Bequests from IRAs end up in limbo often
Monday is federal tax day — so late this year! — and it’s a good time to review charitable giving practices. In particular, I want to dig into a weird friction in charitable giving I learned about recently that silently plagues the philanthropic world.
I say silently because the fundraisers I spoke with are nice people who don’t want to embarrass the financial institutions that are causing them costly and timeintensive headaches.
The friction begins when a deceased person has named a philanthropic organization as a beneficiary on a retirement account, such as an IRA. This starts out as a great thing for a charity. It can end up that way as well. It’s the journey to collecting the funds from the deceased’s financial institution, however, that sometimes is much harder than it ought to be.
Karoline Felts works as associ
ate director for estate and trust administration for the University of Texas System, so any IRA gifts to UT are her office’s responsibility. It collected $6.8 million in inherited IRAs in 2020, which is the good news. The bad news is that it frequently takes six months or longer to collect the funds. Where does the delay come from?
First, from financial institutions not notifying charities after the death of the donor. So the first challenge for charities can be simply finding out they are beneficiaries.
Next, brokerages and insurance companies seemingly have their own requirements to make an inherited IRA distribution to the charity. The effect is to delay and stymie distributions. One common barrier includes requiring submission of death certificates. Another is to request personal information about the deceased, such as Social Security number, last address, birthdate or death date. This may not be readily available to the charity, which may not even have
been aware it was a named beneficiary.
Kim West, senior executive director of gift planning at the University of Texas at San Antonio, listed further delays. She told me one insurance company required an executive from UT to provide a personal Social Security number to register the university as a beneficiary of a life insurance policy. This makes no sense — individual officers at a charity should not have to give up their personal data, and UT refuses to do so. Nevertheless, it causes extraordinary delays. It means seeking a waiver from the insurance company’s general counsel and jumping through bureaucratic hoops.
West named another insurance company that has held onto life insurance proceeds since the 2017 death of a UT donor. . In West’s view, the insurance company is simply not incentivized to disburse funds in a timely way.
Some of the most frustrating requirements, I learned, are from brokerages that require charities to open a new “inherited IRA” account. This makes marketing and commercial sense for the brokerage in the case of a regular inherited IRA, because it probably wants to retain heirs as customers. It makes absolutely no sense in the case of charities, however, because charities already have established accounts for managing their money. An inherited IRA will always be liquidated immediately by the charity. Opening a new account only to liquidate it and close it as soon as possible is a huge waste of everyone’s time.
Iowa-based Johni Hays is a senior vice president at Thompson & Associates, a consultant to charities. She has developed an online resource to attack this “inherited IRA” problem. It’s called the RIFT Project (Release IRA Funds Timely).
Her website names — and, to some extent, shames — 17 of the country’s largest financial institutions, and provides specific experiences and tips for navigating the confusing world of collecting inherited IRA gifts to charities.
Some brokerages cite Patriot Act requirements and “Know Your Customer” best practices as reasons for requiring charities to open new inherited IRA accounts. As Felts notes, however, “as a state institution, we are not subject to the requirements of the Patriot Act.” Still, skipping this step takes time, effort and an active in-house legal counsel who must constantly ask for waivers from financial institutions to collect money owed to the charities.
Hays’ website allows charities to open-source solutions to these weird frictions in philanthropy.
Nevertheless, it would be better if financial institutions recognized the problem and lowered the barriers to disbursing charitable funds. Hays has taken up the problem with U.S. Sen Chuck Grassley, R-Iowa, her state’s senior senator and ranking member of the Senate Finance Committee. She’s appealed to the IRS to make a ruling. And she’s tried the New York state attorney general. But the problem continues.
One financial institution Hays says is particularly egregious has taken more than a month to reply to my questions about this problem. Having waited a month, I’m beginning to understand what it feels like to be charitable organizations, asking for money that is rightly theirs. I’m holding off on shaming the institution by name mostly because it kept promising to reply. I feel like a charitable IRA beneficiary that is silently, patiently waiting.
Please note, if you plan to bequeath proceeds from your IRA to a charity, let it know in advance. Also, provide the charity the name of the financial institution so it can be in touch in a timely way. Hays says the industry estimates only onethird of IRA donors tell the charity in advance that it is named as a beneficiary.
Finally, if you are charityminded, , what’s the best way you can reduce this weird friction?
Give the money while you are alive! This avoids the headaches described. It also is usually more tax-efficient to give while you are alive. And, best of all, you can be thanked by the organization in person, making everyone happier.