Why you should care about unclaimed property
Unclaimed property and the associated obligations can be generated by most businesses, whether they are aware of it or not.
Can you tell me what unclaimed property is?
Financial assets left unclaimed by their rightful owners for a certain period of time are considered unclaimed property. The following are examples:
Safe deposit boxes and bank accounts
Checks for dividends, payroll, or cashier's checks
Mutual fund accounts, stocks, bonds
Royalty or interest payments on minerals
Escrow accounts, trust funds, and court deposits
Savings accounts that are inactive
Proceeds from life insurance
Overpayments by customers
Gift certificates that have been used
Shortly, the owner must receive these items or the state must take them away. In order to make sure your business is properly handling unclaimed property, it's important to understand how the process works, and what steps need to be taken if the property does not meet the criteria.
What Causes Property to Become 'Unclaimed'?
It is possible for property to become unclaimed for a number of reasons. A property may have been neglected, left behind by the owner or forgotten about by the owner. An owner moving from a deposit-required location, changing their address without notifying us, or terminating their employment can lead to unclaimed property.
There may be businesses that hold these items, but they aren't able to handle them because the items are too small. Though it may seem like a small oversight, it could have major consequences down the road.
How Should You Handle Unclaimed Items in Your Business?
When unclaimed property is discovered, there are three steps to follow:
(Research) Identify any unclaimed property items
Ensure that unclaimed property is notified or returned to its owner (due diligence)
A lost or unclaimed item should be remitted to the state (escheatment) if no owner can be located.
A few common terms are defined here:
An unclaimed property item is held by a holder, the business that owns it.
It is the period of time before an unclaimed property item must be reported to a state that defines the dormancy period. States have different laws regarding this.
Escheatment - The process of transferring unclaimed property to the government. As soon as you do this, they are responsible for it.
A final attempt is made to locate the property owner as part of due diligence.
Unclaimed Property: Common Questions
The process of locating the rightful owner of unclaimed property can be time-consuming and difficult. When attempting to locate an owner, businesses need to be diligent and document their efforts.
There are a number of questions businesses end up asking:
Is my property subject to these rules?
Could you please tell me what the reportable value is?
Which state should be notified about the property?
In order to locate the property owner, how do I go about it?
What is the difference between a dormant and a live account?
What is the timeframe for reporting a dormant account?
Unclaimed property items may be reported in different states, so the answers may vary. The reporting rules differ from state to state, and deadlines must be met. Even though unclaimed property does not technically constitute a tax, some states view it as a revenue source. Several states, including Minnesota and Wisconsin, focus on consumer protection when it comes to unclaimed property. The state should be able to collaborate with a company instead of fostering confrontation.
The rules governing unclaimed property
The rules governing unclaimed property differ significantly from tax procedures in several ways:
Despite not having a presence in a state, a company can be subject to a state's unclaimed property rules.
In general, unclaimed property statutes of limitations do not toll. In Delaware, audits go back more than 30 years, and some audits look back 10–20 years.
It is possible to perform audits going back 10–30 years. Auditor's use statistical extrapolation to estimate older years since most businesses don't keep records for that long. Again, the property holder is responsible for proving that these estimates are incorrect. It will be very difficult and onerous for the business to provide proof for early years like 1981 because there are no rebuttable records.
Auditors hold simultaneous contracts with multiple states, resulting in very complex, expensive audits that can take up to three years to complete.
Unclaimed property audits generally do not allow administrative appeals. Taxes, interest, and penalties must be paid by the business or it will be forced to sue.
Non-compliance penalties and interest can potentially exceed the value of unclaimed property.
Financial institutions with unclaimed property
Unclaimed property issues may arise in financial institutions like banks and credit unions. The majority of financial institutions are decentralized and offer a wide range of products and services spanning a wide range of industries. In institutions with commercial operations, keeping track of all this activity can be challenging.
As a result of unclear assignments of "ownership" or account maintenance responsibility at the client's business, commercial banking business lines involving security deposits, club accounts, certificates of deposit, unidentified deposits and suspense accounts, as well as credit balances resulting from loans, could have reporting and escheat issues. Escheat issues may also arise from the following items:
Dividends and stock liquidation
Principal and interest on bonds
Checks issued by fiduciaries
Dividends in cash
Documents warranted
The last "contact" may not always be apparent, and what constitutes acceptable "contact" may not always be apparent. Property owners can acknowledge the existence of the account and wish that it remain current and open by explicitly acknowledging or implicitly acknowledging its existence. A decentralized financial institution with many locations and/or multiple accounts can be particularly affected by this. The unclaimed property issue needs to be resolved, and one way to do so is by putting in place a system for tracking and remitting it.
The fees, interest, and other charges associated with inactive accounts that have been presumed abandoned are also scrutinized. It is essential that the contract deals specifically with inactive accounts when addressing the various charges and fees. In addition, it is important to consider the possibility of contacting customers through another account.
Unclaimed property reporting issues can also arise with Individual Retirement Accounts (IRAs) and Keogh plans. Account owners may be required to report these accounts if they do not claim their distributions as required by law or contract. Distributions from retirement accounts (or death benefits) can only begin the year after the account owner turns 7012, whichever comes first.
Education savings plans that offer tax advantages must distribute after 30 days after a beneficiary's 30th birthday. A three-year dormancy period generally applies if the account balance is not distributed. If the beneficiary hasn't been contacted by the financial institution by the age of 33, the accounts should be reported to the appropriate states.
Unclaimed Property: The Importance of Compliance
It is increasingly important for states to enforce unclaimed property laws, and if your business is not in compliance, there could be serious repercussions. A state can come knocking at any time if you haven't turned over all your unclaimed property, as there is no statute of limitation on unclaimed property audits.
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