Financial services firms are concerned that states have gotten too aggressive in grabbing unclaimed investment accounts.

Every state has laws about when companies and other entities have to turn over unclaimed property to the state. Banks, insurance companies and securities firms are a common source of these unclaimed assets.

The policy goal is to have states take custody of abandoned assets—a process known as “escheatment”—which then makes it possible for rightful owners to find the lost property.

(People can search for unclaimed property and accounts through a multi-state search engine, www.missingmoney.com, run by the National Association of Unclaimed Property Administrators.)

But aggressive audits and a desire to bolster state tax coffers may be causing some states to pressure firms to turn over abandoned property prematurely.

A former client of Ted Turner, an independent registered rep in Osterville, Mass., is a case in point.

Turner, who is serving as executor of the now-deceased client’s estate, claims that in September 2014 Federated Investors took the entire $26,774 balance from the client’s money fund and turned it over to the state of Washington—without calling the client or getting returned mail.

The client, Margaret Harris of Bellingham, Wash., who was age 93 at the time and still living in her own home, had maintained the account since 1983, Turner says in an arbitration claim against Federated. Harris died in February 2016.

The state of Washington has since returned $23,000 net, after incurring $3,800 in liquidation costs. Turner wants the rest of the money plus legal costs from Federated, which he claims failed to perform adequate due diligence before escheating Harris’s property.

“It’s not a lot of money,” Turner says. “It’s more the principle of the thing.”

“Federated will defend this case vigorously because it has complied with the law” as well as its own procedures, said Federated spokesman Ed Costello in a statement.

States More Aggressive Since Financial Crisis

Turner’s situation highlights some of the issues with states going after unclaimed property.

For one thing, industry observers say states have gotten more aggressive in looking for abandoned property—ever since the financial crisis dried up tax revenue.

Lost assets “are supposed to be held in trust by states, in perpetuity, but are often used for the general fund,” said Ferdinand Hogroian, legislative counsel at the Council On State Taxation, a group representing more than 600 multistate corporations.

If property is claimed by the owner, a state will return the liquidated amount. If not, the state keeps it.

With investment accounts, assets may have been sold by a state at less than current value. Plus, there may be taxes and penalties on gains and IRA distributions.

Dormancy Periods Shrink

One way states have gotten more aggressive is by shortening dormancy periods. This is the length of time that an owner must remain inactive or unreachable by mail before property must be delivered to the state. (Usually, brokerage firms send letters to inactive accounts asking for a reply before turning the assets over to a state.)

The Securities Industry and Financial Markets Association (SIFMA) and other industry groups say that dormancy periods have been shortened to three to five years from what had been seven years in most states.

Since 2007, at least 15 states shortened their statutory dormancy periods, according to SIFMA. Anything less than five years doesn’t allow enough time for address databases to capture people who move, according to SIFMA officials.

“More account holders could get caught” with the shorter periods, Hogroian said.

SIFMA is particularly concerned about states taking investment accounts simply because the accounts have been inactive for a period of time—not unusual for the elderly, active military or custodial accounts.

Turner found that out when he visited Harris’s home in Washington in 2014. He discovered she had not been opening her mail after falling ill and being hospitalized.

“People get old, they get tired, and throw [their mail] in a pile,” he said.

It’s not known exactly how much unclaimed property states hold—current numbers are not available. But it’s a lot. As of 2011, states had claimed a total of $5.8 billion, with about $2 billion of that having been paid out, according to SIFMA.

The National Association of Unclaimed Property Administrators, which represents state officials responsible for unclaimed property, did not respond to an e-mailed request for comment for this story.

For their part, elected state treasurers boast about the assets they’ve been able to return to owners, and many maintain an active effort at connecting people with lost property through efforts like www.missingmoney.com. Turner, for instance, says he had no problem getting Harris’s balance back from Washington state.

A model unclaimed-property law approved last summer by the Uniform Law Commission, which drafts proposed state laws, could offer some protection from premature seizures if states adopt the law: The model legislation drops the inactivity test for most investment accounts.

Still, industry groups say the incentive for states to take property remains.

A big worry is states’ use of outsourced auditors to search businesses for property that should be turned over. The audit firms get a piece of collected property, which motivates them to be overly aggressive, industry representatives say.

“For state treasurers, it’s pretty appealing,” said Harold Kim, executive vice president at the U.S. Chamber of Commerce’s Institute for Legal Reform. “They just contract out to a private firm, which does all the work for a contingency fee.”

It’s part of a pattern of states adopting “more and more aggressive strategies, along with their desire to grab more revenue,” said Hogroian.