Category: Uncategorized

Holders: Don’t Forget That You’re Owners Too

Unclaimed Property Holders Should Take Another Look at Potential Claims

Before getting to unclaimed property news, just a quick word to our readers (both of you!):  we hope that you and your families are safe and well during these turbulent times. 

The COVID-19 crisis is, first and foremost, a human tragedy.  But even if and when the virus is tamed, and the immediate economic crisis ends, there is expected to be a significant long-term economic disruption as well.  One place where that disruption will be particularly felt is with regard to cash flow and liquidity. For companies operating on a thin margin, every dollar in the door counts.

Accordingly, this is a good time for holders of unclaimed property to remember that they very well may be owners of unclaimed property too. Often, companies do not bother searching for or claiming unclaimed property reported to the states on their behalf, thinking that the process is too cumbersome or not worth the effort.  In these changing economic times, holders would be well advised to rethink that position and at least take a look at what is out there ready for claiming.

2020 Vision

A Look at the Year Ahead in Unclaimed Property

Happy New Year! Last year saw a variety of developments in the world of unclaimed property. Today, we take a look ahead at five topics that might be at the forefront of unclaimed property news in 2020.

Audit Disputes & Litigation — 2019 saw a number of challenges to the State of Delaware’s audit practices; most notably, the battle between Univar, Inc. and Delaware in parallel federal and state litigations arising out of a proposed unclaimed property audit. While there were a number of procedural and narrowing decisions in that case, the real substance remains to be litigated. That battle will continue, and it appears that new ones will get underway shortly. In December, AT&T filed a lawsuit against Delaware, challenging the state’s audit practices as a violation of the company’s constitutional rights. Similar challenges were recently filed by Fruit of the Loom and Eton Corporation, both of which are challenging the state’s estimation and extrapolation practices. Substantive decisions in any of these cases will be significant for those undergoing Delaware unclaimed property audits.

Savings Bond Tug of War — Back in October, we summarized the decision of the U.S. Court of Appeals for the Federal Circuit in Laturner v. United States, in which the Court held that the federal government had no obligation to turn over the proceeds of matured, but unredeemed U.S. Savings Bonds to the states as unclaimed property. In particular, the Court ruled that state unclaimed property laws were preempted by federal laws allowing bondholders to keep the bonds after maturity, and that states (like owners) could not redeem savings bonds without presenting either the bond itself, or identifying information relating to the bond. In response, Congressman Ron Estes (who, as a former State Treasurer, knows a thing or two about unclaimed property) has proposed the “Unclaimed Savings Bond Act of 2019” which would amend federal law to allow states to take custody of unredeemed savings bonds and substantially undo the Federal Circuit’s decision in LaTurner. Unsurprisingly, the legislation is strongly supported by the National Association of State Treasurers.

More Adoptions of the 2016 Uniform Act — In 2019, Colorado and Maine joined the ranks of states adopting a variant of the 2016 Uniform Unclaimed Property Act. A number of states have similar legislation in the works which may become law during the upcoming year.

IRA Activity — Securities industry holders will also need to take a look at their programming and practices relating to assets held in Individual Retirement Accounts. In most states, the triggering event for IRA escheatment is “the date . . . specified in the income tax laws of the United States by which distribution of the property must begin in order to avoid a tax penalty.” Previously this was age 70.5, but Public Law 116-94, which was signed into law on December 20, 2019, changes the so-called “Mandatory Distribution Date” (MDD) to age 72. The new rule applies to distributions required to be made after December 31, 2019. Holders will have to update their procedures accordingly.

Oh Canada? — 2020 may also see increased unclaimed property activity outside of the United States. The Canadian provinces of Alberta, Quebec, and British Columbia all have unclaimed property regulations of varying sorts that have been in place for some time. In 2019, New Brunswick proposed legislation that might make it the fourth. The New Brunswick Unclaimed Property Act is currently pending before the province’s Standing Committee on Economic Policy. Similarly, the Manitoba Law Reform Commission has issued a report containing recommendations for an unclaimed property regulatory structure similar to those in other provinces. We will see if any of this proposed legislation develops. Of course, the main event in potential Canadian escheat laws is whether or when Ontario will enact such a law. Perhaps this is the year.

Is “True Escheat” The Future of Unclaimed Property Laws?


Nevada is considering a bill “providing that all property rights and legal title to, and ownership of” of U.S. savings bonds would “vest in this State” after three years. After that three year period, the state could choose to pay the proceeds to the rightful owner of the bond, but the decision to do so would be left to the state’s discretion. West Virginia is considering similar legislation, A law proposed in Hawaii goes even further providing that all unclaimed property with a value of $100 or less shall immediately “escheat to the State and be transferred to the general fund.” These are just a few examples of a new (and for unclaimed property owners, troubling) trend in unclaimed property legislation — a shift from “custodial” escheat laws to “true” escheat laws.

Currently, most state unclaimed property laws are “custodial” in nature — meaning that the state takes possession of the unclaimed property on the rightful owner’s behalf, but the state never actually takes “title” (i.e., ownership). Instead, the state holds the property in trust, and the rightful owner can always claim the property from the state when he or she becomes aware of it. To be sure, the state may use those monies for schools, roads, or other budgetary purposes in the interim, but the rightful owner retains the right to get his or her money or property back.

