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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.

Delaware Publishes Proposed VDA and Audit Regulations – Comments Welcome

The Delaware Department of Finance has posted proposed regulations for public comment to govern the state’s unclaimed property audits and VDA proposals.  The proposed regulations are intended to implement the Delaware legislature’s direction “to complete the development of a detailed manual containing procedural guidelines for the conduct of Delaware unclaimed property examinations” as per January 2015’s Senate Bill 11.

Among the highlights of the proposed regulations relating to VDAs administered by the Department of Finance* is the establishment of a “rolling look-back date of 19 report years” for all VDAs entered into on or after January 1, 2017.

The proposed audit regulations include details regarding the appropriate sampling and estimation methodologies, rules for the auditor’s conduct of the audit, procedural steps, as well as a sample (though very summary) non-disclosure agreement acceptable to the state.

The proposed regulations also contain a list of information and factors that may be used to select a holder for audit.  These include a review of the holder’s reports for “inconsistencies, omissions or a lack of detail” and a “comparison of a Holder’s past reports to the reports of similar Holders within the same industry and of the same approximate size.”

Comments are due to the Department of Finance by 4:30 p.m. on April 1.

*  By virtue of legislation enacted in 2012, the Delaware Secretary of State’s office also administers a Voluntary Disclosure Agreement program for holders of unclaimed property.  The proposed regulations above relate to the Department of Finance program.  Implementing guidelines for the Secretary of State’s program can be found here.

Supreme Court Declines to Hear Unclaimed Property Case, But Fires a Shot Across the Bow of “Cash-strapped States”

Today, the Supreme Court of the United States issued an order declining to hear the case of Taylor v. Yee.  In Taylor, the United States Court of Appeals upheld a federal court’s dismissal of a case challenging the methods used by California to notify owners that there property is about to be, or has been, escheated to the state. Specifically, the Taylor plaintiffs alleged that California violated the constitutional rights of unclaimed property owners by failing to, among other things, access databases of other California government agencies for information relating to the whereabouts of unclaimed property owners.

The Supreme Court’s review of lower court decisions is mostly discretionary, so the decision not to review a particular case is not an approval by the Supreme Court of the decision reached below.  In fact, that seems to be especially the case here, as Justices Alito and Thomas agreed with the decision to deny review the Ninth Circuit’s decision in Taylor, but warned that the “constitutionality of the current state of escheat laws is a question that may merit review in a future case.”

In making that determination, the Justices noted that the combination of “shortened escheat periods with minimal notification procedures” raised “important due process concerns.”  Among the notable points of the concurrence:

  • a critique that some states’ notification procedures “rely on old-fashioned methods that are unlikely to be effective.”  (citing Delaware’s newspaper publication statute); and
  • affirmation of the view that the Constitution requires states to provide “preescheat notice” before property is taken by the state; and
  • a recognition that “[a]s advances in technology make it easier and easier to identify and locate property owners, many States appear to be doing less and less to meet their constitutional obligation to provide adequate notice.”

While the states may have avoided review of their escheat practices in Taylor, the Alito/Thomas concurrence suggests that they may want to take a long hard look at their notification procedures before the Supreme Court does so.

*Editor’s Note: The author of this post was one of the co-authors of an amicus brief urging the Supreme Court to review the Taylor case.