KeepUP™ Blog

The following blog originally posted on March 3, 2021 on the UPPO website as part of their Membership Community Blog contribution. MarketSphere is sponsoring UPPO blogs published to their site during the month of March.

Unlike most of the property types in the unclaimed property world, safe deposit boxes are an anomaly because they contain physical, tangible items. As such, handling of safe deposit boxes has a unique set of rules, requirements, and concerns.

There are two scenarios for when a financial institution would likely drill open a safe deposit box: nonpayment and relocation. In either case, state bank laws and the rental agreement between the financial institution and the customer govern how the property should be handled.

Because most consumers are likely to return to the location where they left their physical property, the state where the safe deposit is located – rather than state where the owner lives – dictates the requirements for safe deposit box handling. Familiarity with the specific requirements of the applicable state is essential.

As we find ourselves preparing for Spring reporting (corporations must start the Spring season by submitting reports to Delaware by March 1^st), it is worth highlighting several aspects of the due diligence and reporting processes.

Due Diligence Notices. The due diligence letter is a state mandated requirement that the holder provide notice to the owner before the property is reported and remitted to the state as unclaimed property and is also the holder’s last attempt to establish contact with the owner of dormant property before escheatment.

Method, Timing and Content of the Notice. Typically, a first-class mailing must be sent to the owner 60 to 120 days prior to filing the report, though as is common in unclaimed property, time frames vary state to state. Moreover, certified mail may be required in lieu of, or in addition to, first-class mail (e.g., New York: certified mail for property valued at $1000 or more and for all dividend reinvestment plans). Publication is also required for certain holders in New York, where requirements vary by property type). Many states also provide an exception for mailing to a known bad address, but again, this varies by state.

In states that have adopted a law based on the 2016 Revised Uniform Property Act (“RUUPA”), the time frame for mailing is generally 60-180 days before filing the report, though there are outliers here as well (e.g., Illinois requires notice to be sent 60 days to 1 year prior to the report, and by certified mail for securities valued at $1000 or more, 60 days prior to filing the report). These states have also adopted specific header and language requirements for the notice.

Delaware’s Office of Unclaimed Property (OUP) has updated its payment instructions for wire and ACH payments, in advance of the upcoming March 1, 2021 Spring reporting deadline. 

Vermont recently provided clarification for holders reporting unclaimed property to the state in Spring 2021. Holders should follow the statute currently in effect (§1247 Chapter 14, V.S.A. Title 27), and should not apply the provisions of the Revised Uniform Unclaimed Property Law (House Bill 550, effective January 1, 2021), until the following reporting season.

The guidance provided by the Office of the State Treasurer states the following:

The new RUUPA guidelines will start for January 1, 2021 and next reporting year. That means the current statute applies to this reporting year and should be followed for all reports sent for the spring reporting season.

Reporting Unclaimed Property to Vermont

Per the state's current Unclaimed Property Reporting Manual, holder reports are due to the Treasurer's Office by May 1st of each year. If May 1st falls on a weekend or holiday, reports are due the next business day. As May 1, 2021 is a Saturday, reports for the year ended December 31, 2020 must be received by May 3, 2021.

As the use of blockchain technologies and cryptocurrencies continues to grow, and in the midst of regulators like the SEC and the IRS continued grappling with oversight and enforcement issues, the states are readying themselves to be able to take custody of unclaimed cryptocurrency in its native form. This new functionality, together with the growing popularity of cryptocurrency, merit further consideration, particularly noting the cryptocurrency market is projected to reach $1.5 billion by the end of 2025.

MarketSphere is hosting a Virtual Currency in Unclaimed Property Webinar on February 19 from 1pm - 2pm Central. This webinar will help you understand the basics and current legislative landscape of managing this type of property. Click here to register.  

Virtual currency was first addressed in the 2016 Revised Uniform Unclaimed Property Act (“RUUPA”), a model act promulgated by the Uniform Law Commission as a standard for states to follow when updating their laws. RUUPA defines virtual currency as a “digital representation of value used as a medium of exchange, unit of account, or store of value, which does not have legal tender status recognized by the United States.” Game-related digital content is excluded from this definition.

Several states that have enacted RUUPA-like laws, including Colorado, Illinois, Kentucky, Tennessee, Utah and Vermont, similarly define or adopt the RUUPA definition of virtual currency as a property type that is eligible for escheat. However, neither RUUPA nor any of these states address virtual currency apart from providing a definition. Maine’s law only defines game-related digital content and excludes it from the definition of “property” and thus from escheatment. Even if the state does not specifically provide for virtual currency in its law, each state has a “catchall” provision that includes other miscellaneous intangible property, and the state could argue that this provision encompasses virtual currency.

In today’s digital world, you no longer need to be physically present in a casino, at the poker table, or at the racetrack to place a bet.  In many states, you can now place those bets online or even play daily fantasy sports directly from your mobile device.  

In May 2018, the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act, a federal law that had previously prohibited sports betting. Since then, half of the states have legalized or are in the process of legalizing sports betting.  According to the American Gaming Organization, sports betting revenue in 3Q 2020 totaled $352.3 million[1] .

Online gambling includes online casinos, online poker sites, daily fantasy sports (DFS), and sports betting.  Sports betting, in turn, includes online and mobile “sportsbooks.”  To place an online sports bet, you need an online account.  Most states that permit online sports betting allow you to do this on your mobile device, but in certain states, like Nevada, you need to create your account while physically at the casino (and often to make a deposit or withdrawal as well).

