What does a settlement agent do with funds nobody claims?

A settlement agent who holds money nobody claims first tries to reach the owner and pay it again, keeps it in the trust account while the state's waiting period runs, and then reports and hands it over to the state's unclaimed property program, where the owner can still claim it. The office never keeps the money, however small the amount and however old the check.

This article covers the rules that apply in the United States, where every state runs its own unclaimed property program with its own deadlines. It is general information, not legal or tax advice, and the examples of state rules below are there to show how much they differ, not to replace the instructions of the state you report to.

The subject looks minor until you count. A busy closing desk issues dozens of payments per file: proceeds, payoffs, commissions, recording fees, association dues, refunds of a few dollars. Almost all of them clear within days. A few do not, and each of those few stays on the books as money held for someone else until it is paid or handed to the state. What follows is the routine that deals with them, the dates that govern it, a worked year-end list for a small office, and the habits that keep the list short.

How does an unclaimed balance appear after a closing?

An unclaimed balance appears after a closing whenever the settlement agent has issued or owes a payment that the payee never collects, or has received a little more money than the file finally needed. Nothing has gone wrong with the closing itself: the deed is recorded, the lender is paid off, and a small sum is left with no one asking for it.

The causes repeat from office to office, and knowing them is half of the cure.

A paper check adds a second mechanism. Under the Uniform Commercial Code, a bank has no obligation to pay a check, other than a certified check, presented more than six months after its date. The check is then called stale-dated: the payee may still be owed the money, but the piece of paper can no longer be relied on, and the amount sits in the account as an outstanding item until someone acts on it.

Two categories deserve a separate look. An uncashed check has a known owner and a known amount, so the work is to find that person. An unidentified balance has an amount and no owner yet, so the work starts in the file: reread the settlement statement, the ledger and the bank records until the balance has a name. Only a balance with a researched owner, or one that honest research could not attribute, belongs in the unclaimed property routine.

Why can a settlement agent not keep the money or absorb it into fees?

A settlement agent cannot keep an unclaimed balance because the money in an escrow or trust account belongs to the parties of each file, never to the office that holds it. Moving a stale $20 refund to the operating account is a transfer of someone else's money, whatever the amount, and state unclaimed property laws close the other door by requiring that abandoned funds be turned over to the state.

The trust accounting rules say the same thing from the other side. A trust account is supposed to reconcile to the file level: the bank balance, the book balance and the total of all individual file balances must agree. The American Land Title Association's Best Practices ask title and settlement companies for this three-way reconciliation at least monthly. An old outstanding check is a reconciling item that never clears. An old positive file balance is a liability to a named person. Neither can be written off the way a business writes off a small difference in its own books, because the difference is not the business's to forgive.

Fees work the same way. A fee can be charged when it was disclosed and agreed in the closing documents, at the time of closing. Inventing a "dormancy fee" or an "administrative charge" afterwards to consume an old balance is not a fee, and several states restrict by law what a holder may deduct from property before reporting it. New York, for instance, lets a holder deduct the cost of a certified mailing from the account concerned but not the cost of the first-class notice, according to the State Comptroller's instructions for holders. If your documents provide for a charge on uncashed items, check with counsel that the charge is valid in the states where your payees live before relying on it.

There is a practical reason as well. Underwriters, state regulators and outside auditors who review a settlement office look at the list of outstanding checks and open file balances early in their visit. A list where the oldest item is a few months old and every older one has a note says the account is under control. A list with items of five or eight years says the opposite, even when every dollar is still there.

What do "escheat" and "unclaimed property" mean?

Unclaimed property is money or other property that a business holds for an owner who has had no contact with it for a period set by law, and escheat is the common name for the transfer of that property to the state. Under modern unclaimed property laws the state takes custody for the owner, who can still claim it; the word escheat comes from older law in which property with no owner passed to the sovereign for good.

Four terms carry the whole subject:

• Holder: the business that has the property on its books. In a closing, the settlement agent, title company or closing attorney's office is the holder of the uncashed check or the leftover balance.
• Owner: the person or company entitled to the money, usually the payee of the check.
• Dormancy period: the time, set by state law for each type of property, during which the owner shows no activity or contact. The National Association of Unclaimed Property Administrators describes it as the designated period after which the property must by law be turned over to the state.
• Due diligence: the holder's legal duty to try to reach the owner, generally by a written notice to the last known address, before reporting the property.

The National Association of Unclaimed Property Administrators, which brings together the state programs, estimates that about one in seven people in the United States has unclaimed property waiting for them. Uncashed checks and refunds are among the standard examples it gives, next to forgotten bank accounts, security deposits, insurance payments and customer overpayments. A settlement office handles exactly these kinds of items.

