Often, when I am meeting with clients, I will bring up the subject of "unclaimed property." Many respond by saying that they don’t have any. Still others really haven’t a clue about the subject, and don’t appear overly interested in discussing it. My experience has been that just about all companies have unclaimed property. In the world of unclaimed property, such companies are referred to as "holders."
With more and more states looking for politically palatable ways of raising revenue, failing to grasp the intricacies of what is sometimes referred to as "escheat" can dramatically affect a company’s bottom line. States are currently holding in excess of $40 billion of unclaimed property. This is an area where ignorance is definitely not bliss.
What Is Unclaimed Property?
The concept of unclaimed property escheating to the state is a holdover from the European past of many of our ancestors. In feudal times, if the king granted land to a nobleman, and subsequently the nobleman died without producing an heir, often ownership of the realty was returned, or escheated, back to the monarch.
With the founding of this country, many of the traditions and laws followed in Europe by our forefathers were adopted and applied by the states. All 50 states have unclaimed property statutes, and all of them require that given the passage of the statutory time period, property that remains unclaimed must be turned over to the state. The given purpose of the respective states’ unclaimed property laws is to avoid "unjust enrichment" of holder companies. The states are obligated to hold the property in trust for the actual owners of the property until they claim it.
Common forms of unclaimed property include the following:
- Accounts payable or vendor checks
- Accounts receivable credit balances
- Self-insurance benefit payments
- Uncashed stock dividends and bond interest checks
- Untendered stock certificates
- Gift certificates or gift cards
- Layaway accounts
- Customer deposits
- Customer overpayments
- Unidentified cash/miscellaneous income
- Contents of safe deposit boxes
- Money orders
- Traveler’s checks
- Utility deposits
When Does Property Become Unclaimed Property?
As indicated above, all of the states have passed unclaimed property laws, but there is not complete uniformity among the laws. In general, property is considered abandoned if it constitutes a debt or obligation of the holder that arises in the ordinary course of its business (e.g., gift cards sold by a retailer) and it has remained unclaimed for more than the relevant state’s "dormancy period." Dormancy periods are the lapses of time established under each state’s law between when the debt or obligation arises and when the owner of the debt or obligation exercises activity with respect to it. For example, in the case of a paycheck, the clock starts running when the check is issued. If after the established statutory dormancy period expires, the check remains outstanding, it falls into the category of unclaimed property. Merely cancelling the outstanding check and reissuing a new one does not start the clock again.
Which State Is Entitled To The Property?
While states do not gain ownership of the unclaimed property they hold, in reality a very large amount of it is never claimed by its actual owners. Consequently, such revenue becomes a welcome addition to the states’ coffers. Thus, states often vie for the rights to unclaimed property.
As a result of one such dispute, the United States Supreme Court established some priority rules with respect to which state has precedence when it comes to unclaimed property. Under the Supreme Court’s first priority rule, the state in which the payee of the obligation is located has the senior claim to the unclaimed property. Accordingly, if a company located in New Jersey issues a payroll check to an employee who resides in New York, and that check remains uncashed for the applicable dormancy period, the amount of the check should be remitted to New York.
Under the Supreme Court’s second priority rule, if the address of the payee is unknown, the state in which the holder is incorporated is superior and the unclaimed property should be reported and paid to that state. For example, in the case of the sale of gift certificates, generally the purchaser’s address is not recorded by the retailer selling the certificate. Accordingly, should a gift certificate remain outstanding after the applicable dormancy period has expired, the value of the gift certificate should be reported and remitted to the holder’s state of incorporation (this assumes that state includes gift certificates within its definition of unclaimed property).
The Audit Risk
As indicated above, many states are looking to their escheat laws as sources of revenue. Since many state escheat laws do not include any statute of limitations provisions, the specter of an audit can be particularly onerous. Considering most companies do not keep records for more than a fairly limited period of time, having to produce records from 15 or 20 years ago can be a very daunting, if not impossible task. The inability to produce complete records often leads to state auditors calculating an "extrapolation percentage" for unclaimed property based on the periods for which a holder has records, and then applying it to the periods in the past for which no records exist. Obviously, such methods are very advantageous for states that are popular havens for incorporation such as Delaware. If records can’t be produced, and estimates are made, no addresses of potential payees come into play, and the state of incorporation reaps the benefit under the Supreme Court’s second priority rule.
What To Do
In the area of unclaimed property, "prevention is really worth a pound of cure." Ignoring the problem will not make it go away. If a company suspects that it has an unclaimed property issue, strong consideration should be given to entering the relevant states’ voluntary disclosure programs. Just about all of the states have them, and they generally limit the past periods for which a holder is obligated to report unclaimed property to a more reasonable number. Moreover, penalties are waived, and often interest as well. Help is available, take advantage of it.
If you have any questions regarding this subject, please contact the author at 212-842-7019, or via e-mail at firstname.lastname@example.org.