Dormant Account: Definition, How It Works, and Example

What Is a Dormant Account?

A dormant account is an account that has had no financial activity for a long period of time, except for the posting of interest. Financial institutions are required by state laws to transfer resources held in dormant accounts to the state's treasury after the accounts have been dormant for a certain period of time. The amount of time varies depending on the state.

Accounts that can become dormant include checking and savings accounts, brokerage accounts, 401(k) accounts, pension fund accounts, and other accounts for financial resources.

How a Dormant Account Works

To become dormant, the owner of an account must not have initiated any activity for a specific period of time. An activity can include contacting a financial institution by phone or Internet, logging into the account, or making a withdrawal or deposit. Periodic interest or dividends that are posted automatically on funds at checking, savings, or brokerage accounts are not considered to be activity.

After an account has no activity for a specific period of time, state law considers it to be a dormant account. Financial institutions are required by state laws to make an attempt to contact owners of dormant accounts using the most recent contact information by mail. A statute of limitations usually does not apply to dormant accounts, meaning that funds can be claimed by the owner or beneficiary at any time.

If an attempt to find the owner is unsuccessful, resources in dormant accounts become unclaimed property and must be transferred to the state's treasury department.

In California, for example, checking, savings and brokerage accounts must see no activity for at least three years in order to become dormant. In the state of Delaware, there is a five-year dormancy period for the same types of accounts.

The Escheatment Process of Dormant Accounts

States have enacted escheatment statutes that govern the process of transferring unclaimed funds to the state and protect the unclaimed funds from being reverted back to financial institutions.

Escheatment state laws require companies to transfer unclaimed property from dormant accounts to the general fund of a state for safekeeping. The state takes over record-keeping and the returning of lost or forgotten property to owners or their heirs if the owner has passed away.

Owners can gain back unclaimed property by filing an application with their state at no cost or for a nominal handling fee. Because the state keeps custody of the unclaimed property in perpetuity, owners can claim their property at any time.