Over the last decade, states have increased efforts to ensure compliance with their respective escheatment laws. Increased audits have been initiated in many instances to generate revenue. It is imperative that business owners and corporations understand their obligations in the escheatment (unclaimed property) laws of the state in which they operate.
1. What is Escheatment?
Escheatment is the process of turning over abandoned property to the State. Property includes all forms of property, both tangible and intangible, that becomes abandoned by its rightful owner. For insurance companies (“holding company”) property may include uncashed checks, premium refunds, or death benefits.
Escheatment was originally a process designed to return unclaimed property and proceeds to their rightful owners. When the property is unclaimed, corporations have an obligation under law to look for the owner and, failing to deliver the property, turn it over to the state. States have used the law to gain revenue by holding the property which in 2010 accounted to 42 billion dollars. Most accounts that are escheated have a value of less than $100. If the property remains unclaimed, many states have statues that take over the funds for government use.
2. What happens if Property is not Escheated Pursuant to Law?
State laws often have statutory penalties as well as required interest payable on property not properly escheated. Interest penalties are generally assessed at significant rates from 10 – 25% of the property value. Additional civil penalties for failure to report, remit or deliver may include daily penalties for each day of non-compliance such as $100 to $200 or fines ranging from $1000 to $25,000. In yet other states, a failure to comply may be considered a criminal offense. This can create a significant financial risk for non-complying business owners and corporations
3. What is the Corporation’s duty of Due Diligence?
Corporations and business owners have a responsibility of Due Diligence. Due Diligence refers to the degree of effort and activity required by law that a holder must perform to locate the owner of property before reporting and remitting property to the state. Generally speaking, the required activity involves the holder sending some form of written notice to the owner.
4. When is Property Abandoned?
Property may be deemed abandoned after a dormancy period. The dormancy period is continuous period of time that must elapse without any activity being taken by the owner, or after the death of the owner, before property will be considered “presumed abandoned” and, thus, reportable in accordance with state unclaimed property laws.
Property is escheated to a particular State if the last known address of the person to whom funds are payable is located in that state.
5. What is the Unclaimed Property Act?
Each State has enacted some version Uniform Unclaimed Property Act with revisions, as adopted by the National Association of Unclaimed Property Administrators (NAUPA). As a result, similar timelines exist between the States. Fifty state research its often required to ensure corporations are adoring to the laws of differing states in which they operate. That research can be a time consuming process and it is often advisable to outsource compliance issues to counsel who have experience in that area of law.
Some commonalities often apply between sets of states which may mean that policies and procedures can be drafted broadly to ensure compliance across sets of states.
Retaining an independent legal professional to assist in developing comprehensive policies and procedures can be an important step in risk management related to escheatment compliance.