In the United States, escheatment -- the process of turning unclaimed property over to a state authority -- is big business. Over $1 billion of property is abandoned annually. The 50 U.S. states, which by law become the holders of such abandoned property, receive as much as $30 million in escheat each year. This property is generally added to the state coffers and utilized until the owners reappear to claim it.

Representing significant resources for states, escheatment is not a topic any business should ignore. And it shouldn’t fall solely under the purview of the finance or legal department. Credit managers need to be well informed as some of the assets they manage can also be classified as unclaimed property.

Short History of Escheatment

Escheatment has been a legal concept since the Dark Ages. Originally, it applied to the ownership of land reverting to the feudal lord upon the death of the landowner without any heirs. It thus became a common law doctrine that was eventually expanded to include forfeiture to the state (king, queen, jurisdiction, etc.) of all property belonging to a person dying intestate without any heirs.

Ultimately, escheatment came to pertain to all types of property – tangible and intangible, secured and unsecured – that was unclaimed for a specific period of time.

Uniform Disposition of Unclaimed Property Act

As U.S. property rights are derived from state, rather than federal law, each state defines what property devolved to the state, and when and how. In the 1950s, escheatment statutes became a popular source of state revenue in the United States, and controversies over conflicting property claims became widespread.

In 1954, in order to unify the various state statutes and clearly define ownership of abandoned property, the Uniform Disposition of Unclaimed Property Act was introduced. It was followed by the acts of 1981 and, finally, 1995. These statutes, based on model legislation recommended by the National Conference of Commissioners on Uniform State Laws, were created as consumer protections with the primary purpose of safeguarding individual property.

All 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have enacted their own versions of the Act, which follow to differing degrees the Uniform Act. The purposes of these state versions have been three-fold: to reunite owners with their property; to limit the liability of the holder of the unclaimed property; and, to provide the state with an income stream.

Definition of Terms Utilized in Escheatment Law

Escheat: abandoned/unclaimed property that has reverted to the state when no legal heirs or claimants exist
Custodian: the state, who ultimately holds the property until claimed by the owner
Dormancy period: time during which the property has not been claimed
Due diligence: the requirement that the holder make reasonable attempt to contact the owner before handing the property over to the state
Holder: party (business, association, bank, etc.) with the duty to remit escheatable property to the state
Owner: person entitled to receive the property

Who Must Declare Unclaimed Property to the States?

Every state and U.S. territory requires all legal entities, including corporations, partnerships, LLCs and C corporations, to file an annual unclaimed property report. This is generally true even if the entity has no unclaimed property to declare. However, as you will see below, it is likely that every business will be holding some property that is considered escheatable.

Generally, foreign subsidiaries are not subject to U.S. unclaimed property laws. However, U.S. subsidiaries of foreign-owned firms are subject to the laws.

What Kind of Property Falls Under Escheatment Laws?

Basically all property, whether tangible or intangible, is considered escheatable if unclaimed after a dormancy period, unless specifically exempted under a state’s statute. From a credit manager’s perspective, the list includes:

accounts receivable credit balances
unredeemed merchandise credits
uncashed checks to vendors
overpayments
unused credit memos

Where Does a Business File and Remit Abandoned Property?

As abandoned property represents significant income for the states, there has been quite a bit of haggling over which state should receive what property.

In 1965, the United States Supreme Court established priority rules for circumstances where more than one state claimed the same property. These rules were upheld by the Supreme Court again in 1972.

Property should be reported and handed over to the state of the owner’s last known address.
If there is no such address, the property is reported to the holder’s state of incorporation.
If there is an address, but that state’s law does not cover that category of property, the property is reported to the holder’s state of incorporation.

It is the responsibility, therefore, of every business to be familiar with the laws of its state of incorporation, as well as the laws of every state into which it sells.

When Is Escheatable Property Reported?

Unclaimed property is reported to the appropriate body after it has been abandoned for a specific period of time. Each state sets its own dormancy period which may be specific to the property type. Typical dormancy periods run 3 to 5, or 7 years.

Every state has annual filing dates to which holders are expected to comply – either by November 1st, or during the period between March 1st and May 1st.

How are Reports of Abandoned Property Made?

Unclaimed Property laws require four things of the holder:

Attempting to locate the owner (due diligence)
Filing reports with the proper states
Remitting the property to the proper state
Maintaining records of the property

Due Diligence. Most legislation requires a one-time “reasonable effort” to notify the owner of the property. Generally, a letter sent by first class mail to the last known address not less than six months before the property is to be turned over to the state.

Reports. The first filing with the state is called “initial compliance” and should take into account all property types held by a corporation, whether or not any abandoned property is currently being held under that type. Subsequent filings, considered “annual compliance”, will include identification of all property that has been unclaimed for the required dormancy period.

Each state has its own reporting forms and filing requirements to which holders must adhere. Electronic reporting may be required where there are large numbers of records. There are software packages that can help large volume reporters.

Property Remittance. Everything reported must be delivered to the appropriate state custodian, which in most cases is the State Controller’s office.

Recordkeeping. Again, every state has its own requirements for the specific period of time for which holders must retain records pertaining to unclaimed property. This period is typically 7 years after the property has been reported, but in some cases may be permanently.

Some Recommendations

States can be very aggressive in escheatment enforcement. Auditors profile specific industries and, if appropriate reporting and recordkeeping is not available, can issue assessments higher than a company’s legitimate liability. Some states utilize collection firms to audit for unreported escheatable property. In addition, states add even more to their treasuries via failure-to-file penalties, interest charges, and even claims for damages. In fact, in one case the State of Delaware received a $51 million payment! Therefore ….

Don’t Ignore the Issue

Very few states apply a statute of limitations to unclaimed property. It’s not unheard of for state auditors to go back decades in their search for non-compliance with the unclaimed property law.

Willful failure to complete and file a report, or perform the other duties outlined in the law, are punishable by heavy fines. Failure to deliver unclaimed property within the time prescribed will result in interest payments based on the value of the property from the date it should have been reported and remitted.

If you receive notification of an audit, get your legal counsel involved immediately, fully assess your realistic liability, and determine whether it makes sense to fight it. While it is the state’s burden to persuade a court that the property is escheatable to them, the state usually meets this burden easily.

Attempts at Circumvention May Not Work

According to the National Association of Unclaimed Property Administrators:

“In an effort to avoid turning property over to the states, some corporations have attempted to adopt bylaws or have included contractual provisions to cause a loss of the owner’s property rights prior to the time the property would be remitted to the state. The courts have routinely ruled in favor of the states …”

Consider Letting Professionals Guide You

There are a number of attorneys and consultants that specialize in escheatment. Karen Anderson, vice president of ACS-Unclaimed Property Recovery and Reporting (UPRR), recently presented a webinar on the topic to the members of two of ABC-Amega’s credit groups. A Google search on “unclaimed property consultants” turns up more such firms. And the resources below provide links to other valuable information.

Other Resources on Escheatment Law

For a look at some abuses of escheatment, read this article in the July 18, 2007 issue of the Orange Country Register: California Focus: How Californians are being escheated

For more free information and resources on unclaimed property laws:
(inclusion in this list should not be considered an endorsement by ABC-Amega)

ACS-Unclaimed Property Recovery and Reporting

Blakely and Blakely, LLP

National Association of Unclaimed Property Administrators

New York State Society of CPAs

Spotswood Law, Unclaimed Property Counsel

For software to assist with unclaimed property compliance, Google “unclaimed property software”.

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Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.

This information is provided by ABC-Amega Inc. -- providing commercial debt collection services in more than 200 countries worldwide. For further information, contact info@abc-amega.com.