Alien investors in the US

Practitioners will often need to realise stocks and shares and other assets when administering an executry estate. Ordinarily, there should be no particular difficulty, certainly where UK shares are concerned. But what about realising overseas assets?

It might be thought that the most difficult assets to recover are those in, say, the Middle East or the Far East. Surprisingly, perhaps, cases involving shareholdings in American companies are some of the most frustrating and complex to deal with.

It can be particularly problematic when the company registrar (or transfer agent as they are known in the US) does not have an agent in the jurisdiction where the deceased shareholder resided, especially if the deceased was not a citizen of the United States.

First of all, those residing outside the United States are officially classified as “aliens”. Secondly, when first contacting the transfer agent, you are likely to find that he will be completely thrown by the fact that the shareholder did not have a US social security number. More often than not the transfer agent will return the documentation in its entirety, without a record being kept on their system.

Hoops and hurdles

All the documentation submitted has to be dated within 60 days of receipt by the transfer agent. This also includes confirmation and grants of probate and it is therefore nearly always necessary to have an exemplification of the UK confirmation or grant of probate. Other necessary documentation includes affidavits of domicile and, in lieu of federal transfer certificate (if the total value of US registered assets is less than US$60,000), stock power and/or certificate. Heaven forbid that the certificate is lost as this will also require an affidavit of loss and a surety bond (at 2.0% to 4.0% of the value of the lost certificate). Then, unless the value at the date of death is less than US$60,000, you will be required to obtain a tax clearance certificate which requires the completion of the appropriate IRS tax return. Either way you must make sure that the assets have already been included on the UK inheritance tax return.

There used to be a requirement for a “medallion guarantee” to be applied to the signatures on the reverse of the certificate or stock power. Initially, this created delays because the signatures had to be guaranteed by an institution such as a bank, insurance company or stockbroker with a correspondent institution in the United States. But it was also possible to have the correct wording completed by an officer of a high street bank in the UK where the shareholder held an account and was known to them. However, the US authorities no longer accept this alternative verification.

Without doubt the most cumbersome development is the new bar-coded medallion guarantee, which is a lime green coloured bar code that has to be affixed to any document requiring such guarantee. This was only introduced about a year ago in order to tighten further the money laundering security measures following the 11 September attacks. Unfortunately (although perhaps unsurprisingly for a nation in which only 5% of the population hold a passport), organisations in the US have introduced a system that they consider to be simple and straightforward but which, in my opinion, is a complete quagmire for so-called “aliens”. They even offer the following helpful advice: “If you can’t find a registered guarantor locally then fly over to the States”. They also suggest that if you encounter problems you should “go to the local United States Embassy”. Unfortunately, they appear to have forgotten to advise the embassies of this fact, so they are as confused as the “aliens”!

Forfeit to the state

Having offered some practical advice on the effective administration of assets in the United States, I cannot finish without mentioning “escheatment”. This is the process of identifying “assumed abandoned property” and transferring ownership to the appropriate state in the United States. In actual fact it is a quirk of the United States system that has its origins in English common law whereby abandoned land was returned to the king through the right of “escheat”. In the United States this has been extended to include such assets as uncashed dividends, title to shares, dormant bank accounts and many others. It also provides a rich vein of revenue to the appropriate state governor’s office whereby they can cash in the asset and bolster their flagging local economy by investing in transport infrastructure and public services.

In the past there was a requirement for the asset to be dormant for an average period of seven years before it was assumed to be abandoned. But over the years this source of revenue has become so attractive, especially to state economies such as California, that the “presumed dormancy period” has been reduced to three years.

So how do these assets become dormant? There are a number of ways. The most common, and the reasons most associated with “alien estates”, are as follows:

• In the US, dividends are normally paid quarterly in dollars and the cost to bank them individually in the UK is prohibitive. As a result, the shareholder often decides to accrue a number of dividends to make it more economic to bank them. They subsequently forget to do so and after two dividend cheques have remained uncashed, the transfer agent simply ceases to dispatch any subsequent dividends.
• The shareholder becomes infirm and does not want to concern themselves with such matters.

It is often the case that once the executors commence administering the estate a period of three years of dormancy has already expired. Alternatively, by the time the executors or their representatives have identified the existence of such an asset and are in a position to deal with the transfer/sale, three years have expired.

It is imperative that, at the earliest opportunity, the executors, or their representatives, identify any American assets and, however vague the detail may be, notify the transfer agent immediately and request confirmation that the account is on hold. If this is not done, the transfer agents are under a statutory obligation to report the dormant accounts to the US Stock Transfer Corporation, which is required to make a final attempt to establish contact with the shareholders of the dormant accounts. If a valid response is received, the shareholding will be deleted from the escheatment list and much gnashing of teeth is subsequently avoided. My experience over many years would indicate that “aliens” are not always included in such a process.

Once the shares have been escheated, the title to the shareholding and any outstanding dividends passes to the state in which the company is registered (not to the state in which the transfer agents or the shareholder are registered or are/were residing). This means that if the shares are in, for example, IBM, and the company’s registered office is in New York State, the shares pass to the state governor’s office of New York State. The escheated assets are usually administered by the State Comptroller’s Office and the shares are normally sold and the proceeds accounted for as to where they originated from, including any dividends.

Still time to claim

There is a process whereby the proceeds can be recovered by the estate from the State Comptroller’s office. Usually they ask why the matter was not dealt with prior to the escheatment and the fact that the shareholder has died is usually considered a strong enough justification. Once a claim for the escheated monies has been agreed it can be a lengthy process to recover the proceeds. In fact, it is not uncommon for the process to take between nine and 18 months. It should also be made clear that the claimant will only be entitled to the value received by the state plus a nominal amount of interest (which is fine if the value of the original shares has gone down, but not much comfort if they would have increased dramatically during the period of escheatment and the date of recovery).

In summary, shareholders should always keep in touch with the transfer agents, and executors and their representatives would be well advised to notify the transfer agents at the same time as lodging copies of the death certificate with any other organisation in any jurisdiction.

The American approach is by no means unique – a discussion of the problems in other jurisdictions will need a future article.

Damian Earley has over 15 years’ experience of UK and overseas asset valuation, verification and recovery for trust and executry practitioners. In December 2004 his company DPS became part of the Title Research Group. Damian is now in charge of Asset Research Services at Title Research. You can reach him at DPS House, 52 The Carfax, Horsham, West Sussex RH12 1EQ (t: 01403 252233; f: 01403 255777; e: enquiries@dps.gb.com).

GENEALOGISTS: TRACING THE LONG-LOST KIN

The main reasons for employing a specialist genealogist to help find the true beneficiaries of estates, say professional searchers Hoopers, will be when:

• the deceased failed to prepare a will;
• the whereabouts of named beneficiaries cannot be confirmed;
• named beneficiaries having died, it is necessary to identify and trace their heirs;

Another area of concern today is the international trust – typically used by people who, though domiciled outside the UK, do not want distribution of their estate to be governed by local inheritance laws.

Typically, researchers will start with central and local government records. But they may have to follow a trail across sources ranging from immigration applications and other bureaucratic files to religious, regimental, even sports club histories. While some of these may now be available over the internet, others will still require a painstaking manual archive search.

The fluidity and informality of modern family arrangements can add extra challenges to the solicitor’s duty of care in correctly identifying all the parties. Solicitors can rely on experienced professional genealogists like Hoopers to produce properly documented family trees in an easily understandable form.

t: 020 7490 3908

www.hoopers.co.uk