Charitable Beneficiaries and Their Frustrations

Take-Away: There may be hope for charities that are named as the beneficiaries of a deceased donor’s IRA or transfer-on-death account.

Background: When I was practicing law, I used to encourage clients to use their IRAs as a way to fulfill their philanthropic goals at death, rather than include the charity as a named beneficiary of their estate or trust. This was, in part, to avoid having to provide a copy of their testamentary instrument to a charity, and also for the obvious income and estate tax benefits of transferring taxable assets to a charity. I have to confess that the charity that was named as the beneficiary of the decedent’s IRA, (or even a transfer-on-death marketable portfolio) often became frustrated and complained about the delays it encountered to receive the inherited account. Like any beneficiary, the first question asked of the estate administrator is ‘when will I get my inheritance’- charities are no different.

Cause of Delays: We often think of the use of a beneficiary designation as a way to avoid probate and expedite the transfer of wealth on a decedent’s death, but that is not always the case, especially when it comes to naming a charity as the beneficiary of the decedent’s IRA. Often the delay is caused when the IRA or account custodian requires that the named charity become a full customer requiring that the charity open an inherited IRA. The custodian apparently believes that a new account must be opened in the name of the charity to comply with the Bank Secrecy Act and its ‘Know-Your-Customer’ principle. To implement this required ‘know your new customer process’ the charity is then required to furnish personal, sometimes sensitive, information about an employee or the charity’s board member that is required to open the inherited IRA or other account as part of the custodian’s ‘required process’ before the inherited funds are released

Example: Assume that you are the CFO of a charity that learned that one of its major donors has died. The donor has named the charity as one of the four designated beneficiaries of the donor’s $1.0 million IRA. The CFO contacts the IRA custodian and asks that $250,000 from the IRA be transferred to the charity as soon as possible. The IRA custodian responds to the CFO that the decedent’s account will be transferred to an inherited IRA account ‘to be opened’ at the custodian’s place of business, but in order for that inherited IRA to be opened and the IRA funds transferred, the charity must first open an inherited IRA account with the custodian. The custodian’s new-account form requires the CFO to provide the custodian with the following information: (i) his name; (ii) his address; (iii) his phone number; (iv) his Social Security Number; (v) his marital status; (vi) his driver’s license or passport number; (vii) his annual income; (viii) the value of his personal assets; (ix) any criminal history information); and (x) any credit references. Some custodians will even require marital status information. All this information must be provided, just to open an inherited IRA in the name of the charity, so that it can access its own assets!

This burdensome process is sometimes justified by the IRA custodian because it claims that there needs to be an open account to use for all future death claims or inheritances where the charity is named. Yet there the inherited IRA funds sit, controlled by the custodian, as the charity then has to ‘jump through all the hoops’ the custodian requires to be satisfied- a new account that the charity will use only long enough to withdraw the funds.. It is not an overstatement that often months pass before the charity finally given access to the inherited IRA funds. This is a common experience of many charities which frustration was passed to the National Association of Charitable Gift Planners and its lobbyist.

One Solution: This problem became so burdensome that some charities lobbied the Iowa legislature to pass a law called the Charitable Organization Beneficiary Affidavit and Third-Party Protection Act. [Iowa Code 633.358.] When an Iowa charity is named as the beneficiary of an IRA, a retirement account, a TOD account, or life insurance, the ‘Holder-of-Property’ is prevented from demanding information like Social Security number, driver’s license, contact information, or any personal financial information from the charities’ employee or board member making the request.

Responsive Affidavit: If this information is demanded by the custodian the charity can respond by providing an affidavit that contains: (i) proof of its tax exempt status; (ii) any relevant corporate resolution; (iii) IRS Form W-9; and (iv) a death certificate, notice of death in a newspaper, receipt of paid funeral expenses, or an obituary.

Penalties: If the custodian drags its feet in releasing the IRA or TOD funds within 30 days after receiving the charity’s Affidavit, a court can then award to the charity damages the charity sustained, costs of that legal action, a penalty between $500 and $10,000, and the award of reasonable attorney fees.

Model Law: Iowa’s law has attracted enough attention that a model law has been created, “Charitable Organizations Privacy Protection Act” that can be adopted by other states. Indiana adopted a somewhat similar law [Indiana Code 23-17-26.7], but it gives the custodian a reasonable justification for noncompliance with the law. Other states are considering comparable laws to expedite the release of inherited funds to charities, with other possible provisions, such as: (i) requiring the custodian to notify charities when a donor has died; (ii) notify the charity of the amount of the claim; and (iii) eliminating a 60-day window when there are multiple beneficiaries named. The obvious goal is to expedite the release of inherited funds to charities by forcing custodians to not require the opening of a new custodial account in the name of the inheriting charity just so the charity can access the decedent’s bequest.

Conclusion: Many advisors can relate to the frustrations charities endure just to access a decedent’s bequest when the funds are held by a custodian that insists its ‘rules’ must be followed before the charity can receive its inheritance. Perhaps Michigan’s Legislature should take a look at the model Act, or Iowa’s new statute as an easy model that it can follow.

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