The rationale for such “custodial” escheat laws is reasonably straightforward: given that the rightful owner is not in possession, someone is going to have the “free” use of the money. Better that it be the state for the use of all citizens than a private company. In the custodial paradigm, the owner theoretically is no worse off by the state, rather than a company, holding his or her property (at least if the property is cash, and not securities)

In a “true” escheat system, the state ultimately acquires not only custody of the property, but ownership. As a result, the rights of the original owner are deemed “cut off.” As explained by 18th Century English jurist William Blackstone in his Commentaries on the Laws of England, the rationale for “true” escheat laws is that all property rights were ultimately derived from the sovereign: “The grand and fundamental maxim of all feudal tenure is this; that all lands were originally granted out by the sovereign, and are therefore holden, either mediately or immediately, of the crown.” Accordingly, where something happens to the current owner, the property reverts back to the sovereign.

While this rule may still make sense for “real property” (i.e., land) with the sovereign being the state, it is not for most “intangible” property. A share of stock you purchase from an issuer, a CD you deposit at a bank, a payroll check — none of these items “originated” with the state. The potential for true escheat laws, along with the ever expanding scope of unclaimed property laws, and the apparently inexorable process of making dormancy periods shorter and shorter, could very well have a significant and negative impact on the owners of unclaimed property.

While the current proposals appear to be modest (just a single property type here, a $100 limit there) it is not hard to imagine such laws being expanded. Owners should be wary.

Kentucky Passes Version of 2016 Uniform Unclaimed Property Act

Kentucky Governor Matt Bevin recently signed House Bill 394 into law, which enacts a version of the 2016 Revised Uniform Unclaimed Property Act promulgated by the Uniform Law Commission.  The new law incorporates many of the Uniform Act’s structural and procedural changes, including the establishment of a formalized audit appeal procedure, detailed provisions relating to confidentiality, and rules relating to the reporting and remittance of unclaimed life insurance policies.

The adoption of the Uniform Act provisions also resulted in some substantive changes from the earlier Kentucky Unclaimed Property Act.  For example:

  • The dormancy period for money orders has increased from 3 years to 7 years;
  • The dormancy “trigger” for securities has changed from inactivity to a returned mail standard;
  • Stored value cards are now expressly covered by the Act, with a dormancy period of 3 years from December 31 of the year or issuance or last activity.

Kentucky is the fifth state to adopt a version of the 2016 Revised Uniform Unclaimed Property Act.

In addition to implementing the 2016 Uniform Unclaimed Property Act, the new law also requires the State Treasurer to submit a report to the legislature regarding the “status of the abandoned property fund” at the end of the year.

 

 

UPPO & NAUPA Compile Unclaimed Property Reporting Extension Information for Hurricane-Affected Businesses

The annual unclaimed property report and remittance deadline is rapidly approaching in a number of states.  For those businesses affected by the 2017 Atlantic Hurricanes, a number of states are offering extensions of the October 31 / November 1 fall reporting deadlines.  In addition, the Unclaimed Property Professionals’ Organization (UPPO) and the National Association of Unclaimed Property Administrators (NAUPA) have jointly compiled a list of fall reporting extension information for holders in need of extension information.

Pennsylvania Issues Guidance on Revised IRA Provision, Delays Impact

Last fall, Pennsylvania amended its unclaimed property law to, among other things,  change the ways that Individual Retirement Accounts (IRAs) are covered by the Act.  Under the former law, IRAs were not required to be turned over to the state unless there was an unclaimed distribution or the IRA owner reached the mandatory distribution date specified by the IRS rules.  Under the revised law, the dormancy period begins to run when two account statements are returned to the custodian as undeliverable.  In other words, if a person moves, but forgets to tell his or her IRA custodian within the period of two account statements, the IRA account is on its way to being turned over to the Commonwealth.

As noted in an earlier post, this approach is potentially problematic.  IRA’s are perhaps the predominant “buy and hold” type of investment.  Not only are they designed to provide preferable tax treatment in exchange for holding until a later age, but there are actually hefty tax penalties for failing to hold off on distributions until age 59.5.  The new Pennsylvania laws, however, fail to take this economic reality into account, the dormancy period begins upon the requisite amount of returned mailings, regardless of the age of the account holder or any tax penalties that may occur.

As a result, a number of groups, including the Unclaimed Property Professionals Organization and the Investment Company Institute have objected to the new legislation and/or have asked Pennsylvania to amend or clarify the application of the new IRA provisions.

