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6/12/15 1:21 PM

What's the Difference Between Escheatment and Custodial Possession?

by Greg VerMulm

When we describe any abandoned or unclaimed property turned over to the state, it's common to use the word "escheat." However, "escheat" technically only refers to property that becomes the legal property of a state—and not all property turned over to states becomes legally owned by the states.

  • In most cases, unclaimed property is only "held" or taken possession of by a state as a custodian until the owner is found. Some states have "implied escheat," but don't enforce it.
  • In three states (Hawaii, Indiana, New Hampshire), unclaimed property is held for a certain amount of time, and then permanently transferred to the state. 
  • In some states, for some property types, under certain circumstances, property is "held in perpetuity" and never becomes state property.

Before we tell you how this affects holders, let's talk about where "escheat" comes from.

Origin of "escheatment": English common law

Use of the word escheat first occurred in ancient or medieval common law (Rome or England, depending who you talk to). Its technical origin is the Latin "ex-cadere", which means to "fall out"—in this case, to fall out of ownership. "Ex-cadere" comes from the medieval French "escheoir".

In feudal England, escheat described land that "fell out" of ownership due to an owner's death—or treason. Back then, land actually was owned by the King and "enfeoffed" to an overlord or vassal.

escheat

If the overlord or vassal died with heirs, rights were passed to the heirs. If there were no heirs, land escheated back to the King. There were variations, but that's the basic idea.

The word lost its original meaning when the whole feudal land concept went away and everyone simply owned land.

The modern meaning of escheatment

Modern courts borrowed the idea of escheatment to determine who had rights to any property left without an owner, not just land. The premise behind modern unclaimed property law and escheatment is the belief that it's better for unclaimed property to be held and used for the common good (by the government for the benefit of its citizens) than to be held by and benefit individual companies.

Although there have been efforts toward uniformity, each state still is allowed to establish its own escheatment and unclaimed property laws. In reality, much unclaimed property is never claimed, and most unclaimed property ends up being a source of income for states and their citizens. The National Association of Unclaimed Property Administrators (NAUPA) says nearly $42 billion dollars is sitting in state accounts waiting to be claimed.  

Some people question whether official escheat laws are constitutional. The U.S. Supreme Court requires states to provide prior notice of escheatment and get a judicial ruling to transfer title, but the laws don't include this and probably could be challenged.

In spite of this, a number of states are now pursuing claims to U.S. Savings Bonds and they are following escheat rules that are required by the U.S. Treasury Bureau of Public Debt before they will honor the states' claims—publishing notice of pending escheat in the newspaper and then getting a court judgment transferring title to the state. Some wonder if these cases could be a precursor to more claims for permanent state ownership of unclaimed property.

Why should you care whether unclaimed property is escheated or held in custodial possession?

Escheated money and money held in custody are functionally the same for a holder. Once you properly report and remit unclaimed property according to each state's law, there is no other obligation to fulfill. However, you should know: 

  • For customer relations, it's best to try early-on to unite property with owners.
  • If you wait too long to try reuniting property with owners, chances are good the owners will never be found. Owners who later find their property could become upset if they believe you haven't tried very hard to find them.
  • Customers might not be happy if they realize they could have claimed the money, but now the state owns it and they can't get it (in the three states).
 On the other hand:
  • It is partly the owner's responsibility to provide you with a forwarding address. If you can't find an owner, you have no choice under law but to turn over the property.

If you need help finding owners, we can point you toward resources. In the meantime, even though escheat really refers to ownership, it's okay to use it to mean the reporting and remittance of any unclaimed property to any state. We'll all know what you mean.

Topics: Reporting