What Are Unclaimed Funds? Definition, How They Work, and Example

What Are Unclaimed Funds?

Unclaimed funds are money and other assets whose rightful owner cannot be located. Unclaimed funds are typically turned over to the government after a specific period of time has passed. 

To claim the funds or assets, the designated owner or beneficiary must file a claim. If the property is part of an estate, the claimant may have to prove their right to it.

Understanding Unclaimed Funds

Reasons for Unclaimed Funds

There are various reasons why funds and other assets go unclaimed:

• A taxpayer may be owed a refund but moved without updating their address with the tax authority.
• A customer of a bank that failed is unaware of a bank's closure or does not know who to contact to retrieve their funds.
• A company may fold and employees have no information about the pension administrator and how to collect their pensions.
• An account holder passes away and the financial institution isn't made aware of that fact.
• Individuals may simply forget about their accounts.

The Dormancy Period

Unclaimed property is property that has gone unclaimed beyond a dormancy period. The dormancy period is an amount of time after a financial institution reports an account or asset as inactive up to when the government deems that it's been abandoned. For most states, the dormancy period is three to five years.

When property is officially designated by the state as abandoned or unclaimed, it undergoes a process known as escheatment, where the state assumes ownership of that property until the rightful owner files a claim.

Potential for Taxes

Unclaimed property is not taxed while it is unclaimed. However, when it is reclaimed, the property may be officially recognized as taxable income, resulting in a tax bill for the claimant. Some unclaimed funds such as investments in a 401(k) or an IRA can be reclaimed tax-free.

Not all unclaimed funds originate with the government. Individuals may have unused money left on gift cards, positive account balances with banks and other financial institutions, and uncollected sales commissions with previous employers.

Also, beneficiaries of life insurance policies and other investments are common claimants to unclaimed funds. Businesses that hold on to unclaimed property typically are required legally to attempt to locate the asset owner. But if they're unsuccessful, they may be required to escheat it to a state or local government.

Unclaimed Funds Example

Consider an example in which an individual pays estimated federal taxes over the course of a year, files their taxes, and requests that any refund be mailed to their home address.

Before the refund is processed, they move and fail to disclose their new address to the tax authority. The refund is later processed and mailed to their last known address. 

To deter fraud, correspondence and payments from tax authorities generally cannot be forwarded. So, the refund check is returned to the issuer and becomes unclaimed funds. 

The onus now lies with the taxpayer to contact the government to reissue the check and send it to the correct address.

New York state has reported $18.4 billion in unclaimed money in 2023. Data also show that 70% of New York's unclaimed accounts hold less than $100 (but there is no limit to account size).

Thus far in 2023, Texas has returned $344 million to owners of previously unclaimed property. That amount involves about 200,000 claims (for an average claim amount of around $1,700).

Few claims are likely to match the $32.8 million in stock proceeds that a Connecticut resident claimed in 2012.

Verifying Unclaimed Funds

Federal and state governments offer a variety of ways to check for unclaimed funds. For example, the Internal Revenue Service (IRS) allows taxpayers to check the status of a federal refund online via the Where's My Refund portal and also offers a hotline that taxpayers can call.

However, because the online refund portal is easier and less expensive to maintain than phone systems, the IRS emphasizes that customers should only call if directed by the online portal.

The federal government does not yet have one specific system available for people to check for all unclaimed funds or property. It also does not maintain a centralized database to monitor unclaimed funds at a federal level, nor does it have information about unclaimed funds for each state.

Individuals and businesses looking for unclaimed funds will likely have to contact the appropriate state agencies where unclaimed funds or property may exist.

Potential for Scams

Unbeknownst to many individuals, most, if not all, government agencies are prohibited from contacting owners of unclaimed funds/assets by phone. Scammers understand this limitation and may attempt to defraud members of the public who aren't aware of it. 

In some instances, such as with unclaimed pensions managed by the Pension Benefit Guaranty Corporation (PBGC), the names of individuals owed money are publicly listed. A scam artist may contact these individuals posing as a government employee and offer to help secure the unclaimed funds for a fee.

A key indicator that someone is attempting to defraud is their request for a fee, a social security number (SSN), or banking information.

The Bottom Line

Unclaimed funds are funds that have not been collected by their owners. They can be related to bank accounts, company pensions, wages, insurance policy funds, securities accounts, and more. After a certain number of years, unclaimed funds are turned over to the unclaimed property office in the state in which they are located.

Individuals can try to locate funds that they may be owed by contacting state offices and by searching various databases, including Missing Money and the National Association of Unclaimed Property Administrators.