Which state receives the money follows the owner, not the office. The priority rules set by the Supreme Court send unclaimed intangible property to the state of the owner's last known address in the holder's records, and to the holder's state of incorporation when there is no address. A seller who moved from your state to another before the refund check was issued may therefore put you in front of a second state's rules for one single item. This is one more reason to record a forwarding address at closing.

How long is the dormancy period, and what must be done before reporting?

The dormancy period for the kinds of balances a closing leaves behind is three years in several large states and five years in others, and each state adds its own notice rules and its own filing date. No national figure exists: the period depends on the state and on the property type, and wages, court deposits or money orders often follow different clocks from escrow funds and vendor checks.

The four states below were read from the instructions their own programs publish for holders. They are examples of the spread, not a reference table for filing.

Three things stand out for a settlement office. First, the calendar is not the same anywhere: an office with payees in these four states has a March, a May, a July and a November deadline. Second, California works in two stages, a notice report in the fall and the payment the following June, which leaves the State Controller time to write to owners itself before the money moves. Third, small items are treated differently from state to state. New York lets holders report items of $20 or less in the aggregate without the first-class notice, and Florida's instructions say that refunds, credit balances and customer overpayments under $10 are not presumed unclaimed. Neither rule gives the money to the holder by itself: read the instruction for your property type before deciding what a small balance becomes.

Negative reports differ too. Texas provides a way to file a report stating there is nothing to report. Florida expects a holder that has filed before to file every year, including a zero report. California does not require a nil report unless the State Controller asks for one in writing, but recommends filing its cover sheet every year. New York asks general corporations not to send zero-dollar reports at all.

What is the routine, step by step?

The routine has seven stages: find the stale items in the reconciliation, research each one, try to reach the owner, pay again when the owner answers, hold what remains until the dormancy period has run, report and remit to the state, and keep the record. Each stage produces a note in the file, so that anyone who opens the item later can see what was tried and when.

A due-diligence letter does not need legal language. It says who you are and which transaction the money relates to, gives the amount and the date of the original payment, asks the owner to confirm their current address or payment details by a named date, and states plainly that after that date the law requires you to send the funds to the state, naming the state. Several states publish a sample letter in their holder instructions; using it removes any doubt about content.

Two precautions belong to step four. A request to pay an old balance to new bank details is exactly the kind of instruction that calls for the same verification as any change of payment details: confirm by a call to a number already in the file, never by replying to the message that brought the request. And when the payee is deceased or the company dissolved, the money is still owed to someone, the estate or the successor, and the claim needs the documents that show who that is.

What does a small office's year-end list look like?

A small office's year-end list of stale items is usually short, a handful of lines totalling a few thousand dollars at most, and most of the lines can be paid back before any of them reaches the state. The worked example below is illustrative: the office, the files and the state are invented, and the state's rules are assumptions chosen to show the mechanics.

The assumptions: one trust account; a state with a three-year dormancy period measured at a June 30 cut-off; a report and payment due on November 1; a written notice required for items of $50 or more, at least 60 days before the report. On December 31 the bookkeeper lists every outstanding check older than six months and every open balance on a closed file. Ages are counted in months from the date the payment was issued, or for the last line from the date of closing.

Follow the money. Three items go back to their owners once somebody picks up the phone: C, D and H, for $612.47 + $285.00 + $7.35 = $904.82. Two items have passed three years by the June 30 cut-off, E at 46 months and F at 44, and go to the state on November 1: $18.50 + $1,240.00 = $1,258.50. Three items stay in the trust account because the period has not run: A, B and G, for $42.18 + $36.00 + $55.00 = $133.18. The three groups add up to the list: $904.82 + $1,258.50 + $133.18 = $2,296.50.

Item F shows why the notice matters. It is the largest line, it is above the $50 threshold, and the letter has to leave no later than early September to respect the 60 days. Sent in January, when the list is drawn up, the same letter gives the seller eight more months to answer. Item E is under the threshold, so no notice is required in this illustrative state, but it is reported all the same: a small amount lowers the notice duty, not the duty to hand the money over.

Item G is the trap. At 29 months on December 31 it feels old enough, yet on June 30 it is 35 months old, one month short. Remitting it early is not harmless in every state: some programs do not accept property before it is reportable, and New York's instructions for general corporations tell holders not to file before the cut-off date has passed. G stays on the hold list with its date, and joins the following year's report unless the courier company answers first.

After the cycle, the account carries $133.18 of old items, each with a file note and a dormancy date, instead of $2,296.50 with no notes at all. The office paid out none of its own money and kept none of anyone else's.

How does the owner get the money back from the state?

An owner gets the money back by filing a claim with the unclaimed property program of the state that received it, which is free when done directly with the state. The state holds the money in custody for the owner; the settlement agent's part ends when the report and the payment are accepted.

If you are the person wondering where a closing check went, the order of search is simple. Start with the settlement office: if the check is less than a few years old, the money is very likely still there and can be paid again once your identity and details are confirmed. If the office says the item was remitted, ask for the state, the year of the report and the name and address it was reported under. Then search that state's official unclaimed property site, or the free national search that the National Association of Unclaimed Property Administrators endorses, under the name and former address used at the time of the sale.

