Escheatment: Meaning and Overview
Escheatment refers to the legal process by which unclaimed or abandoned assets are transferred to the state, often due to the absence of a legally recognized heir following a person’s death. This process can also apply to unclaimed employee wages, such as paychecks that were never cashed or direct deposits that were returned. Other assets that can be escheated include investment accounts, real estate, retirement plans, pensions, and insurance proceeds.
Why Escheatment Occurs
The origins of escheatment lie in English common law, where property belonging to individuals who died without heirs would default to the Crown. Today, if someone dies intestate, without a valid will or estate plan, the right to claim their unclaimed property typically falls to the state where the deceased last resided.
How the Escheatment Process Works
When a person passes away without naming beneficiaries, their estate enters probate. During this process, the court attempts to identify legal heirs, spouses, siblings, or more distant relatives. If no rightful heirs are found or if no valid claim is made, the assets are transferred to the state. Escheatment may also occur if a will is invalid or heirs are deemed legally unfit to inherit.
Banks, brokerages, and similar institutions are legally obligated to monitor account activity and flag dormant accounts. If an account remains inactive for a specific period, varying by state, they must make a good-faith effort to contact the owner before reporting and transferring the funds to the appropriate state agency.
Each state sets its own escheatment rules. For example, most states allow one year before unclaimed wages are escheated, but some extend this window to three or even five years, as seen in Delaware and Mississippi.
In some situations, a legitimate heir may come forward even after escheatment. States often allow such claims, but they may impose a statute of limitations, beyond which the property cannot be reclaimed.
What Employers Should Know About Escheatment
If an employee fails to collect their wages, whether due to death, relocation, or simply not cashing a paycheck, the employer must make reasonable efforts to contact them. This may include sending notices via email or postal mail.
If those attempts fail, the escheatment process begins. Employers are responsible for:
- Reporting the unclaimed wages to the state where the employee last lived. Be sure to follow the rules of each individual state if your workforce is spread across regions.
- Filing an annual report that includes the employees’ names, last known addresses, unclaimed wage amounts, and dates of last contact.
- Submitting the funds to the state after the escheatment period has passed, where they will be held in trust until claimed.
- Directing claimants – whether former employees or heirs, to the appropriate state agency to recover escheated funds.
Escheatment Thresholds and Payroll Tax Responsibilities
Some states don’t require escheatment if the amount is under a minimum threshold, typically $50 or $100. However, failing to comply with escheatment regulations when required can result in penalties, interest, and ongoing liability.
It’s also important to remember that escheatment has no impact on payroll tax obligations. Whether or not a paycheck is cashed, employers must still process and submit payroll taxes as usual. Services like Beyond can help automate these processes and ensure compliance even in cases involving unclaimed wages.
By understanding escheatment and following the correct steps, employers can avoid legal trouble while protecting the rights of employees and their heirs.