At a recent stop into a local bank, while waiting in line for a teller, I found myself listening in to an exchange between a female customer and the branch manager. The woman was holding a document up for the manager to see, jabbing her finger at it for emphasis. She was upset. The manager seemed somewhat confused and had taken an apologetic tone.
My continued eavesdropping shed light on this customer’s agitation. She was trying to understand why a custodial account she had opened for her son – who just went off to college – was no longer on deposit with the bank. Instead, and entirely unbeknownst to her, the account had been flagged as dormant due to an extended period of inactivity, and was escheated to New York’s Office of Unclaimed Funds (NYSOUF).
She was frustrated and confused as to how this could happen, given that the bank’s sole responsibility was to act as a safe haven for the money until her son reached the age of majority, which in New York is 18. Moreover, the branch manager seemed equally confused as to how this could happen. He could only offer her some boiler plate advice on unclaimed funds, told her about NYSOUF’s website and that she would have to reach out to the state to regain control of these funds.
I watched her walk out of the bank, aggravated and seemingly with more questions than she came into the bank with. All that was certain was that the money she had set aside for her son wasn’t where it was supposed to be – in the bank she had entrusted with this investment years earlier.
Custodial accounts are a steadily growing asset category contributing to New York State’s titanic holdings in unclaimed funds ($17.5 Billion, conservatively). There are 2 commonly used custodial account types, namely UGMAs (Uniform Gift to Minors Act) and UTMAs (Uniform Transfer to Minors Act). Both are savings accounts, differing only in the types of assets they can hold. UGMAs, the more common of the two, are limited to financial assets such as cash, stocks or mutual funds. UTMAs can hold any type of property, including real estate. Both are administered by an adult – the custodian - for a minor. Once the minor reaches the age of adulthood in their state (18 or 21), control and ownership of the account officially transfers from the custodian to the named beneficiary, irrevocably.
The spirit of these types of investments are long term. Many parents open a custodial savings account for a child during their infancy, with the expectation that the investment will sit safely in the chosen financial institution until the child is of age and ready to make use of the funds. It is not an unreasonable expectation that a custodial account might not have the same consistency of activity that a standard checking or savings account might have. For many adults who open an UGMA for their child, the luxury of making regular contributions to a child’s long-term savings vehicle is not even possible. Many custodial accounts aren’t contributed to at all after the account’s inception. This holds especially true with stockholdings.
Sadly, the days of turning a blind eye to an investment and entrusting its safety to a bank indefinitely are at odds with present day reality. States, in their increasingly aggressive measures to classify and reap unclaimed accounts, have made custodial accounts especially vulnerable to abandonment. Unclaimed property law will classify some accounts as eligible for abandonment after as little as 3 years without any account activity by the owner, which usually consists of deposits or withdrawals. If the custodian is not diligent in keeping the account active and up-to-date, there is a very real possibility the funds will not be available on their child’s 18th birthday.
After a custodial account is abandoned, the subsequent frustration is often compounded by navigating the trial and error recovery system laid out by the state government the asset was surrendered to. In many instances, the custodians take on the responsibility of trying to recover the funds themselves. However, often times years have passed and the beneficiary of the account is no longer a minor. So, after having to learn and comply with the state’s prescribed requirements for claiming an abandoned account, and then waiting for several weeks for the claim to be acknowledged, the claimant instead receives a rejection letter stating that the minor has now reached the age of majority and must initiate the claim on his/her own. While this is in line with nature of these accounts, it wedges another obstacle between the owners and the state, making it that much more likely the funds will never be recovered at all.
What’s unsettling is that these types of accounts enjoy no special protection from being abandoned by the banks where they are on deposit. It could be reasonably argued that discretion should be applied to any account established for the benefit of a child. Until that law is passed, which isn’t likely to be any time soon, if ever, the custodians of these accounts for minors need to be vigilant about keeping them up to date. Fletcher would recommend any account owner to check in with their bank or brokerage at least once a year. Make certain that the account is active. In the event it is not, take whatever measures are necessary to bring it up to date and make sure it does not slip into dormancy.