the period of time an account must be inactive for it to be considered abandoned - Historically, most states had laws that called for property to be considered abandoned after a period of five years or more. However, in over the last decade or so, states have, en masse, been shortening that length of time. In many states, the threshold for abandonment is now down to just three years.

In reality, preventing escheatment should not take too much effort on the part of a client, especially if they are working with an advisor. A simple log-in to a password protected website or a vote of proxies may be enough to keep an account from being considered inactive in some cases. For clients' accounts that are on "autopilot" for one reason or another, this might be a good item for advisors to add to the annual review. If an account has not been accessed during the past year, do a cursory log-in of the account to protect it from being considered abandoned.

In the event that property is escheated, a state will often liquidate the property and turn them into state funds. However, if a client has a valid claim to the property, there is generally a procedure they may follow to have their escheated funds returned.

Advisor Action Plan

  • Know your state law and regulations! Make sure you understand state law rules regarding the definition of abandoned property and the steps for clients to follow should they need to reclaim escheated property.
  • It's generally best to make sure clients are receiving statements of some kind every now and then! If they're not, work with them to find out why.
  • Make sure that clients are accessing their accounts or otherwise taking actions that would deem their accounts "active" in order to avoid potential escheatment.
  • Let clients and prospects know about escheatment! No one wants to have their property confiscated by the government, but few people are aware of the relatively liberal definitions of abandonment used by many states.

From the Securities and Exchange Commission (SEC)

Accounts – Abandoned or Unclaimed

The Escheatment Process

All states require financial institutions, including brokerage firms, to report when personal property has been abandoned or unclaimed after a period of time specified by state law – often five years. Before a brokerage account can be considered abandoned or unclaimed, the firm must make a diligent effort to try to locate the account owner. If the firm is unable to do so, and the account has remained inactive for the period of time specified by state law, the firm must repost the account to the state where the account is held. The state then claims the account through a process called "escheatment," whereby the state becomes the owner of the account.

As part of the escheatment process, the state will hold the account as a bookkeeping entry, against which the former account owner may make a claim. States tend to sell the securities in escheated accounts and treat the proceeds as state funds. When a former account owner makes a valid request, however, the states will normally provide the former owner with cash equaling the value of the account at the time of escheatment. This amount of cash does not include any dividends or interest covering the time after escheatment.

There are several websites, including commercial ones, where you can search for unclaimed property. One non-commercial site, the National Association of Unclaimed Property Administrators, allows you to search by individual state.

States have their own requirements for finding and claiming unclaimed property. If you believe you have unclaimed property, the state will require you to send them information about yourself to verify your ownership of the unclaimed property. After verifying your ownership, the state will either mail you a claim form or permit you to fill out the form online and print it for submission to the state.

Copyright © 2016 Ed Slott and Company, LLC Reprinted from The Slott Report, 6/24/2016, with permission.

Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

“Ed Slott’s Elite IRA Advisor Group” is solely an indication that the financial advisor has attended training provided by Ed Slott and Company. Ed Slott is not affiliated with Royal Alliance Associates, Inc. Securities and advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC. Additional advisory and financial planning offered through Affiliated Advisors, Inc. Insurance services offered through Eastern Planning Inc. Listed entities not affiliated with Royal Alliance.