Does the state have your money?

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Many of us have accounts we haven’t checked up on in a while: savings accounts we started for a specific goal that we’ve since put on hold; dividend reinvestment accounts we started to finance a child’s higher education.

We probably assume that these accounts will be there when we need them. Because of a practice called escheat, however, that assumption could end up turning your financial life upside down.

Escheat laws were originally intended to create a sort of giant “lost and found” for each state. Unclaimed property could be taken away from institutions that might try to hide them on their books and hope that no one noticed they were gone.

But to cover budget shortfalls, some states quietly empty this lost and found into their general funds, trampling private property rights in the process, says William Palmer, a California attorney who has represented many victims of improper escheatment.

“Things are just getting escheated, getting liquidated, and these statutes that are supposed to be for preserving assets for owners that have forgotten about them have turned into revenue generators for the state,” says Jennifer Borden, an attorney with Holland & Knight based in Boston. “The fact that the owners don’t get their money back — which is supposed to be the goal of the statute — now seems to be of little consequence to the state.”

One woman’s experience

Madonna Suever of Oregon found out about the perils of escheat first hand. Her mother, who lived in northern California, had received a cashier’s check from World Savings Bank for over $16,000 from the estate of Suever’s uncle after he passed away in 1986.

Like many women of her generation, Suever’s mother was a financial novice, and kept the check uncashed until her husband’s death in December 2001. After Suever learned of the money, she took the check to Wells Fargo to establish a savings account in her mother’s name.

A few days later, Wells Fargo returned the check, citing insufficient funds. Suever contacted World Savings Bank, which informed her that the money had been escheated to the state. Suever and her mother were incredulous — they had never received any kind of notice from the state.

“Nobody tried to get a hold of my mother, and she lived in the same house for the last 45 years and had the same telephone number listed in the telephone book,” says Suever. “There was only one Suever in the whole area, and she filed taxes every year.”

After being bounced back and forth between different government agencies for months, Suever grew increasingly frustrated. The lost money was becoming a source of conflict between her and her mother, who was suffering from the onset of Alzheimer’s. So Suever turned to Palmer, who was working with other owners to get their escheated property back.

Suever joined a class-action suit brought by Palmer’s clients against the state of California and eventually got her mother’s money back. She’s currently involved in litigation to force the state to pay interest on the money they held.

Suever isn’t the only client of Palmer’s to lose money to escheatment. Chris Taylor, a former Intel employee, had millions of dollars worth of stock in an employee stock plan held in California. Despite the fact that Taylor was in regular contact with other departments of the company, the division keeping track of his stock reported it as unclaimed property to state auditors, says Palmer. The auditors took a chunk of his stock and sold it; Taylor didn’t find out until he was making final plans to retire that a portion of his retirement money was gone.

“You think that you have your retirement savings safe and sound,” says Borden. “Then find that they’re in the hands of the state and they’ve been liquidated well below what they should have been.”

Escheat happens

So how does an investment account or other property get confiscated as unclaimed property?

Accounts become “abandoned” in a number of ways. You can fail to cash a check, forget to update the address on the account, fail to respond to a proxy statement or simply fail to make contact with your financial institution for a “defined period of time,” says Borden. That can range anywhere between just three and seven years, but, she says, “the definitions can get a little sketchy.”

Once an asset reaches the “abandoned” threshold, the institution may try to contact you via mail or phone before reporting your property as unclaimed. But if the owner’s address is wrong or he or she simply doesn’t open the letter, the escheat process begins.

States find out about abandoned accounts in one of two ways: your financial institutions could include it in a required yearly filing or it could be discovered in an audit, says Nebraska Treasurer Shane Osborn, president of the National Association of Unclaimed Property Administrators.

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.