US Charities Face Years-Long Delays Collecting Retirement Account Donations

Charitable organizations across the United States are encountering significant obstacles when attempting to collect donations bequeathed through individual retirement accounts. Furthermore, lawyers and nonprofit leaders warn that what should be a straightforward process has become a bureaucratic nightmare spanning months or even years.

Donors who wish to leave a legacy while reducing their tax burden often name charities as beneficiaries of their retirement accounts upon death. Typically, these arrangements allow donors to leave their IRA to a nonprofit without adjusting their will. Consequently, the amount is subtracted from the taxable estate, and the assets transfer to the charity free of income taxes that individual heirs would otherwise pay.

Financial Institutions Demand Sensitive Information

However, collecting these gifts has become increasingly complex. Some brokerages and banks require nonprofits to open new accounts with the institution before releasing IRA assets. In addition, they often request detailed and sometimes sensitive information that raises privacy concerns among charitable organizations.

According to experts who spoke with CNBC, IRA custodians have sought personal information of nonprofits’ employees or board members in some cases. Moreover, these requests have included Social Security numbers, home addresses, photographs of driver’s licenses, information on personal assets, and consent to credit-history checks. Remarkably, financial institutions sometimes make these demands without even disclosing the gift’s value.

The hurdles force charities to spend scarce staff time chasing funds intended for their missions. Occasionally, the administrative burden becomes so overwhelming that organizations walk away from gifts altogether.

Extreme Cases Span Multiple Years

“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,” said Rob Hilbert, president of the Iowa PBS Foundation.

Hilbert’s 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 emphasized that pushing back against what he characterized as invasive demands by brokerages is a frequent burden for the foundation.

Similarly, Jon Kraus, executive director of gift planning at the University of Denver, recounted a case where it took two years to collect a donor’s investment account worth $2 million. Initially, the university resisted the financial institution’s requests to open an account and provide personal information.

According to Kraus’s estimate, if those $2 million had generated 4.5% annually, the university could have allocated $90,000 each year to student scholarships. Instead, the funds remained among the assets managed by the financial company.

Smaller Organizations Face Disproportionate Burden

The problem affects nonprofits of all sizes. Melanie Sadek, CEO of the Valley Humane Society, reported that her organization spent two and a half years obtaining a $70,000 donation from an IRA. Furthermore, the bank required all nine account beneficiaries to submit documents within the same 90-day period, creating coordination challenges.

Lawyers told CNBC that IRA custodians are generally not required to inform nonprofits or individuals that they are beneficiaries of these gifts. Additionally, financial institutions have no legal obligation to disclose how much organizations are owed, leaving charities in the dark about whether pursuing the gift justifies the administrative costs.

States Begin Addressing the Problem

Representatives of the charitable sector are seeking state laws that would require financial institutions to transfer assets in a timely manner. Importantly, they are also pushing for regulations that would prevent organizations from being forced to open new accounts.

Over the past two years, six states have passed such laws. In California, a corresponding bill is currently under consideration by Governor Gavin Newsom.

In Colorado, asset custodians must transfer assets within 60 days after receiving from a charity a sworn statement of entitlement to the funds. According to lawyer Joni Hays, all enacted state laws except Iowa’s also prohibit requiring charities to open an account.

Impact on Charitable Missions

The delays have real-world consequences for the beneficiaries these organizations serve. While funds remain tied up in administrative processes, scholarships go unfunded, animal welfare programs lack resources, and public broadcasting stations cannot invest in programming.

For donors who carefully planned their estate to support causes they believed in, the reality that their final wishes may be stalled for years represents a betrayal of their intentions. Moreover, the uncertainty creates planning challenges for nonprofits that cannot predict when or if they will receive bequeathed funds.

Looking Forward

As more states consider legislation to address these issues, the charitable sector hopes for broader reform. Nevertheless, the patchwork of state-by-state regulations means that nonprofits operating across multiple jurisdictions still face inconsistent requirements.

Financial companies often explain their requirements as necessary for compliance with anti-money laundering regulations and customer identification rules. However, critics argue that these explanations do not justify the excessive demands placed on established charitable organizations with verified tax-exempt status.

Until comprehensive reform occurs, nonprofits must continue dedicating valuable staff hours to navigating the complex maze of requirements. Ultimately, the burden falls not just on charitable organizations but on the individuals and communities they serve.