As of November 10, 2020, retail and/or online sports betting is permitted in: AR, CO, DC, DE, IA, IL, IN, MI, MS, NV, NH, NM, NJ, NY, MT, OR, PA, RI, and WV.  Sports betting is legal, but not operational in the following states: LA, MD, NC, SD, VA, and WA.  Pending legislation exists in OR and MA.  Sports betting is prohibited in the following states: ID, ND, OK, SC, TX, UT, and WI[2].

H.R. 8696, known as “The Securing a Strong Retirement Act of 2020” or “the SECURE Act 2.0”, introduced in the House of Representatives on October 27, 2020, is a bipartisan bill aimed at further protecting and enhancing retirement savings. There are two key aspects of this bill that if enacted, would change the way individual retirement accounts (IRAs) are treated:

1. The age for required minimum distributions (RMDs) from employer-sponsored defined contribution plans and traditional IRAs would increase to age 75.  This provision would be effective for individuals who would turn age 72 after December 31, 2020.

The impact on IRAs would be similar to the impact under the SECURE ACT of 2019 (SECURE ACT) adding another level of analysis required to calculate the RMD date and the trigger date for escheatment. Under the SECURE ACT, we now consider whether the owner turned 70.5 after 12/31/2019. Under the SECURE Act 2.0, we would also have to consider whether an owner has turned 72 after 12/31/2020.

Additionally, certain states that have recently revised their unclaimed property statutes specifically reference “age 70.5” as a possible trigger date for escheatment of IRA accounts (except for Vermont which references “age 72”), which is not in line with the SECURE ACT.   The SECURE ACT 2.0 further underscores the present need for all states to ensure their retirement account provisions align with federal law. 

On October 16, 2020, the IRS issued new guidance applicable to payments made to state unclaimed property funds.

IRS Rev. Rul. 2020-24

The IRS provides that a payment from a qualified retirement plan to a state’s unclaimed property fund constitutes a designated distribution which is subject to federal income tax withholding and reporting requirements

In the example provided by the IRS, the employer is a plan administrator of a qualified retirement plan that does not include designated Roth accounts, employer securities, nondeductible employee contributions or accident or health plan benefits. The taxpayer is an individual with an accrued benefit in the plan with a value of $900 who did not make a withholding election.  In 2020, the taxpayer’s accrued benefit was paid to the state’s unclaimed property fund. 

Under the ruling, because none of the statutory exceptions from the treatment as a designated distribution apply (wages, a payment to a nonresident alien or corporation or dividends on employer securities), the payment and the amount withheld are a designated distribution and subject to federal income tax withholding. Additionally, because the amount is over the $10 reporting threshold, the distribution must be reported on Form 1099-R, with the distribution amount in Box 1 and the federal income tax withheld in Box 4.

Organizations (holders) are not always made aware of the death of the people they do business with. While death plays an important role in the escheatment process, holders of banking and securities property types are not required to proactively search for and confirm death. Similarly, in the securities industry, SEC 17Ad-17 searches for lost shareowners are not required if the holder has received documentation that a shareowner is deceased

Death, however, is a factor in triggering escheatment. For example, death serves as the dormancy trigger for Roth IRA accounts in most states, as a possible trigger date for individual retirement accounts, and in states like Illinois and Maine, decreases the dormancy period for “other tax deferred” accounts.  In states that have adopted certain provisions of the 2016 Revised Uniform Unclaimed Property Act (RUUPA) as they relate to retirement accounts and securities, holders are not required to confirm death unless and until they receive a notice or indication of death (with death to be confirmed within 90 days).

Often, a holder becomes aware of the death of an owner when the next of kin contacts the holder. In other cases, notice of death comes from an SEC 17Ad-17 search of an account that is RPO (Returned by Post Office). There are no statutory requirements that force holders of banking or securities property to proactively determine if owners are deceased. Auditors, however, have been taking a more aggressive approach and assert that holders must proactively bump their records against the death master file (“DMF”) database. If an account owner is found to be deceased and there has been no contact with a beneficiary, the account is considered lost, which triggers escheatment and the property becomes fair game for the auditor. The National Change of Address (NCOA) database is similarly utilized by auditors as an attempt to locate accounts with updated addresses. According to auditors, these updates serve as proof that the holder does not know the location of the account owner, which triggers escheatment for some property types, including securities.

The 2016 Revised Uniform Unclaimed Property Act (“RUUPA”) is a model act designed to assist states in updating their unclaimed property laws, which for the most part, are outdated, since they are based on either a 1981 or 1995 version of the act.   Certain provisions of RUUPA address modern technology and have been incorporated into the laws of states that have recently enacted RUUPA-like laws.

For example, RUUPA requires that holders reach out to owners of retirement, securities or custodial accounts that have consented to receive electronic communications from the holder via email no later than 2 years after the owner’s last indication of interest in the property. This pre-due diligence requirement must be followed up promptly with first class mail if the holder lacks an email address for the owner or believes an email to be invalid, if the email bounces back, or if the owner does not respond within 30 days.

RUUPA also requires that if an owner consented to electronic communications, the due diligence notice must be sent via first class mail and email. Both the pre-due diligence outreach and the electronic due diligence requirements have been adopted in Tennessee, Utah, Illinois, Kentucky, Maine, and Colorado (email optional), Vermont (effective 1/1/2021), and Nevada. RUUPA-like bills have been introduced in the District of Columbia, Minnesota, Washington, and Wisconsin, and we expect additional states to also follow suit.