[an error occurred while processing this directive] [an error occurred while processing this directive] Comptroller's Office [an error occurred while processing this directive] Texas Taxes
Audit Manuals
Audit Procedures for Unclaimed Property
Revised 09/2007 [an error occurred while processing this directive]

EMPLOYEE BENEFIT TRUST DISTRIBUTIONS

Large employers often establish some form of employee benefit/retirement plan. Retired and ex-employees move away, the plan administrator loses contact with them and their benefit distributions remain unclaimed. Often, a bank's trust department is the plan administrator and the auditor will require an introduction from the company before auditing records at the bank.

This is an area of continuing controversy. Employee benefit trusts (EBTs), established under the provisions of the Employee Retirement Income Security Act (ERISA), call for unclaimed distributions to be absorbed back into the trust for the benefit of the remaining members. This contradicts the prohibition against private escheat included in the unclaimed property statutes of Texas and many other states as well.

Much has been written over the years about whether ERISA, a federal law, preempts state unclaimed property laws. Some states have challenged it in the past; others continue to do so. The few actual court cases on this subject have been inconclusive. Texas has not taken a formal position on the issue, preferring to defer audits of ERISA-based plans until after the question is settled.

The results of step 1, then, will assist the auditor in deciding whether to continue with the rest of the audit of the employee benefit plan.


 

PERSONAL TRUST PROPERTY

The most frequently occurring form of unclaimed personal trust property is the excess of dividends over what can be allocated to personal trust accounts. This occurs as a result of timing differences between the sale of securities on behalf of one or more trust accounts and the declaration of dividends by the issuer of the securities.

Usually, the issuer's dividend disbursing agent will follow up with a refund request for excess dividends after being contacted by the new owner of the securities, but not always. Some dividend disbursing agents even refuse the trust company's attempts to return unallocable dividends when they haven't heard from the new owners because, left as is, their records balance.


 

CORPORATE TRUST PROPERTY

Coupon-Bond Paying Agent
The bond-paying agency of a bank's corporate trust department is frequently out of balance in many of its client accounts when the bonds are bearer instruments. Bond issuers transfer funds to the paying agent at each coupon maturity date to cover that period's interest payments. Though some commingling of funds may occasionally be found, the common procedure is for the agency to deposit the funds to the appropriate demand deposit account (DDA) set up for each specific bond series. Bond and coupon redemptions are then paid directly from those accounts.

Some bond paying agents have such tight controls on these DDAs that they are able to report exactly which coupons from which numbered bonds remain outstanding. However, the many similar names of the different bond series increase the chances for clerical errors when interest coupons are received for payment. Coupons from one series of bonds are redeemed with funds received for another series and, within a few years, the accounts can be hopelessly out of balance.

Dividend Disbursing Agent
Even when the actual certificates are presumed to be in the possession of the missing owner, stock shares must be reported as abandoned if:

When reported, these are identified as underlying shares. Please note, the only time mail not returned by the Post Office prevents the assumption of abandonment is when there have been no distributions during the previous three-year period.


Stock Transfer Agent/Exchange Agent

Receiverships

EQUITY AND DEBT

The auditor may find the required records at the holder's office, but frequently this function is contracted out to one or more agents.


 

Shareholder Equity

Cash and Stock Dividends

Unexchanged Stock

Principal and Interest on Debt Issues


CREDIT MEMORANDA, GIFT OR MERCHANDISE CERTIFICATES, ELECTRONIC GIFT CARDS, SCRIP OR INSTRUMENTS REPRESENTING CASH SOLD OR ORIGINALLY ISSUED PRIOR TO SEPTEMBER 1, 2005

Some holders successfully prevent states from collecting unredeemed gift certificates by strictly adhering to a policy of redeeming them for merchandise or services only. That is why the auditor's identification of a waiver of this policy (addressed in step 2) is so significant. While the unclaimed property laws of many states, like Texas, include tangible property, most states are unwilling to go through the process of receiving and selling merchandise.

Gift certificates that are redeemable for merchandise or services only, and have a stated expiration period that is less than the statutory period required for the presumption of abandonment, will not be considered as reportable unclaimed property in Texas.

