Escheating Securities in IRAs - some considerations
Escheatment of securities can be complicated due to the various laws and regulations that govern the transfer of ownership and the different types of securities that can be subject to escheatment. It's important to note that the rules around unclaimed property in IRAs is complex and may vary depending on state laws and individual financial institution policies. It's always a good idea for IRA owners to work closely with their financial advisors to ensure they are meeting all the necessary requirements and avoiding any potential penalties.
One factor that can make escheatment of securities even more complex is the Employee Retirement Income Security Act (ERISA). ERISA is a federal law that governs employee benefit plans, such as 401(k) plans and pension plans. Under ERISA, employers are required to establish and maintain employee benefit plans that meet certain minimum standards. ERISA also requires employers to act as fiduciaries for the benefit plans, which means they must act in the best interests of plan participants and beneficiaries.
When it comes to escheatment of securities held in employee benefit plans, ERISA adds an additional layer of complexity. ERISA requires that employers hold employee benefit plan assets in trust for the exclusive benefit of plan participants and beneficiaries. This means that the assets held in these plans are not technically owned by the employer and therefore cannot be subject to escheatment by the state.
However, if a plan participant or beneficiary cannot be located, the plan administrator may be required to transfer the unclaimed assets to a state's unclaimed property office. In this case, the plan administrator must follow strict procedures to ensure compliance with ERISA regulations and protect the interests of plan participants and beneficiaries.
Look-back vs Look-forward
When it comes to escheating Individual Retirement Accounts (IRAs), there are two types of dormancy periods: look-back and look-forward. A look-back dormancy period starts from the date of the last owner activity on the account, while a look-forward dormancy period starts from the date the IRA becomes active. Activity can be prompted by mandatory distribution from the owner's eligibility for Required Minimum Distributions (RMDs) or taking voluntary distributions.
The look-forward dormancy period does not begin until after the RMD has been satisfied for that year. This means that if an IRA owner is taking their RMDs as required, the account is considered active, and the look-forward dormancy period will not begin until after the owner reaches the specified age and fails to take their RMD for the year. If the owner fails to take their RMD for the year, the account could become subject to the look-forward dormancy period and ultimately escheatment to the state's unclaimed property office.
What happens when the state receives it?
Most states take a proactive approach to reuniting owners with their property. However, if they are unable to do so with securities, they typically holds them for a specified period of time before liquidating them. The length of time a state holds escheated securities before liquidating them can vary depending on state law and the type of security. For example, in South Dakota, securities are liquidated after 3 years.
It's worth noting that some states may have different liquidation periods for different types of securities. For example, securities that are publicly traded may have a shorter holding period than those that are not publicly traded.
Unfortunately this means that when owners are reunited with their property, they might not have appreciated if the previously owned asset did.
If you're exploring how to account for and handle dormant IRAs, please reach out and see if we can help!