What is unclaimed property and why should you care

Most businesses, whether they know it or not, have the potential to generate unclaimed property and the associated obligations that come with it.

What is unclaimed property?
Unclaimed property is any financial asset that has been abandoned or unclaimed by the rightful owner for a specific period of time. Examples include:

• Bank accounts and contents of safe deposit boxes
• Dividends, payroll or cashier’s checks
• Stocks, bonds, mutual fund accounts
• Mineral interest or royalty payments
• Court deposits, trust funds, escrow accounts
• Inactive savings accountings
• Life insurance proceeds
• Customer overpayments
• Used gift certificates

In short, these items must be given to the owner or turned over to the state. Unclaimed property can have some expensive consequences if not handled correctly, so it's important to understand how property can qualify as unclaimed, and what steps your business may need to take to deal with it.

How Does Property Become 'Unclaimed'?
There are several reasons property could become unclaimed. In some cases, the owner simply forgot about the property, passed away or left it behind. Unclaimed property can result from an employee termination, an owner changing their address without notification, or an owner moving from a location where a deposit was required.

Businesses holding these types of items may know they exist, but think the item is too small for them to take the time to deal with it. This may seem like a small oversight, but it could prove to be very expensive in the long run.

What Do You Do if Your Business Has Unclaimed Items?
There are three progressive steps that must be taken when unclaimed property is discovered:

1. Identify any unclaimed property item (research)
2. Notify, or return, the unclaimed property to the owner (due diligence)
3. If the owner cannot be found, remit the unclaimed property item to the state (escheatment)

Common Questions on Unclaimed Property
Connecting identified unclaimed property with the rightful owner can be difficult and time consuming. Businesses need to make sure they are diligent in trying to locate the owner and documenting their efforts.

Many businesses end up asking the following questions:

• What types of property do I have that may be subject to these rules?
• What is the value that should be reported?
• To what state should the property be reported to?
• How do I go about tracking down the property owner?
• How do I know whether or not an account is dormant?
• How long after the account is dormant do I have to report it?

There may be different answers to these questions depending on the state where an unclaimed property item is reported. Different states have different rules for reporting, and there are strict timelines to follow. Some states see unclaimed property as a revenue source, even though unclaimed property is not technically a tax. Other states, such as Minnesota and Wisconsin, approach unclaimed property from a consumer protection perspective. This is helpful, as it should result in a state’s collaboration with a company, instead of fostering a confrontational review.

Rules Surrounding Unclaimed Property
There are a number of important differences between unclaimed property rules and tax procedure:

• A company can be subject to a state’s unclaimed property rules without having nexus—in other words, no presence in the state.
• The statute of limitations for unclaimed property generally does not toll. Audits can look back 10–20 years, and Delaware has been known to look back more than 30 years.
• Audits can go back 10–30 years. Most businesses don’t keep records for that long, so the auditors resort to using statistical extrapolation for older years. Again, the property holder has the burden to prove these estimates are wrong. With no rebuttable records for early years like 1981, the business will find providing proof a very difficult and onerous task.
• Third-party auditors often hold simultaneous contracts with multiple states, which can often lead to very aggressive and expensive audits and can take as long as 3-5 years to complete.
• Generally, there are no administrative appeal procedures in unclaimed property audits. A business must pay the tax, interest and penalties or litigate.
• Interest and non-compliance penalties can potentially reach amounts that are close to the value of the unclaimed property itself.

Unclaimed Property in Financial Institutions
Financial institutions, such as banks or credit unions, have the potential to have unclaimed property issues. Many financial institutions are decentralized and offer a variety of products and services that transcend various business lines. Keeping track of all this activity can present a challenge, especially in institutions with commercial operations.

Specifically, commercial banking business lines that involve security deposits, club accounts, certificates of deposit, unidentified deposits and suspense accounts, and credit balances arising from loans, may have reporting and escheat issues resulting from unclear assignment of “ownership” or account maintenance responsibility at the client’s business. Some other items that may cause escheat issues:

• Stock and liquidating dividends
• Bond interest and principal
• Fiduciary checks
• Cash dividends
• Warrants

It’s not always easy to identify when last “contact” occurred, and what constitutes acceptable “contact.” Contact can be evidenced by the property owner’s explicit or implicit acknowledgement of the existence of the account and their wish for the account to remain current and open. Particularly, this can be a problem for decentralized financial institutions that have customers with multiple accounts and/or in numerous locations. These issues need to be resolved, and one way to do that is to put a plan in place for tracking and remitting unclaimed property.

Another area of scrutiny revolves around inactivity fees, interest charges, and other service charges on inactive accounts which are presumed abandoned. In order for these fees to be deemed valid, the contract needs to address the various charges and fees with specific reference to inactive accounts. Again, the question of customer contact through other accounts must be considered.

Individual Retirement Accounts (IRAs) and Keogh plans can also present unclaimed property reporting issues. These accounts might be reportable if the account owner does not claim their distribution as required by contract or law. Generally, the owner of a retirement account (or beneficiary) must begin taking distributions no later than the year after turning age 70½, or as a death benefit.

Similarly, special tax-advantaged educational savings plan accounts are required to distribute 30 days after the beneficiary’s 30th birthday. If the account balance is not distributed, a three-year dormancy period will generally apply. Financial institutions should report these accounts to the appropriate states if there has been no contact with the beneficiary once they reach the age of 33. 

Importance of Compliance in Unclaimed Property
States are increasing unclaimed property enforcement efforts, and there can be hefty consequences if your business is not in compliance. There's no statute of limitation on unclaimed property audits if you have failed to turn over all the unclaimed property, which means a state can come knocking at any time, and it can wind up being very costly.