Escheatment

What Is Escheatment?

Escheatment is the legal process by which forgotten or abandoned financial assets are transferred to a state government, usually after a specified period of inactivity, known as the dormancy period. This falls under the broader category of Financial Law & Regulation. It ensures that property does not remain in an indefinite "limbo" without a recognized owner. While the state takes custody of these assets, it typically maintains an indefinite obligation to return the property or its equivalent value to the rightful owner or their heirs if they come forward. Common examples of assets subject to escheatment include dormant bank accounts, uncashed checks, forgotten utility deposits, unredeemed gift cards, and even safe deposit box contents. Companies and financial institutions that hold such assets are legally referred to as "holders" and are responsible for reporting and remitting them to the appropriate state.

History and Origin

The concept of escheatment has deep roots in feudal systems, dating back to English common law. In feudal England, if a tenant died without heirs or committed a felony, their land would revert, or "escheat," to their immediate feudal lord or the Crown. This practice ensured that land remained productive and prevented it from becoming ownerless. Originally, escheatment primarily applied to real estate. The idea of bona vacantia (ownerless goods) emerged later to encompass personal property without a clear heir.¹⁰

The philosophical basis for U.S. escheatment law draws from these historical principles, with individual states assuming the role of the feudal lord or monarchy.⁹ Early U.S. escheat laws in states like California, dating back to the 19th century, initially focused on properties of deceased persons without known heirs. By the 1910s, California expanded these laws to include dormant bank accounts.⁸ The first nationwide unclaimed property law was drafted in 1954 by the Commission on Uniform State Laws, establishing a more standardized framework for states to manage forgotten assets.⁷

Key Takeaways

• Escheatment is the legal process of transferring unclaimed or abandoned financial assets to state control after a period of inactivity.
• States act as custodians, holding escheated property indefinitely until the rightful owner or their heirs claim it.
• The process evolved from feudal common law traditions, initially concerning land reverting to the lord or Crown.
• Businesses and financial institutions are required to perform due diligence to locate owners before remitting assets to the state.
• Unclaimed property audits by states have become a significant focus for ensuring regulatory compliance.

Interpreting Escheatment

Escheatment is a legal and administrative process, rather than a financial calculation with a specific formula. Its interpretation centers on compliance and the rights of property owners. For businesses, interpreting escheatment involves understanding specific state laws governing dormancy periods, reporting deadlines, and due diligence requirements. These laws vary significantly from state to state. For individuals, understanding escheatment means recognizing that state governments serve as a central repository for unclaimed property, and a legitimate pathway exists to reclaim assets. The state's role is generally custodial, meaning they hold the property or its monetary equivalent in trust, rather than permanently seizing it. This custodial nature implies a perpetual liability for the state until the property is claimed.

Hypothetical Example

Consider Jane, who opened a savings account with $1,000 at a local bank in New York in 2010. After a few years, Jane moved to another state and forgot about this small account, no longer conducting any transactions or responding to bank correspondence. New York, like many states, has a dormancy period of three years for savings accounts before they are considered abandoned.

By 2013, with no activity, the bank classifies Jane's account as dormant. Before escheatment, the bank is legally required to perform due diligence, attempting to contact Jane at her last known address via mail. If Jane does not respond to these attempts within a set timeframe, the bank will then report and remit the $1,000 to the New York State Comptroller's Office, the state's designated asset management authority for unclaimed funds. The $1,000 is now escheated, and the state holds it in a custodial capacity. Years later, in 2025, Jane remembers the account while doing some personal financial planning. She searches the state's unclaimed property database, finds her name, and initiates a claim process by providing proof of identity and her connection to the account. The state verifies her claim and returns the $1,000 to her.

Practical Applications

Escheatment plays a critical role across various financial sectors, primarily in ensuring that forgotten assets are managed transparently and returned to their rightful owners. In corporate finance and risk management, companies must implement robust systems to track outstanding obligations and ensure compliance with state unclaimed property laws. This includes reconciling accounts payable, tracking uncashed payroll checks, dormant customer deposits, and unclaimed dividends or stock certificates.