In summary:  All gift certificates with expiration dates of less than three years are not considered unclaimed property.  Gift certificates with no expiration date or with expiration dates of three years and longer are considered unclaimed property.  However, as a practical matter, those gift certificates considered unclaimed property and redeemable only in merchandise or services should not be considered in an audit without prior approval.

CREDIT MEMORANDA, GIFT OR MERCHANDISE CERTIFICATES, ELECTRONIC GIFT CARDS, STORED VALUE CARDS, SCRIP OR INSTRUMENTS REPRESENTING CASH, SERVICES OR MERCHANDISE SOLD OR ORIGINALLY ISSUED ON OR AFTER SEPTEMBER 1, 2005

EFFECTIVE SEPTEMBER 1, 2005

The 79th regular session of the State Legislature passed Senate Bill 446 (as amended) on May 9, 2005.  The Governor signed the bill on May 17, 2005 with an effective date of September 1, 2005.

 

First and foremost; SB446 applies to stored value cards sold or originally issued on or after September 1, 2005.  All stored valued cards issued prior to this date will be subject to the audit policies and procedures in place prior to this date.  Effectively this means it will be a minimum of three years before this change becomes an audit issue. 

 

Senate Bill 446 is primarily a consumer protection statute relating to stored value cards.  This bill clarifies the definition of a stored value card and changes the criteria in which stored value cards (gift cards/certificate) would be consider unclaimed property and alters the manner and method they will be treated in an unclaimed property audit.

 

"Stored value card" means a record that evidences a promise made for monetary consideration by the seller or issuer of the record that goods or services will be provided to the owner of the record in the value shown in the record, that is prefunded, and the value of which is reduced on redemption.  The term includes a gift card or gift certificate


 

From an audit perspective the bill’s wording is confusing as to when or if a stored value card becomes reportable as unclaimed property.  For audit purposes it makes no difference whether the stored value cards are redeemable for cash, merchandise or service.  In all cases the following guidelines should be used:

 

 

Note:  A stored value card sold without the disclosure as required by this section is valid until redeemed or replaced.


 

LIFE INSURANCE DEATH CLAIMS

The auditor will often find that the reasons some death claim payments are still unpaid years after the date of death relate to disputes between the heirs. Questionable circumstances surrounding the death of the insured, such as the beneficiary's contribution toward bringing about the death, can also hold up payment.

These are certainly valid reasons for delaying payment, but they cannot be used indefinitely. The auditor's inquiries may bring long-standing unpaid death claims to the attention of the holder, with the only reasonable resolution being to report the benefits for an unknown owner.

When examining this type of property:


 

MATURED ENDOWMENTS, POLICIES REACHING LIMITING AGE, AND OTHER MATURITIES DUE OR PAYABLE

People usually know if they've been named as beneficiaries on life insurance policies. In the event they don't, however, they are unable to inform the life insurance company of the insured's death. Without that information, the death benefits are not yet payable, the abandonment period cannot begin to run and, if the company doesn't learn of the insured's death through other means, the abandonment period won't commence until the limiting age specified in the policy is reached.

In the case of annuity payments and other obligations that are conditioned upon the continued life of a person, those payments are not considered to be "due and payable" in the absence of proof that the payee was alive at the time required by the contract. So, while losing contact with a payee often starts the abandonment period for other types of personal property, it will generally, and properly, result in the cessation of payments made pursuant to an annuity contract.

If the payment of premiums on a policy ceases, and the company is unable to locate the insured or make a determination of death, the cash surrender value may be consumed under an automatic premium loan or other non-forfeiture provision. This is an unfortunate, often unavoidable, consequence for the beneficiary when the insured cannot be located.

Steps to be followed include:

Test the ratios of reportable maturities from year to year. Analyze variances.

[Table of Contents]
[Basic Rules]
[Statute of Limitations to Property and Casualty Insurance Claim Checks and Drafts]
[Mineral Interests to Unidentified Deposits/Remittances]
[Checks Issued by Banking Organizations to Collateral]
[Employee Benefit Trust Distributions to Matured Endowments, Policies Reaching Limiting Age, and Other Maturities Due]
[Agent Credit Balances to Penalties and Interest]
[Interest Calculation Worksheet Illustration]
[Commonly Reported Types of Unclaimed Property Listed by Industry]

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