Monday, April 3, 2017

Utah Passes Version of 2016 Uniform Unclaimed Property Act

It has been about nine months since the National Conference of Commissioners on Uniform State Laws approved the 2016 Uniform Unclaimed Property Act and recommended it for adoption.  A number of 2016 Uniform Act bills, or state variants thereof, are now working their way through state legislatures; some are crossing or nearing the finish line.

On March 24, 2017, the Governor of Utah signed Senate Bill 175 into law.  This legislation repeals and reenacts the state Unclaimed Property Act, adopting most (but not all) of the provisions of the 2016 Uniform Act.  While the new law does not change the dormancy period for most items, it does incorporate 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.  At the same time, Utah kept some of its state-specific differences from prior uniform acts, such as exemptions for gift cards and credit memos.

Wednesday, March 29, 2017

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.

Thursday, January 26, 2017

Proposed Delaware Legislation on the Fast Track

The unclaimed property community is abuzz regarding new legislation in Delaware that is being touted as a fix for the numerous deficiencies and questionable practices that a federal court vigorously criticized last summer.  The new legislation -- Senate Bill 13 -- is intended to fix the problems identified by U.S. District Court Judge Gregory M. Sleet in Temple Inland v. Cook, as well as to adopt some of the new proposals set forth in the Revised 2016 Uniform Unclaimed Property Act.

Among some of the highlights of the proposed legislation include:
  • a uniform due diligence requirement;
  • more clarity on what information constitutes a last-known address;
  • notice to the owner by the State Escheator for certain types of property;
  • clearer standards for determining when a debt has been discharged;
  • a 10 year record retention provision;
While these are all welcomed potential developments, what really has the unclaimed property community intrigued are the provisions relating to audits.  In particular, a 10 year period of limitation on the state's audit rights (except for cases of fraudulent or willful misrepresentation), and a provision limiting the state's use of estimation to those periods where statutorily required records are not kept.  Even more notable is a potential provision impacting audits that are already underway.

For any audit commenced on or before July 22, 2015 (except for certain securities examinations where estimations are not being used) the holder under audit may exercise the option of converting the audit into a review under the Secretary of State's Voluntary Disclosure Agreement (VDA) program, and limit the period under audit to 10 report years from the date of the original audit notice. 

The legislation, introduced on January 12, has already passed the Senate and been approved by the House Administration Committee and is currently on the "Ready List" (meaning that it is ready for debate by the full House). 

Monday, September 12, 2016

Pennsylvania Changes IRA Rules

According to the Investment Company Institute, Americans have $5.68 trillion in Individual Retirement Accounts (IRAs).  In a traditional IRA account, a person can make tax deductible contributions to an account that can grow over the years with no tax impact until distribution.  Importantly, individuals must wait until age 59.5 to make withdrawals without a tax penalty (and individuals generally must begin taking distributions at age 70.5).  In other words, an IRA is a prototypical long term investment.  Depending upon the individual's age when he or she opens the plan, decades can go by before the money is touched, in fact, to avoid tax penalties, it is likely.

The unclaimed property laws account for the fact that long dormancy is expected.  Pursuant to the 1995 Uniform Unclaimed Property Act, the dormancy period for IRAs and similar accounts does not begin to run until (1) the attempted distribution of assets or (2) the date that distribution must begin under the tax laws. 

This position is sensible - the whole purpose of these accounts is to put the money away until retirement.

Pennsylvania, however, has recently amended its unclaimed property laws for IRAs.  Under the new law (House Bill 1605) 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. 

It is unclear if there are any positive impacts from this change, but there certainly could be negative impacts.  Under the former law, if a person moved without notifying his/her broker, their funds would not be escheated until the mandatory distribution date (therefore there is no adverse tax consequence).  Now, if the same move happens, and the property is escheated, the account owner may suffer tax implications as a result of the "distribution" of his or her property to the Commonwealth. 

Moreover, it wouldn't seem that delivering the property to the Commonwealth does not make it any more likely that it will be returned to the owner.  If an individual remembers that he or she had a forgotten IRA account, he/she is more likely to remember (and contact) the broker rather than to contact the Commonwealth.  Accordingly, other than simply bringing more money into Pennsylvania's treasury, the reasons for this change are not clear.