The unique convergence of a well-executed estate plan and a complimentary Will can ultimately make sure a decedent’s assets are distributed in accordance with their final wishes. Most people, for that matter, will name beneficiaries or heirs in order to transfer their assets to loved ones. A Will (and a letter of instruction) is often enough to make sure assets are transferred to the right people. However, there are times when personal property is unaccounted for and at risk of becoming subject to the escheat process.
Escheat, or the right for a state to claim unclaimed property, poses a threat to assets that haven’t been designated for a subsequent owner. Therefore, instead of risking that any of your assets are turned over to the state, it is of the utmost importance to learn everything you can about the escheat process and how to avoid it. This guide will tell you everything you need to know, including:
What Happens to Unclaimed Property?
The term “property” refers to anything that’s owned by a person or entity. Taking a closer look, the legal definition of property can be broken down into two types: real property and personal property. Real property, as its name suggests, encompasses the equitable interest in things like raw land and physical real estate. Personal property, on the other hand, is just about everything else. Everything from automobiles to assets held within financial institutions, companies, and government agencies.
If, however, property (both real and personal) is left unattended via the untimely death of the owner or they simply can’t be reached for a prolonged period of time, the property becomes “unclaimed” and the state is legally required to take control of it. If property isn’t accounted for during each state’s dormancy period (oftentimes years), respective banks, firms, and authorities will report the inactivity to the state. In order to prevent the property from falling into limbo, the state will take control of it, only after proving there are no owners, beneficiaries, or legal heirs it should go to instead. The process by which property is turned over to the state is known as escheatment.
What is Escheat?
Escheat is both a right and a process enacted by governments on a state level to take control of unclaimed property. If, for example, a person passes away and does not leave their assets to any heirs or beneficiaries, the property may go unattended for an extended period of time. Otherwise known as the dormancy period (which can range anywhere from 1 to 5 years, depending on the state), banks, firms, and authorities will often give anyone with the rights to the property time to come forward.
If nobody can justify a claim to the subject property, the entity in control of it will report the inactivity to the state. Rather than letting property fall into limbo, where nobody knows what to do with it or has any sort of claim, states will take it upon themselves to claim the property.
Escheat is specifically designed to ensure that all types of property will always have a legally recognized owner. Therefore, if nobody can provide the appropriate documentation to claim rights to the property, the state will begin the process of escheatment to claim it.
The process involves a legal hearing which gives anyone who may have rights to claim the property the opportunity to do so. Additionally, the court of law will do its best to confirm that there are no owners, beneficiaries, or legal heirs with justifiable claims to the property.
If nobody claims the property, the escheatment process will legally name the state as the new owner. The state will then proceed to hold the property for a limited time, only to sell it at a later date and collect the proceeds.
When Does Escheat Occur?
Technically, escheat occurs once the state begins the legal process of escheatment. Upon closer examination, however, the escheatment process begins well before the state is even aware of unclaimed property.
Property must first sit idle for a prolonged period of time before anyone realizes it may not be in the possession of anyone. It isn’t until the entity responsible for holding the property — like a bank, firm, or brokerage — is made aware of the account’s inactivity that anything can be done. Once the property has sat idle for longer than the state’s dormancy period, the entity will notify the government, who then begins the escheat process.
What Can Be Escheated?
State governments may start the escheatment process on unclaimed property. That said, unclaimed property is loosely defined as assets within financial institutions, brokerages, or other companies that have not been in contact with the original owner for at least a year (or up to five years in some states).
The most common items to be escheated include, but are not limited to:
Money held in checking and savings accounts
Uncashed payroll and commission checks
Outstanding vendor credits/refunds
Stocks, bonds, mutual funds, exchange traded funds, and REITs
Certificates of deposit
Individual retirement accounts
The proceeds from a life insurance death benefit
State tax refunds (federal refunds are not claimed by the state)
Let’s say, for example, years of investing in stocks and equities that outperformed the broader indices granted a lucky person in their twilight years the ability to travel the world. The proceeds from the stocks in their brokerage account were more than enough to supplement their lifestyle on the road. However, years abroad simultaneously severed any ties with family and friends.
If the elderly individual in our example were to die without a Will, there’s an increased likelihood that the assets will slip under the radar during the estate planning process. If the assets sit long enough, the brokerage will be forced to tell the state in which they reside. Provided the assists have surpassed the dormancy period, the state will begin the escheatment process to claim them. Since nobody was able to claim the assets for themselves, the state will take on the responsibility.
How Does Escheatment Work in the United States?
Brokerage firms, financial institutions, and other companies responsible for holding legal property in the United States are required to report unclaimed and abandoned accounts. The definition of an unclaimed and abandoned account will vary from state to state, as too will the dormancy period. That said, no company can consider property unclaimed until they make a serious attempt to find the owner — or someone else with legal claim to the property.
The moment the institution realizes it won’t be able to contact anyone with claim to the assets they are holding, they must report the property to the state in which the assets are held. From there, the state will begin the escheatment process and attempt to claim the unclaimed property. If the property is transferred to the state, the respective comptroller’s office will typically liquidate the assets and keep the proceeds.
Can You Reclaim Assets That Have Been Escheated?
Yes, it is possible to reclaim assets that have been escheated. In order to do so, you must first file a claim with the state which currently controls the property. The rules and regulations put in place to reclaim assets will vary from state to state, but everyone should be prepared to provide documentation that proves they have legal claim to the subject property. States will only return escheated property to owners who can prove (beyond the shadow of a doubt) they have legal claim to the assets in question. Anyone looking to claim property back from the state will also need to do so before the statute of limitations expires. Past a certain point, even the legal owners of property may not be able to claim what was rightfully theirs.
Don’t Fall Victim to Escheatment: Update Your Will Today
Most estate plans will clearly identify any and all financial accounts held by the recently deceased. If for nothing else, a prepared decedent will have written a letter of instruction detailing all of their assets and where to find them. Of course, not everything goes according to plan. For one reason or another, many accounts may go unnoticed or unattended for years following the death of someone. In the case an owner can’t be found, the state will enact the right of escheat to claim the property for itself.
Don’t let the state claim property you want to leave to loved ones. Update your Will and estate plan in order to prevent any future misunderstandings that have the potential to jeopardize your assets. Here at Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!
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