What corporate America needs to know about unclaimed property: a primer for the business holder.

• Author: Cutler, Stephanie

1. Introduction

   Accounting personnel who work "in the trenches" of a company's day-to-day financial operations often grapple with such questions as: "How should I treat uncashed vendor checks and payroll checks?" "Can such amounts be taken into income?" "Must they be reported and paid to a state and, if so, which state is entitled to the unclaimed funds?" The answers lie in the state statutes known as the unclaimed property laws. These statutes governing the disposition of unclaimed property are also sometimes referred to as "escheat laws," a term harkening back to the rule in feudal England that land "escheats" to the Crown when the tenant dies without heirs.

   Today, all 50 states and the District of Columbia have statutes regulating unclaimed property. Although there are important variations among state laws, most of the statutes are based on a uniform unclaimed property statute first adopted in 1954 and most recently revised in 1995. Almost all modern unclaimed property statutes are custodial in nature, meaning that title to the property does not pass to the state but rather is held (potentially in perpetuity) by the state on behalf of the absent owner.

   Even though the states do not receive title to the unclaimed funds, they enjoy obvious benefits from the right to hold and use unclaimed funds for the general benefit of state citizens. Our increasingly mobile society has generated a large amount of lost wealth, with the total amount of unclaimed property in state coffers today estimated to be $20 billion or more. (1) According to some experts, roughly one in eight Americans is owed unclaimed property. In most states, despite increased state efforts to find missing owners and return property, less than half of the unclaimed property collected each year is ever returned to the original owners. (2)

   Many businesses have historically treated unclaimed property as a source of revenue. As a general rule, however, businesses are not allowed to convert unclaimed payables on their books to income. Instead, they must report and remit such amounts to the appropriate state offices after the property has been abandoned for a prescribed period of time.

   This article first provides an overview of the law of unclaimed property as enacted by most states, including how to determine if abandoned property is covered by the law and the appropriate states to which such property must be reported and paid. Next, the article reviews the risks of not complying with unclaimed property laws, followed by an examination of trends in the law and how those trends may benefit businesses holding unclaimed property. Finally, the article explains how businesses that may not have perfect unclaimed property compliance records can jump-start a compliance program.

2. Overview of the Law

   1. The Four Essential Elements of Unclaimed Property

      For property to constitute "unclaimed property" within the meaning of most state laws, the following four elements must be present:

      1. The property must be intangible. Land and other tangible assets (such as jewelry and furniture) generally do not fall within the reach of the unclaimed property laws. (3)

         What is intangible property? Intangible property is most easily understood as a right to hold or receive something of value. That right is often evidenced by a written document. Uncashed checks and unclaimed stock certificates are classic examples of unclaimed property. In those examples, the check is written evidence of the intangible right of the payee to receive money from the maker, and the stock certificate is written evidence of the intangible right of the stock owner to share in a corporation's net profits.

         Although uncashed checks and unclaimed stock and stock dividends may be the most easily recognizable types of unclaimed property, most state statutes include a general requirement that all intangible property held or owing in the ordinary course of business be reported and paid to the state. To guide holders in identifying covered intangible property, the reporting instructions published by many states list more than 100 different types of unclaimed property that must be reported and remitted to the state. The following items, in addition to uncashed checks, stocks, and dividends, are typically listed by the states as property subject to their unclaimed property laws:

         * accounts payable, such as refunds due or credit balances owed to customers;

         * unredeemed gift certificates;

         * unclaimed debt obligations, such as unclaimed interest on bonds, debentures and notes;

         * dormant bank accounts;

         * unclaimed royalty payments, including mineral royalties;

         * certain unclaimed insurance policy benefits; and

         * abandoned utility deposits and security deposits.

      2. The apparent owner of the property cannot be located. A common occurrence giving rise to unclaimed property is a change of the property owner's address. When an individual entitled to receive money, such as a stockholder entitled to a dividend, changes addresses and fails to leave a forwarding address with the company that owes the obligation, unclaimed property is created. In most states, the law requires the business that owes the unclaimed property (known in unclaimed property law parlance as the "holder") to make an effort to return the property to the owner before reporting and remitting the property to the state. This process is frequently referred to as "due diligence." In some states, such as Massachusetts, Virginia, and Kansas, specific monetary penalties may be imposed on a holder for failure to undertake required due diligence efforts. If a holder's due diligence efforts fail, the holder must turn the property over to the applicable state office, which then attempts to locate the owner.

      3. The property must remain unclaimed by the owner for a period of time referred to in the law as the "abandonment period" or "dormancy period." In most states, this period of time ranges from I year for a few types of property--most notably, unclaimed wages--to 15 years for travelers checks. The most common dormancy periods are 3 and 5 years. Since the first uniform unclaimed property law was approved in 1954, there has been a trend toward shortening dormancy periods. State law must be consulted to determine the dormancy period for the particular type of property. The dormancy period generally begins at the time the property first becomes payable or distributable to the owner and typically continues so long as there is no communication or expression of interest from the missing owner. Each state sets a deadline date for reporting and remitting to that state all property for which the applicable dormancy period expired during the preceding year.

      4. There must be a fixed and certain legal obligation of the holder to the owner. A holder is not subject to the unclaimed property laws with respect to a debt that is not clearly owed and fixed in amount. For example, the Comments to section 1 of the Uniform Unclaimed Property Act (1995) state that "The requirement that the right be `fixed and certain' excludes unliquidated claims from the coverage of the Act, such as disputed tort claims." Thus, a check written by an insurance company as a conditional offer of settlement, even if uncashed by the payee for many years, is not unclaimed property, since the insurance company was not legally obligated to make the payment.

   2. Which State Law Applies

      Whether a business is establishing a program for ensuring future compliance with unclaimed property laws, or is considering how best to remedy historical noncompliance, the first step must be to determine which state unclaimed property laws apply. The result of this inquiry will determine the applicable abandonment periods, any available exemptions, the relevant reporting and payment periods, and other information critical to proper legal compliance.

      In several landmark cases, the Supreme Court of the United States has established and reaffirmed a priority scheme for unclaimed property. These rules, which are essentially incorporated into both the 1981 and 1995 versions of the Uniform Unclaimed Property Act, govern the priority rights of the states to take custody of unclaimed property. In this high stakes arena, the state having the enviable first priority right to take and hold unclaimed property is the state shown on the holder's books as the state of the last known...