The claim itself asks for proof that you are the owner: a government photo identification, something linking you to the reported address, such as the settlement statement from the sale, and for a company, an estate or a trust, the documents that show who may act for it. Processing times and document lists vary by state. You may receive letters from firms offering to recover the money for a share of it; this service is legal within limits that many states set, and the same claim can be filed directly with the state at no charge.

For the settlement office, the useful habit is to answer these calls well. A caller who is told "we sent it to the state in such a year, under this name, and here is how to claim it" hangs up satisfied. That answer exists only if the record was kept.

What are the penalties and the audit exposure?

A holder that does not report or remit unclaimed property on time is exposed to interest and penalties under state law, and to an examination of its books that can reach back many years. The amounts and the look-back differ from one state to the next, so the reliable statement is general: the cost of not filing grows with time, and the cost of filing is small.

The states' own instructions describe the exposure plainly. Florida's reporting manual warns that failing to perform due diligence could result in fines and interest penalties. Texas requires holders to keep their records for at least ten years after the report, which gives an idea of how far back a review may look. State programs also examine holders, with their own staff or through audit firms working under contract, and an examination usually starts from the outstanding check lists, the voided check registers and the general ledger accounts where old balances were written off.

That last point is where settlement offices are most often caught, and rarely through bad faith. A bookkeeper who voids a stale $30 check and posts it to miscellaneous income to make the reconciliation clean has created exactly the entry an examiner searches for, and has also taken trust money into operating funds. The repair is the routine above, applied backwards: list the old write-offs, restore them as liabilities, send the notices and report what is due. Many states run voluntary disclosure or voluntary compliance programs for holders who come forward before an audit, generally with reduced or waived penalties; Texas and California both publish one. A first late report filed voluntarily is a far better position than a first report prompted by an examination.

How do you reduce stale items at the source?

Stale items are reduced at the source by paying in ways that confirm receipt, by issuing fewer paper checks, and by confirming each payee's details and future address before the closing instead of after it. Every item that never becomes stale is one less letter, one less line on a report and one less entry on next year's list.

The payment method decides most of it.

Beyond the method, a few habits at the closing table do more than any year-end effort:

• Take a forwarding address and a personal email from every seller, in writing, and note it in the file. The property address stops being useful the day the deed records.
• Confirm vendor details before disbursing: the association's current management company, the municipality's payee name, the surveyor's remittance address. Details copied from last year's file are a common source of uncashed vendor checks.
• Collect recording and transfer charges as precisely as the county's schedule allows, and when a difference remains, refund it in the same week, by the same method as the proceeds where possible, while the party still answers the phone.
• Decide in advance how tiny refunds are paid. A refund of a few dollars by paper check is the item least likely to be cashed. An electronic refund to the account that received the proceeds, with the owner's agreement recorded at closing, never joins the list.
• Review outstanding checks at 60 or 90 days, not at year-end. A call at three months usually reaches the same phone number as at closing.
• Zero every file. A closed file should show a balance of zero, and a file that does not is a question to answer that month.

Where a deal is paid out through a payment router instead of a held balance, the question takes a different form. Shaka is a payment router: each party's share is agreed, and can be signed by each recipient, before the client pays; the client pays once, every party is paid at the same moment, and the payment is final. Shaka routes the funds and never holds them, so no check is outstanding afterwards. It is not an escrow service and does not replace a trust account where the law or the parties require one; it applies to payouts that do not need funds to be held.

What should the unclaimed property file contain?

The unclaimed property file should contain, for every item, enough to show what the money was, whose it was, what was done to return it and where it went. A reviewer, a successor bookkeeper or the owner should be able to follow one item from the closing to its end without asking anyone.

In practice that means six things kept together, per reporting year: the list of stale items as of the review date, with file number, payee, amount and issue date; the research notes for any balance that had no obvious owner; proof of each contact attempt, including a copy of the notice and the returned envelope if it came back; the void or stop-payment record and the details of any reissue; the report as filed with each state and the state's confirmation; and the proof of payment to the state, matched to the trust account entry that removed the liability.

The trust ledger closes the loop. When an item is remitted, the entry on the file shows the payee as the state's unclaimed property program, with the report year in the description, and the file goes to zero. When an item is paid back to its owner, the entry shows the new payment and the voided one. In both cases the three-way reconciliation loses a reconciling item for a documented reason.

Give the task an owner and a date. In a small office the person who reconciles the account is usually the person who keeps this file, and the calendar carries two recurring entries: a review of outstanding items every month, and each state's notice and report dates once a year. Unclaimed funds are rarely an emergency, which is why they are forgotten; with a date on the calendar and a list that is read every month, they stay a short list.