Can You Really Set It and Forget It? Beware of Escheatment

Did you know that your unknown, or “left alone,” investments may be in danger of tax consequences? States have some rights (and brokers the obligation) to esc escheatment of abandoned property
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True or false: Your out-of-sight, out-of-mind investments can grow uninterrupted without consequences?

False. Beware of escheatment. Say what? Perhaps you purchased securities a few years back looking for capital appreciation or distribution income. You may review your statements regularly to see how well you’re doing, but other than that, you’ve just kicked back and put your feet up. Warning—states have the right (and brokers the obligation) to escheat your property based on certain criteria. Escheatment simply means assets that have apparently been abandoned are eventually handed over to the state if the owner cannot be contacted.

The escheatment rules vary from state to state, but generally apply to one (or a combination) of the following scenarios:

  • Dormancy. This occurs when there is no client-driven activity within a certain time frame, generally three to five years. There’s typically no way to track whether you are receiving your statements by mail, so there needs to be some type of electronic impression to track. And you need to leave those tracks. This can be as simple as logging into your account periodically or calling the firm. These activities are tracked and will tell the firm that you are indeed actively managing your account.
  • Returned mail. Mailings that come back to the firm are a cause for a concern. Have you moved? Did you forget about your account? Did the account holder pass away and the estate executor is unaware of the account? If you do move, you’ll need to inform your broker. This is another form of client activity and helps restart the clock on dormancy.

Not Just Investment Accounts at Risk

Escheatment is applicable to your bank accounts, CDs, and much more. Special rules apply to Individual Retirement Accounts (IRAs). Depending on the type of IRA, it may be able to lie dormant until required minimum distributions (those payments that kick in at age 70 1/2) are mandatory, but it’s important to make sure.

You may have checks that you never cashed, which after a certain time frame are handed over to the state. Firms are required to notify you in advance if your property is headed for escheatment; you may be given 60 days or longer in order to contact the firm. But those notifications are sent through the mail, so if the address on your account is not current, the firm might be unable to contact you.

Assets Are Escheated. Now What?

This depends on the state and what was escheated. Checks, for instance, are cashed and held. If securities are escheated, the state may try to hold them for a limited period of time before liquidating them for cash. That means income that would have been earned on your investments is forfeited.

Your best bet? Check in with the financial firms you use (or have used) on a regular basis. You may want to do this annually to make it a habit. Pick a day you’ll remember: your birthday, the day you file your taxes—anything you do on an annual basis will work just fine.

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