Charities say gifts by deceased donors are getting held up at financial firms

Charities say gifts by deceased donors are getting held up at financial firms. Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuKey PointsLeaving an IRA account to charity is easy and tax-savvy for donors, but charities can struggle to collect these final gifts.

What happened

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. Hays said donors can vote with their feet and move to financial firms that have smoother practices. Nonprofit leaders and lawyers told CNBC that charities sometimes spend months or years navigating red tape at financial institutions. The sole cause is unclear, but there are several possible culprits: institutions becoming more aggressive, charities better marketing the tax-efficient strategy, or more donors dying as the population ages.

The proof is other major financial institutions are not requiring charities to jump through all those hoops," said lawyer David Cahoone, who was Brown University's director of philanthropic strategies and planned giving until 2024. Anne Calder, vice president of philanthropy at the Quad Cities Community Foundation, said donors can make it easier for their charities of choice by providing the intended recipients a copy of their beneficiary designation form and their account number. She also recommended that donors tell charities in advance about the designation, though some donors can be shy about it.

The wider picture

Nonprofits are pushing back against policies by financial institutions to collect personal information of charity employees before releasing a gift. Charities are pushing back against policy requirements to create new accounts and provide personal information of employees and board members. 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. Typically, donors can leave their IRA to a nonprofit without adjusting their will.

But collecting these gifts can take months or even years of navigating red tape, according to experts. 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. 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. 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.

What has been reported

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. "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.

Lawyer Johni Hays has spent a decade helping charities push back against policies from custodians that she deems to be unreasonable. "Charities are, frankly, willing to give their tax ID, their articles of incorporation, their 501(c)(3) status — all those things they have given for decades and decades," she said. "Melanie Sadek, CEO of Valley Humane Society, an animal-welfare nonprofit, said these types of gifts are especially significant as they tend to be much larger than lifetime donations.

They all said they still support this type of giving as it's simple and tax-friendly for donors, despite the headaches that sometimes arise. Hays, the lawyer leading efforts to smooth out the process of collecting IRA donations, said Fidelity and Schwab are two of the biggest brokerage firms known to frequently enforce requirements that can result in delays or denials related to beneficiary-designated accounts.

What happens next

Justin Sullivan | Getty ImagesWhile financial institutions' policies vary, they often invoke anti-money-laundering and customer-identification rules designed to prevent financial crime as the basis for such protocols, according to five lawyers who spoke with CNBC. However, those lawyers said custodians are not legally required to make charities open accounts to receive funds. In 2020, a coalition of government agencies including the Financial Crimes Enforcement Network, or FinCEN, issued a fact sheet to "remind banks that the U.

"In a 2024 administrative ruling, FinCEN said Bank Secrecy Act laws do not require broker-dealers to make charities open new accounts to receive inherited IRA funds. However, he said, there are also financial incentives behind the practice, like collecting fees for managing assets. Scott Kilpatrick said regardless of the motivation, firms that market IRAs to wealthy clients as estate-planning tools should have clear systems in place to distribute the money efficiently. "You would think that if you're an international, multibillion-dollar financial custodian … that you would have it built out so that when the person does pass, you are ready to fulfill the promise," he said.