The simple tax move with hidden costs

Naming a charity as your IRA beneficiary is tax-efficient and easy to set up. But nonprofits often spend months or years navigating red tape to actually collect these final gifts.

How IRA gifts to charity work

When you leave an IRA to a nonprofit, the amount is subtracted from your taxable estate and goes to the charity free of income taxes. No will changes needed.

Banks demand new accounts and personal data

Some brokerages and banks require nonprofits to open new accounts before releasing IRA assets. They often ask for sensitive information like Social Security numbers and home addresses without disclosing the gift's value.

Five years for a six thousand dollar gift

Rob Hilbert, president of the Iowa PBS Foundation, spent more than five years exchanging paperwork to receive a gift that turned out to be just six thousand dollars.

“These contributions are important, because a person has chosen to leave part of what they worked their entire life for to support our mission, and we want to honor that designation. But we can't do it if we don't receive the funds.”

Two million dollars stuck for two years

The University of Denver waited two years to collect a donor's investment account worth two million dollars. The delayed funds could have generated ninety thousand dollars annually in student scholarships.

“That $2 million at 4.5% would have spun off $90,000 a year that we could have been awarding in student scholarships. Instead it sat at the company in their assets under management.”

Charities aren't required to be told

IRA custodians are generally not required to inform nonprofits or individuals that they are beneficiaries of gifts or how much they are owed.

Invasive requests go beyond legal requirements

Charities report being asked for photos of employees' driver's licenses, personal asset information, and consent to credit checks. Lawyers say these demands exceed what anti-money-laundering laws actually require.

Personal risk for nonprofit staff

Nonprofit employees providing their Social Security numbers and personal information to dozens of financial institutions worry about identity theft and data breaches.

“This is not something that I anticipated when I took this job, and I don't love doing it. My wife and three kids didn't sign up for any of that.”

Seventy thousand dollars took two and a half years

Valley Humane Society CEO Melanie Sadek spent two and a half years collecting a seventy thousand dollar IRA gift. The bank required all nine beneficiaries to complete paperwork within the same ninety-day window.

Eighteen trillion dollars at stake

By Cerulli Associates' estimate, eighteen trillion dollars is expected to be donated to charities and philanthropic causes by twenty forty-eight. The delays could impact how much nonprofits actually receive.

Some firms make it easier than others

Edward Jones and Merrill Lynch are easier to work with, but the result is a patchwork of procedures that vary by firm. The problem also affects four-oh-one-k-s, life insurance policies, and brokerage accounts.

Fidelity and Schwab frequently enforce delays

Fidelity and Schwab are two of the biggest brokerage firms known to frequently enforce requirements that result in delays or denials. Fidelity holds twenty point three million active IRA accounts.

Schwab says it's meeting legal obligations

Schwab says its policies execute clients' wishes while meeting legal, tax-reporting, and fraud-prevention obligations. The firm says it continually evaluates ways to simplify the inheritance experience.

“Schwab is committed to carrying out a client's beneficiary instructions and distributing inherited assets.”

Government says charities aren't high risk

In twenty twenty, FinCEN issued a fact sheet reminding banks that the U.S. government does not view the charitable sector as presenting a uniform or unacceptably high risk for money laundering or terrorist financing.

New accounts aren't legally required

In a twenty twenty-four administrative ruling, FinCEN said Bank Secrecy Act laws do not require broker-dealers to make charities open new accounts to receive inherited IRA funds.

Financial incentives may drive the delays

Iowa State Representative Bill Gustoff, also a lawyer, suggests some firms hold onto funds to collect fees for managing assets. He introduced Iowa's reform bill after learning about the issue.

“I think, unfortunately, there are some who are just unscrupulous who are trying to hold on to funds for various reasons or open and close accounts for various reasons.”

Six states have passed reform laws

Iowa, Colorado, Illinois, Tennessee, and two others have passed laws requiring financial institutions to transfer assets in a timely manner. California's bill is awaiting Governor Gavin Newsom's signature.

Colorado requires sixty day transfers

Colorado's law, signed in April, requires custodians to transfer assets within sixty days of receiving an affidavit from the charity claiming the funds.

Most state laws ban forced new accounts

Five of the six state laws stipulate that charities cannot be required to open an account. Illinois and Tennessee also require institutions to inform charities they are beneficiaries.

What donors can do now

Donors can provide their intended charities with a copy of their beneficiary designation form and account number. They can also move to financial firms with smoother practices and tell charities in advance about the designation.