On Retirement

Protect client assets from aggressive unclaimed property rules

Ignoring proxy letters could lead to lost assets

Sep 1, 2016 @ 12:00 pm

By Mary Beth Franklin

Who doesn't like a good treasure hunt? State governments have claimed more than $41 billion in lost property from U.S. taxpayers over the past few decades. All you have to do is prove that the property is yours — assuming you even knew it was missing. The bulk of the money is never returned.

In the meantime, the bounty serves as a huge source of revenue for cash-strapped states. Unclaimed property includes bank accounts, insurance policies, stocks and other securities. States usually sell the securities and hold the cash in perpetuity for the owner. The cash assets, and any earnings on those assets, are used as part of states' general revenue funds.

Over the years, states have adopted more aggressive definitions of lost or abandoned property that could help separate unwitting investors from their assets, including mutual funds and individual retirement accounts. In many cases, the time frame for when such property is considered abandoned has been reduced from seven years to five years, and in about half of the states, to just three years.

“The financial crisis was the trigger,” said Tami Salmon, associate counsel of the Investment Company Institute (ICI), which represents the mutual fund industry. “States were looking for new sources of revenue … This was money that they could claim to use for state budgets.”

States are able to claim such property under escheatment laws that originally were enacted so states could use their greater resources, such as tax and property records, to find lost owners and reunite them with their property. Property is turned over to the state of residence of the owner's last known address, or in the case of an unknown address to the state where the financial institution is incorporated. Many mutual funds are incorporated in Delaware, Massachusetts and Maryland because of favorable corporate tax laws.

Last month, the Uniform Law Commission adopted a recommendation to make it harder for states to claim so-called lost or abandoned assets held in mutual fund accounts. It would preserve the definition of unclaimed property as being based on the return of undeliverable mail, rather than on a no-contact standard.

Under the more aggressive no-contact definition, adopted by 18 states so far, the account holder is deemed lost if the owner of the property doesn't contact the financial institution holding the account for a certain period of time. Even if the account owner is receiving account statements or other mail from the institution, the account could be deemed abandoned and turned over to the state because the owner hasn't contacted the institution.

The ICI has created a resource center and outreach program to help investors find lost assets and to protect existing assets. “The message we are trying to send to financial advisers and individual investors is to make sure that property never becomes abandoned in the first place,” said Ms. Salmon.

The most important thing a mutual fund shareholder can do to protect an account is to contact the financial institution holding the shares at least once every three years. Contact generally means calling, emailing or sending correspondence, such as voting a proxy, to the mutual fund. Investors who hold shares through a broker, financial adviser or other financial intermediary should contact that firm rather than the mutual fund company.

Automated features, such as automatic deposits, withdrawals or reinvested dividends, do not constitute contact in the view of many states, the ICI warned. And calling an automated phone line may not be sufficient. But by speaking to a representative, the mutual fund company will be able to document that you contacted them about your account.

Contact each financial institution holding your property. If you hold mutual funds through a brokerage account as well as through an IRA account or other retirement account, make sure you contact each person or institution that holds an account of yours. And if you have multiple accounts at one financial institution, tell the institution so they can establish contact for each of your accounts.

Normally, a retirement account is presumed abandoned based on two triggers: the owner of the account reaches age 70 , the age of required minimum distributions and, depending on state law, either mail sent to the owner is returned to the sender as undeliverable or the owner has failed to indicate an interest in the account within a specified period of time.

Pennsylvania is the first state to eliminate the age trigger as criteria for abandonment. Effective Sept. 10, individual retirement accounts and retirement plans for self-employed individuals will be presumed abandoned and unclaimed three years after the holder has lost contact with the owner, regardless of age, unless the owner has begun receiving distributions, increased or decreased the principal or otherwise indicated an interest in the account.

Mutual fund shareholders should visit the National Association of Unclaimed Property Administrators or go to MissingMoney.com, a free site supported by the National Association of Unclaimed Property Administrators, to find out if a state is holding any of your financial assets or other property. You can search for lost accounts or property nationwide or state by state. Once you identify the lost property, it is up to you to contact the state to claim it.

(Questions about new Social Security rules? Find the answers in my new ebook.)

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.

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