Friday, April 19, 2019

Colorado Passes Version of 2016 Uniform Unclaimed Property Act

New Legislation, Which Reduces Many Dormancy Periods To 3 Years, Is Effective July 1, 2020

 

On April 16, 2019, Colorado Governor Jared S. Polis signed Senate Bill 19-088 into law, which adopts a version of the 2016 Uniform Unclaimed Property Act. Under the new law, the dormancy period for most property types will drop to 3 years (down from 5). Certain bank accounts and gift cards will still be subject to a 5 year dormancy period, and other items like payroll and dissolution proceeds will continue to have a 1 year dormancy period.

With respect to securities, the new legislation imposes a 3 year dormancy period, that now begins to run upon the second instance of returned mail (as opposed to the former unclaimed dividend standard). The new law also leaves in place certain Colorado-specific exemptions that were in the prior Unclaimed Property Act, such as the exemption for certain lawyer trust accounts, gaming chips or tokens, property held by racetracks, and certain gift card proceeds held by small issuers.

The new legislation keeps the current October 31 reporting deadline for property deemed abandoned as of the previous June 30. The new law goes into effect for the 2020 report.

Wednesday, April 3, 2019

Is "True Escheat" The Future of Unclaimed Property?

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.

Wednesday, March 27, 2019

Arkansas Passes Law For Immediate Liquidation of Unclaimed Securities

Recently, we posted an article addressing the potential pitfalls to owners arising out of certain state's treatment of "unclaimed" securities account. In that article, we noted a bill pending in Arkansas legislature permitting the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. That bill became recently became law.

The new law was also passed as an emergency measure meaning that the legislature made a determination that this new law was "immediately necessary for the preservation of the public peace, health, and safety." Accordingly, the law became effective immediately upon its approval by the Governor on March 15.

Assuming that the state begins the practice of immediately selling securities reported to the state, it means that owners who later seek to recover their property from the state will not receive the securities -- nor any of the dividends, splits, or other compensation that may have accrued -- but rather just the value of the securities at the time of liquidation, less any fees incurred by the state.  

Friday, March 22, 2019

Friday Lost + Found

IRS Holding $1.4B in Unclaimed Refunds -- According to CBS News the Internal Revenue Service has announced that it has approximately $1.4 billion in unclaimed tax returns for more than a million taxpayers. In addition to background on how these amounts have gone unclaimed, the article also has some tips for those who may have fallen behind on filings.

California Holding Over $9 Billion in Unclaimed Property -- From time to time, states will publish estimates of the approximate amount of unclaimed funds being held at a given time. According to a recent press release from the California State Controller's Office, the Golden State holds over $9 billion dollars in unclaimed funds waiting for its rightful owners.
 
Former Mutual Fund Employee Convicted of Stealing from Dormant Accounts -- Whenever any organization has a cache of dormant or otherwise unclaimed funds lying around (so to speak) there will be those who see the potential to take some of that money for themselves. According to the Philly Inquirer, a supervisor at a large mutual fund company has recently pled guilty to stealing more than $2 million "from dormant accounts that were slated for 'escheat.'" He then issued checks from these accounts to various family members. There is no information on how the scam was discovered, but according to the Inquirer "[s]entencing guidelines call for a potential 46 years in prison, $2.1 million in restitution and a $1.25 million fine."

Friday, March 8, 2019

Friday Lost + Found

A Roundup of Odds & Ends From the Week in Unclaimed Property


GAO Issues Report on Unclaimed 401(k) Funds -- The Government Accountability Office, which is responsible for providing recommendations to Congress on the responsibilities of the federal government, recently issued a report concerning the application state unclaimed property laws to retirement assets such as 401(k)s. In preparing the report, GAO sent questionnaires to the unclaimed property offices of all 50 states, interviewed industry representatives, and surveyed fund and brokerage firms on their handling of these items. Among the GAO's recommendations are that the IRS clarify the tax treatment of plans that are escheated to the state and consider allowing taxpayers whose later claim assets that were unknowingly escheated to rollover the assets into a qualified plan.

Claim Headaches -- One of the benefits of modern escheat laws is that they are generally "custodial" in nature -- meaning that the state takes possession of unclaimed property on the owner's behalf, but the property does not actually become the state's property. That said, the claim process can be a trap for the unwary. As recounted by the Mercury News, individuals seeking to claim property from the state face (at least) paperwork and (at worst) scammers that try to take some or all of the money owed to the claimant. The article recounts these problems and has a number of tips for claimants. It is worth a review for those considering filing a claim.