As a result of these inquiries, the Pennsylvania Department of Treasury issued policy guidance on the application of the new IRA rules.  Unfortunately, the guidance does not address the shortcomings of the revised law, but kicks the problem down the road.  In the guidance, the Treasury Department opines that no adverse tax consequence for the owner is “anticipated”:

The provisions of Section 1301.8 directing the transfer of abandoned and unclaimed retirement accounts into the custody of the Commonwealth are not anticipated to implicate early distribution related taxes. Upon the transfer of an IRA or certain retirement assets pursuant to Section 1301.8, the Commonwealth will act solely as custodian of those assets until such time as the owner or beneficiary is located and reclaims the abandoned and unclaimed property. Because neither the owner nor the beneficiary will have constructive possession or control of the account, the transfer to the Commonwealth’s custody should not be taxable, reportable or potentially penalize a premature distribution to the account owner, but instead should be treated as a non-reportable transfer of retirement assets.

Unfortunately, there is no citation, analysis, or explanation of the reasons for the Treasury Department’s position, nor any indication that there has been any communication with the IRS in order to confirm the Treasury Department’s understanding.  That said, the guidance at least puts off the day of reckoning for this issue, providing that the Treasury Department will “neither demand nor accept” abandoned IRA accounts unless (1) three years have passed since the death of the owner and or (2) the owner has reached the mandatory distribution requirement.  This directive will remain in place while the Treasury Department studies the issue.

 

Update: Delaware Senate Bill 13 Signed by Governor, Effective Immediately

Delaware Senate Bill 13 — implementing certain provisions of the 2016 Uniform Unclaimed Property Act, and making significant change’s to the state’s unclaimed property practices, was signed by the Governor last week, and is effective immediately.

‘Twas the Night Before Fall Reporting

‘Twas the night before Fall Reporting, and all through the firm,

Everyone in unclaimed property was starting to squirm.

Wire transfer instructions were given to disbursements with care,

In the hope that remittance confirmations soon would be there.

 

In state capitols, Treasurers smiled at the incoming proffers,

Knowing that millions would soon be in the states’ coffers.

Bob was in payables, and me with the CFO,

Was it all out?  Both of us wanted to know.

 

When down from the Controller there arose such a wailing,

I assumed there must be a late response to a due diligence mailing.

Away to accounting we ran down the hall,

Where Bob and I nearly tripped over the accumulated sprawl.

 

UP-1s, NAUPA codes, and Holder Reporting Guides,

Covered every flat surface with big stacks besides.

When, what led my stomach to churn and contort,

But hundreds of names that were left off the report.

 

When I asked how this many names could’ve been missed,

I was told they were still working off last quarter’s list.

Quickly, Bob and I each stifled a cry,

Certainly an exemption or two must here apply.

 

Airline miles? Lottery winnings? Stale B2B credits?

Perhaps just small balances with offsetting debits?

Alas, no, we would be late, and it might be gory,

With penalties and interest (both statutory).

 

There just wasn’t enough time to report all the names

Relationship codes, amounts less “lawful claims.”

We needed an answer, and the clock was still ticking,

Through each statute and reg, we just kept on clicking.

 

Then I noticed on the ledger I continued to assess,

All of the amounts listed were $50 or less.

My mood picked right up, and I started to sing:

We’ll just add it all up and report the whole thing!

 

Aggregate reporting — that was the way!

We’d still get this report out by the end of the day!

We quickly revised, and added, and listed,

Everyone in tax helped, even legal assisted.

 

When it was ready, we unleashed the whole thing,

Breathing a sigh of relief (at least ’til next spring).

And I said to Bob, as the remittance flew out of sight,

Happy fall reporting to all, and to all a good night!

Charging Money for Free Information (On Both Sides of the World)

The Sydney Morning Herald (Australia) recently posted an article outlining how various companies in Australia seek to make money by repackaging otherwise public information at increased prices. According to the article, profit-minded Aussies are charging for public information relating to unclaimed property, ancestry records, government reports — sometimes at a significant profit.

The experience here in the U.S. is no different, particularly with regard to unclaimed property.  Agreements with so-called “finder firms” are allowed in many states, pursuant to which the finder agrees to assist a claimant with obtaining his or her money from the state in exchange for a percentage fee.

Of course, states generally charge no fees for searching, claiming and receiving unclaimed property that they hold for the benefit of the rightful owner.  Accordingly, finder firms (might) provide you with expertise or time (i.e., the they will deal with the the claim process so you don’t have to).  They are NOT, however, providing you with access to the money; the underlying funds belong to the owner and is (or shortly will be) claimable directly from the state without the involvement of a finder firm.

Everyone is free to spend their time and money how they wish, and everyone has their own individual balance of what is worth doing and what is worth paying someone else to do.  Just know what you are paying for.  In the case of unclaimed funds and finder firms, it is (maybe) time and expertise, not access, that you are buying.

Update on West Virginia Life Insurance Legislation

We recently published a brief post concerning West Virginia legislation relating to the obligation (or not) of life insurers to review the Social Security Death Master File (DMF) to determine when a life insurance policy becomes payable.  After the West Virginia Supreme Court held that life insurers had a duty to periodically ascertain when life insurance policies become payable, a few West Virginia legislators introduced a bill that would largely undo that decision – by specifically providing that “the obligation to pay does not arise until after a claim is made.”

Instead of that legislation, however, the West Virginia legislature recently passed a bill that would make DMF searches a statutory requirement for insurers.  The bill has been sent to the Governor for action.