Everyone has guilty pleasures they cannot resist...wine, women...mine are economics podcasts, specifically the wonderfully nerdy Planet Money from NPR. I was listening to a an episode recently that introduced me to a concept I'd never heard of before: escheat.
The word dates to the 1300s, and derives from an old French term meaning to fall - in this case, referring to an inheritance that falls to another. (For those readers who imagined the term possibly derived from the word cheat - stay tuned, you may be onto something.)
In feudal times when the law was introduced, any property left without legal claimants, beneficiaries or heirs became property of the state on the death of the owner. There was presumably less outcry at a time where monarchy was the most common form of government.
In our modern democratic era, the state does not overtly take over property so much as become the interim custodian until the rightful owner can be identified. Rather than only applying to property left behind when an owner dies, escheat law has grown to include any unclaimed property held by a business for a prolonged time that rightfully belongs to someone else.
Examples of property that fall subject to escheat law include:
- Savings and checking accounts
- Uncashed payroll or cashier checks
- Money orders and travelers checks
- Safe Deposit Box Contents
- Bonds
- Stock and dividends
Each state in the U.S. makes different rules as to how long a period must pass before property is regarded as abandoned or unclaimed long enough to revert to the state under the law. In the pre-digital age, states placed ads in newspapers to encourage owners to lay claim to property in state custody.
In the digital age, most states host websites and staff departments (California operates through the state Controller's Office) where owners can lay claim. Interestingly, in California you need only leave most accounts inactive for 3 years.
In theory, the state defends escheat actions by stating that its scruples are superior to those of private business entities who have zero interest in reuniting an owner with their stake in property held by the business.
If one considers the actions of Swiss banks that held accounts dormant for decades from Jewish clients killed in the Holocaust, profiting in the process, the state seems to have a valid point.
The problem comes when the state begins to regard escheat income as a source of revenue for state coffers, creating a tremendous conflict of interest. When the state confiscates property to become custodian, it sells any assets (it does not wish to become your portfolio manager) and undertakes what is effectively a tax-free loan.
Trends in recent years have shown that state laws are reducing dormancy periods - increasing the amount of assets that would qualify under escheat law. From 2003-2015, there were 13 states that reduced the dormancy period for banking assets from 3 to 5 years. I am not by nature prone to conspiracy theories, but in this case I am worried about a state grab for private assets.
Readers of the New Yorker might recall an article from August 2013 describing the practice of civil forfeiture, where local (often small-town) police pull over "suspects" and bring them to the station where they are threatened with jail time and prosecution for serious-sounding crimes based on scant evidence - unless they are willing to sign over their cash in exchange for a waiver stating no charges will be filed. The practice has come to be known as "cash for freedom."
One could imagine a state employee or legislator arguing with conviction that escheat law serves citizens by increasing funding for important programs and reducing the need to raise taxes.
The segment on Planet Money that most resonated with me described an elderly investor who had bought $6,000 in Amazon shares back before it was a household name. Intending to set it and forget it, he did not open his TD Ameritrade account for 20 years, expecting a pleasant surprise for his patience.
Instead of finding a balance of over $100,000, which is what his investment should have been worth at the time he logged back in, he found a balance of zero. His account had lain dormant for years and been subjected to escheat laws from Delaware, where TD Ameritrade is incorporated.
Delaware had sold the stock for $8,000, and they cut him a check in that amount. They owed him no interest under the law. He wants to lawyer up, but no attorney will take on the case for the amount involved.
So much for set it and forget it.
I suggest you google any state you have lived in during training combined with the word "escheat" to see if you have unclaimed property.
Let me know how your treasure hunt pans out!
Comments 10
This is an eye opening post, especially the Amazon example.
You would think there would be a requirement that the state or account makes an attempt to contacting the owner before it is confiscated by the state.
There is a lot of advice out there to not check your 401k balance because you would be likely to make bad decisions. But by not checking it would you risk it being considered abandoned and lost to the state?
Author
Perhaps making it an annual task to login to ensure your account has up to date contact information will preclude an account being considered inactive and protect you from unclaimed property laws.
Scary world out there with everyone trying to eat your cookies and drink your milk, as Gasem is fond of saying.
Not sure about 401ks or other tax-deferred accounts – that may be a bit different because the individual isn’t eligible to access until 59 1/2. So I doubt they can escheat before then and don’t know what the rules are after. Would be worth some research, crispy doc!
Escheatment DOES apply to pensions: the pension administrator must make a reasonable effort to locate the recipient when it’s time to start paying out the pension so that they can pay out the benefit, but, if the recipient cannot be found, after a certain amount of time the administrator releases the funds. The state takes their cut.
If you have pensions at former employers (or 401ks that you didn’t roll over), definitely make sure they have your current contact information and that applicable beneficiaries are up to date. Or if your parents did, it may be worth a google search for them as well.
As my parents remind me, they receive a pension check for $100 a month. They joked about it when they FIREd 20 years ago – now they say, “Hey, the further you go in this, the more you appreciate every dollar.”
Author
JB,
Interesting point. A shallow search suggests 401k’s may also fall victim to unclaimed property laws, although I could not find explicit information as to how California addresses the issue:
https://www.thinkadvisor.com/2019/02/20/more-irs-guidance-needed-on-unclaimed-401k-savings-gao/?slreturn=20200203123531
If your parents enjoy a few nights out thanks to the pension, all the better!
When I was in residency I had a savings account with the credit union. After I finished I forgot about the account which had about $200 left. A few years later I received a note from them asking me if I would like for them to remove then redeposit $1 to avoid being escheated. How customer friendly!
Author
If only most banks were that considerate!
I had no idea about these escheat laws. I wonder if logging in and out to check your balance is enough or do you have to have some form of transactional activity.
For the gentleman in the Planet Money segment, what a terrible situation.
Knowing this, I definitely won’t forget it after setting it.
Author
I know logging in helps to keep it fresh, so I’d pick one time a year to log into all your accounts as a safeguard.
And you think government is your friend. In fact you are its benefactor. What do you think an IRA or 529 is all about?
I live 7 miles south of Volusia County FL. I-95 runs smack dab through it’s middle and it was common for people to be stopped and any money over a few hundred dollars to be confiscated on the presumption is was somehow crime related. I’ve seen video’s on land grabs on youtube by government confiscation. You are at best borrowing your own assets.
Author
Some abuses of justice are beyond egregious, brazen to the point of counting as chutzpah.