How safe is your IRA? Not from the markets, but from the State!

unclaimed propertyI discussed how inheritances can go amuck and the heirs don’t get the inheritance – the State does. This can happen while you’re still alive too! Did you know that the State can claim your IRA (or any account for that matter) due to inactivity?

 

A couple of articles to drive the issue home:

Protect client assets from aggressive unclaimed property rules

Will the state take your client’s IRA? It can

 

State Escheatment laws kick in when property is unclaimed or abandoned. The SEC explains escheatment on their site. States have adopted more aggressive due to the financial crisis in the late 2000’s since the property can be used for State budgets. There are time periods for when property is considered abandoned and goes to the State, and time periods when the property is sold to go into State funds.

Even when you are receiving statements or other correspondence FROM the financial institution the property can escheat to the State because YOU did not contact the institution (as required by your State laws)!

What does contact mean?

Here are a few pointers from the ICI.org website:

  • State laws may require that you contact your financial institutions at least once every three years to avoid having the state deem your property abandoned
  • Even if you have automated features on your account (such as automatic deposits or withdrawals, or the automatic reinvestment of dividends), you still must contact your financial institution(s). In the view of many states, such automated features do not constitute contact, allowing these states to deem your account abandoned.
  • What should you say when contacting your fund company or financial institution to establish contact? There are no “magic” words you have to recite to protect your account—but you must talk to a representative. Calling an automated phone line may not suffice! You might just say, for example, “I’m calling to maintain contact regarding my account(s),” or “I’m calling to make sure you have my correct address.” The important thing is that you talk to a live human being regarding your account. By speaking to a representative, the mutual fund company will be able to document that you contacted them about your account(s).
  • Be sure to contact each financial institution holding your property, including property that does not involve mutual fund shares (such as bank accounts or brokerage accounts).
  • And if you have multiple accounts at one financial institution (for example, an account in your name as well as a joint account with your spouse), make sure you let the institution know, so they can establish contact for each of your accounts.
  • If you’re not sure whom to contact, look at a recent statement you received regarding your account. It should have the name and contact information on the firm holding your account.

 

So what is inactivity?

Some articles suggest that logging into your account online once a year may be deemed contact. Other articles, such as the ICI site linked to above suggest calling. Escheat laws vary by State since each do not interpret unclaimed property in the same way. Here’s a site where you may some information on each State.

 

Okay … you may be thinking just how can somebody lose track of their property or accounts?

It becomes easier than you think today for two reasons.

  1. Paperless statements and automatic contributions or distributions. Both of these conspire to losing track, and then not contacting the financial institution as required by the State you live in results in escheatment.
  2. Diminished financial capacity as we age. Even getting statements doesn’t help, in this case, since the person doesn’t make financial institution contact due to forgetfulness or the need simply not being part of a longer term routine. Simply put, this is not on their mind.

Either or both of these have put a lot of money into State budgets.

Both of these also become problems for heirs to know what you have because they work together by no paper statements and the owner simply not remembering what they own. But, I’ll point out, this happens to many younger people too since they too are out of the habit of thinking about accounts without paper reminders, AND not knowing what the State requires of them in this area. And if something happens prematurely while younger – without something documenting what you own, because of paperless online setups, how does anybody else know what you owned to pass it on as you wish (this is where escheatment happens – the property and accounts have been deemed to be abandoned). AND again, I’ll remind you, this can happen while you’re alive too since you don’t have something to remind you what you have, and remind you of the requirement to notify the institution as required by your State’s law.

If receiving statements on accounts suddenly stop, electronically or paper, that’s a hint. If you don’t keep good records (statements) so your heirs can find your accounts, that’s a problem.

When talking about banks, is there a difference?

 

PS. The National Association of Unclaimed Property Administators (NAUPA) has information about how to find and reclaim escheated property.

PPS. The above should not be construed as legal advice. The purpose is to simply bring to light a potential issue if you are not careful.

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2 Responses to How safe is your IRA? Not from the markets, but from the State!

  1. Larry Frank, Sr. April 21, 2017 at 2:03 pm #

    As an example only … here are the specifics, and exemptions or qualifications, related to clients who use my services (again, as an example ONLY) … other custodians and States may be, and likely are, slightly different):

    Abandoned Property:
    Abandoned Property (or Unclaimed Property) is property that has been dormant and inactive for time period specified by the appropriate state. The most common dormancy period is 3 or 5 years.

    Dormant client property can result from a bad address (BA) restriction and/ or no account activity. TD Ameritrade cannot keep the abandoned property, and has a legal obligation to report and escheat (transfer) it to the states.

    The states require TD Ameritrade to make and document a final due diligence attempt to locate the owners of the abandoned property by mailing a letter to the owners last known address. Generally these letters are sent 60 to 180 days before the states final filing date.

    Abandoned Property is typically:
    • Dormant client account Cash balances and securities positions
    • Small credit balance write-offs from closed client accounts
    • Miscellaneous property discovered within TDA where the owner is unknown
    • Uncashed IRA checks that have been Stale Date Voided
    Examples of how Abandoned Property happens:
    • Bad Address (BA) Restriction – the client has had statements or other returned mail which placed a BA on the account
    • Inactivity – there is no evidence of client initiated activity in the account for several years (Client initiated activity would also include advisor activity; trades, cash disbursements, and deposits would be included.)
    • Death – client dies and heirs are not aware of assets or are unwilling to claim them
    • Unknown Owners – the property may belong to clients but the specific owner is not known
    • Unacceptable Deposit – for example, someone tries to open an account with a check, the check may be deposited but the account is never opened because we were not able to verify the identity the person trying to open the account.

    Special Situations:

    IRA Checks:
    For IRA accounts where the account owner is younger than 70 1/2 and they have received a Due Diligence letter, typically it’s a result of an uncashed IRA distribution check. Not all account assets are at risk of being escheated, just the uncashed check(s). To prevent escheatment, the account owner must re-request the assets and the reissued check must be cashed.

    Abandoned property is handled differently in California than in other states. TD Ameritrade does not immediately transfer the dormant assets to California upon completing due diligence and filing the initial report in October. Instead, TDA continues to hold the assets until California has sent out its own letters. If the client does not contact TDA because of a California letter TDA escheats the property to California the following June.

    Please do NOT interpret the above as applying in your case since this is a specific example (emphasis example) on what applies to clients I work with. You need to check with your financial institution and/or adviser for the specifics of your own situation. Also note that the above does NOT apply to NON-TD Ameritrade Institutional accounts. The financial institution holding those accounts should be contacted. The above post and this comment are not legal advice.

  2. Larry Frank, Sr. July 19, 2018 at 4:14 am #

    Here’s an article on Forbes about the unclaimed issue as well … includes 401k’s “A New Retirement Risk: Unclaimed Property Laws”

    https://www.forbes.com/sites/jamiehopkins/2018/07/16/a-new-retirement-risk-unclaimed-property-laws/#774d71f952b8

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