investing

Does the state have your money?

Before taking possession of the property, most state laws require an attempt to find and contact the owner. If the owner isn't found or doesn't come forward, the property is transferred to the state. Physical property or securities are either held as is or converted to cash through sale or auction. Depending on state law, the resulting cash may be transferred directly into the state's general fund to close budget gaps or simply held in case the owner comes for it.

How to avoid escheat
  • Keep your address up to date with all financial institutions and employer.
  • Cash all checks.
  • Open all mail from financial institutions.
  • Keep a list of all accounts and account numbers.

If you eventually discover what happened and want to get your property back, you have to make a claim on it and fill out paperwork to prove your identity. The state would then return your property if it was still in their possession, or if it was sold, cut you a check for the proceeds of the sale, even if that amount is significantly less than appraised or current market value.

How did we get here?

How did we get to the point where states are quietly appropriating millions of dollars from innocent taxpayers?

"Some states do a really good job of being proactive and making it easy to claim money," says Osborn. He cites Florida, Tennessee and Nebraska, which have returned $38 million in unclaimed property since he took office, as examples of states that are successfully reuniting owners and assets.

However, says Osborn, "there are a few bad apples out there that are just blatant in trying to keep this money for their state coffers, where it's one of their largest state revenue sources."

A big part of what's fueling this problem, Osborn says, is a Supreme Court decision that allows property with no recorded address attached to it to be taken over by the state in which the holder -- the business that has possession of the asset -- is incorporated.

That means auditors in states where a large number of national and international companies are incorporated can go treasure hunting for out-of-state consumers' unclaimed assets. As long as assets are held by a company domiciled in that state and don't have a current address attached, auditors can confiscate them.

The ruling has fueled a cottage industry of auditing firms that work on what amounts to a bounty system: They keep a percentage of the unclaimed property that is converted into state revenue instead of being returned to its rightful owners, says Palmer.

Once auditors find this property, Palmer says, states often make little or no attempt to contact owners before liquidating and spending assets. For instance, authorities in California have been known to take out block ads in local newspapers featuring little more than a drawing of a hand holding cash and a caption that reads simply, "You may have unclaimed property," he says.

To notify property owners of pending escheatment, Delaware's division of revenue simply publishes an ad in The News Journal in Wilmington, according to Patrick Carter, the state's director of revenue, even though the owner could be anywhere in the U.S. or even the world.

Getting worse instead of better

While California has taken some steps to address the problems experienced by Palmer's clients, says Osborn, others have grown more aggressive.

One state in particular has capitalized on its status as a corporate haven to do so: Delaware.

"The state where most companies are incorporated -- Delaware -- does a really poor job of trying to give money back," says Osborn. Escheat is now the state's third-largest source of revenue, he says.

In 2008, Delaware joined 25 other states in shortening the period of inactivity required to declare an asset unclaimed to three years from five years. This change alone boosted escheat revenue from $379 million in 2007 to $476 million in 2008, according to Carter.

One of the state's contracted auditors, ACS Unclaimed Property Clearinghouse, is working on a plan to escheat retirement accounts held by financial institutions headquartered there.

"(ACS) is looking at the possibility of whether IRAs and Keoghs -- these retirement accounts -- should or should not be escheatable," Carter says. "(They're looking at) the legal issue of whether there's federal preemption that would say that no, because they were set up by federal law, they aren't escheatable."

If they are escheatable, it could mean that Americans could have their IRAs prematurely cashed in without their consent. Not only could that seriously disrupt your retirement planning, but, Osborn says, it would also create a taxable event for the individual, perhaps even incurring an early-withdrawal penalty.

Keep in touch

So how can consumers protect their property from escheatment?

The best way is to stay in contact with whoever is holding your property, be it a financial institution, bank or employer, says Osborn. Keeping your address up to date, cashing dividend checks and opening all your mail from these institutions can insure your name won't come up on an auditor's ledger.

Osborn also recommends keeping a list of all your accounts with the names of the institutions and account numbers in case you pass away unexpectedly. That way, you can be sure your property will go to your heirs and not an aggressive state auditor.

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