2016 Uniform Act News -- States continue to work on legislation relating to the 2016 Revised Uniform Unclaimed Property Act.The Washington state legislature is currently considering such a bill, as are lawmakers in Nevada. and South Carolina.

Monday, March 4, 2019

Britons Blindsided by U.S. Escheat Laws

Jessica Gorst-Williams, the "Agony Aunt" of U.K. newspaper The Telegraph recently ran an help column relating to a U.K. resident's complaint that her shares were escheated to the State of Delaware without her knowledge. Accordingly to the unlucky shareholder, her shares were turned over to the state "because I had not made any contact with the company since receiving the shares, the necessity of which I had no prior knowledge." 

Ultimately, the shareholder had to submit her driver's license, passport, bus pass (seriously), as well as a copy of the actual stock certificate. After jumping through these hoops, did our heroine across the pond get her stock back? Not exactly. Instead, she got a check for $1, as the state had already liquidated the stock without her consent at the then-market value.

This story is far from unique. Every year, certain states require broker/dealer firms to turn over stock positions, which are in many cases summarily liquidated, based upon nothing more than the fact that the account owner did not engage in activity during the previous 3-5 years.

By way of background, all states require the reporting and delivery of dormant securities positions. However, the manner in which this "dormancy" is measured differs among the states. There are generally two styles. In "Returned Mail" (sometimes called "RPO" (Returned by Post Office)) states, the three to five year time period after which the broker must turn over "abandoned" securities to the state does not begin to run until one or more mailed account statements are returned to the broker as undeliverable by the postal service. In "activity" states, on the other hand, the dormancy period begins to run immediately after the last owner-generated activity in the account. In other words, when you open up a brokerage account subject to the unclaimed property jurisdiction of an "activity" state, the dormancy period begins to run immediately. If you don't trade in that account or engage in some other activity, your securities will be deemed abandoned at the end of three to five years.

While the passage of time alone might make sense to require the escheat of certain items (i.e., payroll checks - which generally aren't held for a long time), it doesn't make sense when it comes to securities accounts, many of which are being held for the long term. While investment advice is not something this blog is qualified to provide, it is nonetheless true that "Buy and Hold" (or passive investing) has been a popular investment strategy for decades. Thus, escheating securities to the state (where they may be quickly liquidated) simply because of a lack of activity seems inconsistent with how many owners utilize their investment accounts.

Adding financial insult to injury, the overwhelming majority of states do not hold those securities escheated to them in the name of the rightful owner. Instead, most states' laws, including those that have adopted the recent 2016 Uniform Unclaimed Property Act, provide that the state may sell securities after three years, and that generally the rightful owner is entitled only to the proceeds of the sale. In other words, the owner loses any increase in value of those securities after they are sold by the state.

Unfortunately, it does not look like these practices are waning. For example, a bill currently making its way through the Arkansas legislature would permit the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. Thus, the states' every increasing appetite for unclaimed property has shifted the burdens of maintaining ownership squarely onto the shoulders of the owner. Now, more than ever, it is important for owners to keep tabs on their securities accounts, even if they are holding for the long term.

Friday, February 22, 2019

Friday Lost + Found

Ohio Oops -- The Ohio Division of Unclaimed Funds recently issued 1099 tax forms to those individuals who claimed abandoned property from the state during the prior year. Unfortunately, it appears that many of the forms were not sent to the correct individuals. Those who may be affected are encouraged to contact the Division of Unclaimed Funds for more information and a free year of identity theft protection.

Municipal Unclaimed Funds -- While we focus most of our attention on unclaimed property held by state governments, municipalities and counties may also hold unclaimed property. A municipal or county government may be holding payment refunds, jury service checks, or deposit refunds for rightful owners who have not claimed those amounts. For example, CBS 58 in Milwaukee reports that Milwaukee County is holding more than $2.2 million in unclaimed funds for its residents and business partners.

2016 Uniform Act News -- The Revised Uniform Unclaimed Property Act was released in 2016 and has been adopted in several states. Other states continue to consider getting on the bandwagon. Last week Colorado Senate Bill 88 (which would implement a version of the Uniform Act) was referred to the full state senate for consideration. At the same time, however, the Illinois legislature is considering bills to amend or repeal its early adoption of the UUPA.