What is escheatment?

Escheatment definition and meaning

Escheatment is the process of transferring unclaimed property to the state after someone dies if there is no legally verifiable heir. This includes unclaimed wages via uncashed payroll checks or returned direct deposits after a certain amount of time has passed. Other unclaimed assets that can escheat include bank and brokerage accounts, retirement accounts, shares of stock, real estate, pension accounts, and annuity contracts.

Why does escheatment happen?

The concept of escheatment originated in English common law. It stated that any property owned by a decedent who died without a legal beneficiary should not remain unclaimed. At the time, escheat rights were granted to the king, who was allowed to claim the property and do with it whatever he wished. Today, if someone passes away without a last will and testament or trust in place (i.e., dies intestate), escheatment rights are granted to the state where the decedent last lived.

How does escheatment work?

If a person dies intestate, his or her assets go through probate, a legal process that involves researching heirs (e.g., spouses, siblings, aunts, uncles, cousins) who may have a right to claim the decedent’s assets. If no one is found who has a legal right to claim the assets, the probate judge will grant escheat rights to the state where the decedent last lived. In addition, escheat rights may also be granted if a will or trust is found to be defective, or if legal heirs are deemed incompetent to manage the assets.

Financial institutions and brokerage houses maintain records of account activity and flag inactive accounts that have been dormant for a while. They are required by law to try to find the owners before granting escheatment rights to the state after a certain period of time has elapsed, which varies by state.

Escheat laws are different in every state, including the time frame for granting escheatment rights to the state. In most states, the escheatment timeframe for unclaimed earnings is one year, but it is three years in several states and five years in Delaware and Mississippi. So if someone dies intestate in Delaware or Mississippi, the state won’t receive escheat rights until five years after the death.

In some cases, if a rightful heir comes forward after escheat rights have been granted to the state, he or she can make a claim to the state for the property rights. State laws vary in how this would work, including a potential statute of limitations, after which time the property cannot be reclaimed by heirs.

How escheatment affects employers

Should an employee fail to cash a paycheck, or if an employee’s payroll direct deposit is returned, an employer is responsible for trying to reach the employee via postal mail or email and let him or her know there are unclaimed wages. This is the case regardless of why the wages are unclaimed — for example, due to the employee’s death, relocation, or decision for whatever reason not to cash the paycheck and collect the wages.

If the employer is unsuccessful in reaching the employee, the escheatment process then begins. Here are the steps involved:

1. Report the unclaimed wages to the state where the employee last resided. If you have employees who reside in different states, be sure to follow the escheatment laws in each employee’s last state of residence.
2. File an annual report with the state listing all unclaimed wages, the names and last known addresses of employees who didn’t claim wages, and the date you last made contact with these employees.
3. After the escheatment timeframe has elapsed, deliver the unclaimed wages to the state, which will hold the funds indefinitely in case a rightful heir comes forward to claim them.
4. If the employee or a rightful heir contacts you after the unclaimed wages have become escheated, instruct him or her to contact the state to which the funds were delivered to try to reclaim the wages.

Thresholds for escheatment and payroll tax obligations

Some states have minimum thresholds for escheatment, such as $50 or $100. If unclaimed wages are below the threshold, escheatment isn’t required. Penalties and interest could be assessed against your business if escheatment is required and these procedures aren’t followed. Liability accumulates indefinitely, along with potentially increasing penalties and interest.

Note that escheatment doesn’t change a company’s payroll tax obligations. If a paycheck by a deceased employee isn’t cashed, payroll taxes must still be submitted and reported to the appropriate taxing authority. In other words, the payroll process remains the same whether a paycheck is cashed or not.