State governments actively enforce escheatment laws. Audits are increasingly common, with states often contracting with third-party auditors who may be compensated on a contingency fee basis. These audits can be lengthy, sometimes lasting several years, and can cover records spanning 10 to 15 years, posing challenges for companies whose standard record retention policies may be shorter.⁶,⁵ For instance, the Journal of Accountancy reported that in the mid-2010s, the life insurance industry faced significant scrutiny and audits, resulting in billions of dollars returned to owners or escheated to states.⁴ Organizations must prioritize proper regulatory compliance to avoid potential penalties and reputational damage.

Individuals can search for unclaimed property through official state unclaimed property websites or the National Association of Unclaimed Property Administrators (NAUPA) website, Unclaimed.org.³ This process allows people to reclaim forgotten funds from sources such as old bank accounts, insurance policies, or overpayments.

Limitations and Criticisms

While escheatment serves an important public purpose, the system faces limitations and criticisms. One primary concern is the potential for funds to be permanently absorbed into state general funds if owners are never found. Although states generally maintain a perpetual custodial obligation, practically, many unclaimed property items may never be reunited with their owners.

The process of reclaiming escheated assets can sometimes be cumbersome for individuals. As seen in consumer complaints, individuals may face difficulties when financial institutions improperly transfer funds to states or fail to provide clear guidance, leading to frustration and perceived loss of funds. For example, one complaint filed with the Consumer Financial Protection Bureau (CFPB) detailed how a bank closed an account and sent funds to unclaimed property without clear reasoning or requesting proper documentation from the customer.²

For businesses, compliance with varying state laws can be complex and burdensome. The lack of uniform dormancy periods and reporting requirements across all 50 states, coupled with aggressive audit practices, can impose significant compliance costs. Businesses must ensure robust internal controls and fiduciary duty to avoid penalties and lengthy audits. The long look-back periods in audits, often exceeding common record retention policies, also present a challenge for companies in providing complete documentation.¹

Escheatment vs. Abandoned Property

The terms escheatment and unclaimed property (often referred to as abandoned property) are closely related and frequently used interchangeably, but there's a subtle distinction. "Unclaimed property" or "abandoned property" refers to the asset itself—such as a dormant bank account, uncashed check, or forgotten stock equity—that has had no owner-initiated activity for a specified dormancy period.

"Escheatment," on the other hand, is the legal process by which that unclaimed or abandoned property is officially transferred from the holder (e.g., a bank, company) to the custody of the state government. It is the final step in the unclaimed property life cycle, where the state assumes responsibility for safeguarding and ultimately returning the assets to the rightful owner. So, while a dormant bank account is "unclaimed property," the act of the bank remitting those funds to the state is "escheatment."

FAQs

What types of assets are subject to escheatment?

A wide range of tangible assets and intangible assets can be subject to escheatment, including checking and savings accounts, uncashed payroll checks, dividend payments, utility deposits, insurance policy proceeds, safe deposit box contents, gift cards, and even mutual fund shares. If there's no owner activity for a statutorily defined dormancy period, these assets become eligible for escheatment.

Can I reclaim escheated property?

Yes, in most cases, you or your legal heirs can reclaim escheated property from the state. States act as custodians of these funds, maintaining an indefinite obligation to return them. You typically need to provide proof of ownership and identity. The easiest way to start a search is through your state's unclaimed property website or the national Unclaimed.org portal.

What is a dormancy period?

A dormancy period is the length of time an asset must remain inactive (without owner-initiated contact or transaction) before it is considered abandoned and eligible for escheatment. This period varies by state and by the type of property. For example, a payroll check might have a dormancy period of one year, while a savings account might have a dormancy period of three or five years. Holders must perform due diligence to contact owners before reporting and remitting the property after the dormancy period has passed.

Who is responsible for reporting escheated property?

The "holder" of the property is responsible for reporting and remitting it to the state. A holder can be any entity that owes money or holds assets belonging to another party. This includes banks, corporations, insurance companies, payroll processors, and even government agencies. These entities have a fiduciary duty to attempt to locate the owner before escheatment.

Does escheatment affect my personal credit or taxes?

No, escheatment itself generally does not directly impact your personal credit score or result in new tax liabilities. The money or property was already yours, and the state is merely holding it. However, if the escheated property was an income-generating asset (like stock dividends or interest from a bank account), any income earned before escheatment would still be subject to relevant income taxes, and tax forms (like 1099s) would have been issued by the holder. When you reclaim escheated property, you are simply receiving your original asset or its equivalent value.