Charities say IRA gifts by deceased donors get held up

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For donors who want to leave a legacy and save on taxes, naming a charity to receive their retirement account upon their death is one of the simplest ways to do so. But nonprofit leaders and lawyers warn of a growing wrinkle in carrying out these last wishes.  

Typically, donors can leave their IRA to a nonprofit without adjusting their will. The amount is subtracted from their taxable estate, and the assets go to the charity — free of the income taxes that would otherwise be paid by the individual who inherits the estate.  

But collecting these gifts can take months or even years of navigating red tape, according to experts. Some brokerages and banks require a nonprofit to open a new account with the institution before they’ll release the IRA assets, often asking for detailed and sometimes sensitive information. 

Experts told CNBC that in some cases, IRA custodians have sought the personal information of nonprofits’ employees or board members, such as Social Security numbers or home addresses, without even disclosing the gift’s value. 

The hurdles force charities to spend scarce staff time chasing funds intended for their missions and, occasionally, walk away from the gift altogether, the experts said.  

“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,” said Rob Hilbert, president of the Iowa PBS Foundation. “But we can’t do it if we don’t receive the funds.”

Hilbert said his nonprofit once spent more than five years sending paperwork back and forth to receive a gift that turned out to be $6,000. While he acknowledged that was an extreme case, he said pushing back against what he characterized as invasive demands by brokerages is a frequent burden for the foundation.

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

Jon Kraus, executive director of gift planning at the University of Denver, said it once took two years to collect a donor’s investment account, which turned out to be worth $2 million. The university initially resisted the financial institution’s requests to open an account and to provide personal information of its then-chief financial officer, but ultimately gave in, Kraus said.

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

Many of the nonprofit leaders who shared their experiences with CNBC asked to keep some details, including the institutions they worked with, confidential, citing donor privacy and concerns about retaliation. 

Some nonprofits are now advocating for state laws that require financial firms to release funds and benefits in a timely manner and without forcing charities to create new accounts. 

In the past two years, six states have passed such bills. California is set to become the seventh with a donor intent bill sitting on Gov. Gavin Newsom’s desk. 

Kraus helped champion reform in Colorado that was signed into law in April. He said such legislation is critical, since the problem is likely to become more prevalent as the great wealth transfer triggers a wave of bequests and retirement-account gifts. 

By Cerulli Associates’ estimate, $18 trillion is expected to be donated to charities and philanthropic causes by 2048. 

“There’s trillions of dollars sitting in these IRA and stock accounts,” Kraus said. “Getting this right and having a process, not just state-by-state, but hopefully, eventually at the national level — it’s going to have a huge impact on the ability of nonprofits to get these funds quickly and be able to use them for what the donor intended.”