By Anthony Allsopp, Head of Business at Title Research
Over the course of the summer we’ve been discussing US assets held in UK estates both in terms of whether they are on the increase, as well as the tax treaty in place between the two nations and its application.
As we saw from the application of the tax treaty, not only are there inherent challenges to overcome in order to successfully tax certify assets in the US so that they can be administered, the timescales to do so are not favourable – it currently takes 2 years to obtain a Federal Transfer Certificate (Form 5173). With those timescales involved, practitioners in the UK need to be wary of potential escheatment of US assets and its implication to the UK estate.
Firstly, what is escheatment? State Governments in the US have certain rights to claim property that has become dormant and each State has varying rules around this. However, the general commonality is that if property is flagged as dormant over a period of 3-5 years, then the financial institution that maintains the property is mandated to release custody of it to the State in which the property was incorporated. In UK probate matters, the common property that escheats is shareholdings that are maintained by a transfer agent (or share registrar as we refer to them in the UK).
Inactivity on a shareholding account can include the following:
All of the above are of course quite likely when the account holder is deceased. If a UK estate is known to include US shareholdings it is important to ensure that correspondence from the transfer agent is monitored. Warning letters will be sent to the account holder advising of potential escheatment if no action is taken. Wherever possible, dividends should be attended to, although UK banks are becoming increasingly reluctant to deal with foreign currency. If the Personal Representative (PR) for the estate becomes aware of this risk, it is possible to place a block on the process but only usually for a period of 180 days; this can be of little use if tax clearance is required, which currently takes 2 years.
Once a shareholding has been flagged as dormant, the transfer agent will formally undergo an escheatment process, which involves releasing custody of the holding to the relevant US State. Most commonly, this is Delaware as most companies are incorporated there. Once in the custody of a state, the holding will usually be liquidated, and the resulting funds held on an unclaimed asset register. Whilst these funds can be reclaimed by their rightful owner or decedents of the deceased for probate matters, the holding ceases to be an asset that can either depreciate or appreciate in value.
The value element is an important aspect for UK practitioners to consider as it may impact valuations used for obtaining a Grant and for reporting to HMRC. As an example, if a deceased held shares in a US company that significantly increased in value (such as several pharmaceutical companies during the pandemic) and values were obtained on the basis of an intact holding, if it later transpires that the holding escheated prior to significant appreciation, then it may be the deciding factor in whether the estate was taxable. Notwithstanding, beneficiaries may be disappointed to discover that the estate is of lower value than anticipated.
If it transpires that a US shareholding has escheated, how can you determine its value? In short, not easily and the best-case scenario is by approximation. A transfer agent can confirm when a shareholding escheated as well as the number of shares that have escheated; it will not confirm the value. If dividends have also escheated, which is usually the case as they will generally escheat first, then the value of these will be confirmed as they have already been issued. Although a date for escheatment can be determined, the point at which a state then liquidates the holding will remain unknown, but it will usually be within 6 months. On that basis, an approximate share value can be calculated but it is not an ideal scenario.
How are escheated funds reclaimed? Once it has been established by a transfer agent the state to which escheated assets have passed to, a claim can be made with the state directly. Whilst you do not need legal knowledge to undergo this process for probate purposes, and claims are all conducted online, it is a time-consuming process. A state will request various evidence and forms of ID to verify rightful ownership and often certain documents will need to be certified and resubmitted within a time limit. If these time limits are missed, then the process will begin again. We generally advise to allow 1 year to process an escheatment claim but it can be longer and to an extent timely success will be reliant on third parties, such as registry offices, notaries etc.
If there are US assets held in a UK estate, it is advisable to start planning their administration as soon as possible as resolution timescales are not similar to the UK (e.g. if the assets exceed $60,000 at death then tax clearance will be required from the IRS, which can take 2 years)
Monitor all correspondence from the relevant financial institution to ensure that there is not escheatment warnings being issued
If US assets are held within an investment portfolio, it is advisable to contact the investment company to enquire about escheatment risks and how they might be prevented. Some investment companies will agree to transfer the funds into a beneficiary account should tax clearance be required
Title Research often assists Solicitors in the resolution of complex estate administration where US shareholdings have been escheated. If you think an estate may have escheated assets, Title Research is able to identify the state to which assets have escheated. Around 20% of cases where we are verifying, transferring, or selling US assets feature escheated shares.
We are experts at navigating the complex process of selling and transferring shareholdings in North America. We have extensive knowledge of different state processes and can maximise the value of the estate for the beneficiaries by recovering any escheated assets.
Find out more about how we can help with North American assets.
Title Research successfully claimed escheated funds from a Keurig Dr Pepper shareholding within 6 months. The Keurig Dr Pepper shares were held as part of a UK estate, despite this being a US company. In addition, our team realised that Keurig Dr Pepper did not exist in 2003, and the Deceased had died prior to this.
Watch the video below to learn what happened and how these shares came to be escheated.
If you’d like to find out more about how Title Research can help you retrieve escheated assets or administer North American shares and funds, call our Client Services Team on 0345 87 27 600 or email fill in the form below.