Proactive Approaches to Unclaimed Property Pay Off
Every state, including the District of Columbia, and the territories of Guam, Puerto Rico, and the Virgin Islands, has an unclaimed property law that requires businesses (holders) to report unclaimed property to the states/territories after a certain period of absent owner activity, which is known as the dormancy period. Common types of unclaimed property include paychecks, vendor checks, life insurance proceeds, retirement accounts, and securities.
Dormancy periods vary by state. While a certain property type may be subject to reporting in one state, other states may exempt it (i.e., gift cards). Banking property, which includes checking accounts, savings accounts, certificates of deposits, and securities, typically have either a three- or five-year dormancy period in some states. On the other hand, payroll property usually has a shorter dormancy period typically limited to one year.
Property must be dormant for the duration of the dormancy period before it becomes eligible to be reported as unclaimed property. A paycheck can remain uncashed by the owner for several reasons. For instance, it may have been lost or thrown out, or the owner may have moved and forgotten about the check. Paychecks that are automatically deposited into a bank account may also go unclaimed if there was an issue with the direct deposit.
States have recently been updating their unclaimed property laws based on the 2016 Revised Uniform Unclaimed Property Act (RUUPA) to accommodate new property types that are subject to the unclaimed property laws, such as paycards, and at the same time reducing dormancy periods.
The dormancy period for a paycard may carry the same dormancy period as a paycheck—typically one year—but some RUUPA states consider paycards under their banking provisions and will apply the same three- or five-year dormancy period, depending on the state.
The state to which the holder must report the unclaimed property is determined in accordance with the priority rules, first articulated in 1965 by the United States Supreme Court in Texas v. New Jersey (379 U.S. 674, 677 (1965)). The Supreme Court held that unclaimed property shall be reported to the state of the owner’s last known address—even if it’s a bad address, according to the books and records of the holder, or the entity legally responsible for making payment of the property to the owner. If there is no address on file for the owner, the property shall be reported to the holder’s state of corporate domicile.
The unclaimed property reporting cycle involves a review by the holder of its books and records for dormant accounts. This review involves the performance of statutory due diligence to resolve and/or reactivate accounts, a final reconciliation of accounts, the filing of unclaimed property reports, and delivery of the property to the state(s) in accordance with each state’s particular requirements. This complex and time intensive process can be a drain on internal resources.
States vary in report due dates, which may also vary based on industry type, dormancy periods, and the trigger dates for when property becomes eligible for reporting. Some examples of this include inactivity on the account or the date a mailing was returned to the holder by the post office as undeliverable.
Due Diligence Process
All states and U.S. territories require written notice to the owner prior to the reporting and delivery of the property, which represents the holder’s last attempt to contact the owner and reunite the owner with his or her property. The due diligence letter puts the owner on notice that the holder is in possession of the owner’s unclaimed funds, which will be reported and delivered to the state as unclaimed property if they fail to respond to the holder within a set period. Once the property is reported and delivered to the state, the owner must contact the state to reclaim the property.
Even if due diligence letters are sent once the property becomes dormant, it can be a long process. In some cases, it may have been years since the owner had contact with the holder, which decreases the likelihood of successfully reuniting the owner with his or her property. The requirements for the due diligence notice vary among states and often require specific, formal language to be included in the notice. This may be confusing to owners or even increase the chances that the notice will be seen as a scam and be discarded.
States vary in when the due diligence notice must be sent, the dollar amount above which notice is required to be sent, the method of delivery—email, certified mail, newspaper publication, etc.—and even the language that must be included in the notice. California, for example, requires specific wording and even a particular font size. New Jersey requires certified mail for all property, while Ohio requires certified mail only for property valued at or above $1,000. Other states limit certified mail to certain property types. For example, Illinois requires certified mail for securities property valued at over $1,000.
