See November 24, 2020 update at the end of this post
If you read my previous blog entry, "Free Money!", you might be wondering how that money ended up in a state treasury. Well, the legal theory is that of escheatment, whereby money or other property deemed abandoned by the holder is transferred to the control of the state in which the tangible property is located, or the state in which the address or domicile of the owner of intangible property is located. There are many complexities involved in this, as you can imagine, so I won't go into how this happens, but I want you to be aware of what you need to do to make sure the state does not end up with one of your investment or bank accounts.
Unfortunately, the English common law on escheatment has evolved from making sure abandoned property does not go to waste, to making sure the state has another source of income. They have done this in two ways; by changing the definition of "abandoned," and by shortening the time period an account must by inactive for it to be considered "abandoned."
It used to be that the definition of abandoned was whether mail sent to an account holder’s address of record was returned as undeliverable by the post office. Now, many states base that decision on "inactivity," a vague term that can even include an account that has been set up to have interest and dividends automatically reinvested, but other actions are not taken in a specified period of time.
The generally understood time period used to define abandoned was normally five years, but many states have shortened that to three years (Pennsylvania, our home state, uses the three-year rule).
To avoid losing an account through escheatment, you might want to make sure that some activity occurs during the period your state uses. Obviously, accounts that you use regularly, such as an IRA to which you make regular contributions, should not be an issue. However, if you have an old employer plan or IRA sitting someplace while you actively contribute to other such accounts, or a five-year CD that requires no action on your part to renew, you may want to consider:
- Finding out your state laws and regulations on escheatment
- Making sure you are receiving statements from the account custodian
- Providing at least annual activity, such as making a small contribution or withdrawal from the account; in some cases, just accessing the account online may be considered activity
As always, be sure to tell your Stout Bowman financial advisor about all of your accounts so that we can help you avoid getting "escheated!"
Updated November 24, 2020
Revenue Procedure 2020-46 added another self-certification rule for IRA rollovers that makes is possible for a rollover from an unclaimed property fund IRA after it was abandoned and turned over to the state. This can now qualify for the 60-day rollover exemption from penalties even if the 60 days has long expired.