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

by Michael Rato


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.