In some states that have adopted RUUPA-like laws, letters must be mailed via first-class mail 60-180 days prior to the filing of the report. The letters must also be sent to the owner by email if the owner has consented to receive electronic mail delivery from the holder. However, there is variation even among the RUUPA states. For example, Colorado and Indiana permit notice to be sent via first-class mail or email. The RUUPA states all require certain language to be included in the notice and that owners are given 30 days to respond. The time and resources spent on due diligence are therefore often significant.
Many states also require an affidavit from the holder affirming compliance with the state’s due diligence requirements. Holders that report and deliver unclaimed property in good faith are typically indemnified against future claims by the owner, but the failure to perform due diligence may jeopardize this indemnification and can even lead to penalties. For example, the Virginia statute allows the state to assess a civil penalty of up to $50 per account for noncompliance with due diligence.
Owner Outreach, Reunification Efforts
While due diligence is an essential aspect of a holder’s compliance obligations, early owner outreach and reunification efforts can help facilitate contact with the owner, thus reducing the population of accounts eligible for due diligence and ultimately those that must be reported. Reunification also assists holders with customer retention and satisfaction. A regular review of accounts and successful communication with owners saves valuable time and resources.
A proactive approach can begin as early as 60-90 days after an account becomes inactive. In addition to serving as a cost savings measure, owner outreach campaigns via phone, courtesy mailings, and/or email increase the likelihood of a response by the owner. These efforts are customizable, less expensive, and are considered more effective ways to reestablish contact with the owner and update contact information.
Additional options include integrating a system with web-based portal software and/or interactive voice response (IVR) systems, which allows the holder to customize the information provided to the owner and encourages contact. Positive contact via phone, email, or log-in by the owner into the account all serve to reactivate the account and reset the dormancy period. Once the last contact date is updated by the holder, the account no longer requires state-mandated due diligence.
Best Practice Considerations
As a best practice, it is recommended that holders document their unclaimed property policies and procedures—including processes for early outreach—in addition to their due diligence and reporting processes. Policies and procedures should be reviewed and updated on a regular basis. Monitoring legislative and regulatory activity is also essential to stay up to date with ever-changing unclaimed property requirements and enables holders to update internal documentation, processes, procedures, and systems promptly.
Record retention provisions also vary among the states. Thus, it is important that policies and procedures cover all aspects of unclaimed property compliance including documentation of all methods and points of contact with the owner, the retention of due diligence responses, and other key records in accordance with the states’ record retention periods—typically 10 years plus the dormancy period for the property type at issue.
States are permitted to enforce a holder’s compliance with the unclaimed property laws and have increasingly done so with creative methods that go beyond the conventional unclaimed property audit. For example, Delaware mails several rounds of invitations a year asking holders to join the Secretary of State’s Voluntary Disclosure Agreement (VDA) program, successful completion of which includes a waiver of penalties and interest on past-due property. If a holder fails to respond to the invitation within 90 days, the holder will be referred for audit.
Other states’ initiatives include invitations to fill out questionnaires online or to perform self-audits, which are state-run but typically assisted by third-party auditors that review the holder’s compliance history. It is crucial that holders review all lines of business for potential unclaimed property and perform annual self-reviews to look for areas of potential exposure—such as outstanding accounts payable checks, customer credit balances, unidentified ACH remittances, or gift cards—particularly after a merger or acquisition and take the necessary steps to remediate and minimize further exposure.
Outside Expertise Is Available
Holders who are unfamiliar with the unclaimed property reporting process, who need additional assistance with creating or updating formal policies and procedures, or who have discovered large amounts of past-due property that they would like to resolve can reach out to experienced professionals in the unclaimed property industry. These professionals can be used to outsource key reporting functions and assist in owner reunification efforts.
Heather Steffans is Partner, Strategic Solutions at MarketSphere Unclaimed Property Specialists, and is an expert in unclaimed property planning. Steffans recently served on the Board of Directors in the Unclaimed Property Professional Organization (UPPO) from 2017-2022, most recently as the Immediate Past President from 2021-2022.