Nonprofits face growing hurdles, red tape when collecting inherited IRAs and retirement account gifts

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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."

Few good options

Not all banks and brokerages require nonprofits to jump through hoops to receive designated funds. The charity leaders and lawyers who spoke with CNBC said some institutions, including Edward Jones and Merrill Lynch, are easier to work with.

But the result is a patchwork of procedures and policies that vary by firm. And while IRA accounts are the most frequently cited example of the problem, it can also arise with other accounts that pass directly to named beneficiaries rather than through probate, including 401(k)s, life insurance policies and brokerage accounts.

Lawyer Johni Hays has spent a decade helping charities push back against policies from custodians that she deems to be unreasonable. The estate and charitable gift planner said she provides advice and template letters on a volunteer basis to nonprofits including the University of Denver and the Iowa PBS Foundation.

Hays said she's seen institutions require photos of employees' driver's licenses, their personal asset information and consent to credit checks.

"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. "It's this extraneous stuff that has gone too far."

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.

Sadek said she was inspired to advocate for reform in California after a two-and-a-half-year effort to collect a $70,000 IRA gift.

In 2021, the humane society was named as one of nine beneficiaries of a donor's IRA, which Sadek said the nonprofit only learned about through the donor's sister.

The charity's paperwork to collect the gift was repeatedly denied over a period of two years, despite Sadek providing her SSN and personal information and that of two board members, she said.

The problem, Sadek learned, was that the bank required all nine beneficiaries to complete the paperwork within the same 90-day window. It took five months to coordinate with the other beneficiaries – whose names had to be obtained from the donor's sister – and to submit the paperwork all on the same day, she said.

These policies often pressure charity employees to choose between giving personal information or having their employer forgo needed funds. LCMS Foundation Vice President Brad Conrad said he's provided such information at least 50 times since he joined the foundation, which supports the Lutheran Church, in 2019.

Conrad said he worries about having his identity stolen in the event of a data breach at any of the various institutions that now have his information on hand. Last year, Conrad said, he was particularly concerned about consenting to a credit check as he and his wife were in the middle of trying to buy a house.

"This is not something that I anticipated when I took this job, and I don't love doing it. My wife and three kids didn't sign up for any of that," he said. "Because I love the mission, I'm OK putting myself at risk, but yes, it is something that weighs on me."

Customer protections

The experts who spoke with CNBC said the problem has gotten worse in the past five to 10 years. 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.

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.

Fidelity reported holding 20.3 million active IRA accounts as of the end of June. Schwab does not disclose this figure.

Fidelity declined to comment for this article.

A spokesperson for Schwab said its policies are intended to execute clients' wishes while meeting legal, tax-reporting and fraud-prevention obligations. The representative added that Schwab "continually evaluates opportunities to simplify the inheritance experience for all beneficiaries" in accordance with these requirements.

"Schwab is committed to carrying out a client's beneficiary instructions and distributing inherited assets," the spokesperson said in a written statement. "Upon receiving confirmation of a client's death, Schwab makes every reasonable effort to identify and contact named beneficiaries and guide them through the inheritance process."

While 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.S. government does not view the charitable sector as a whole as presenting a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing (ML/TF), or sanctions violations."

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. If a broker-dealer chooses to require a new account, however, it must collect identifying information from a charity official per customer due-diligence rules.

"They don't have to require it. 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.

Representatives for FinCEN and the Treasury Department did not comment for this story.

Iowa State Representative Bill Gustoff said some concerns about liability could be genuine. For instance, a bank might need to reclaim distributed funds to cover a donor's estate debts, said Gustoff, who is also a lawyer.

However, he said, there are also financial incentives behind the practice, like collecting fees for managing assets. Gustoff introduced Iowa's reform bill after becoming aware of the issue from Hays, who works at the same law firm, Thompson & Associates.

"I think, unfortunately, there are some who are just unscrupulous who are trying to hold on to funds for various reasons or open and close accounts for various reasons," said Gustoff. "I think that's a lot of the driver behind this, just money and profit. And the person who left it to them is dead, so who's going to complain, right?"

Lawyer J. 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. "But many don't."

What donors can do

The first state-level reform law passed in 2024 in Iowa. Charity advocates in Missouri and Florida are working on similar efforts, experts in those states told CNBC.

Each of the six state laws that have passed has its nuances, but they generally require financial institutions to transfer assets in a timely manner. In Colorado, custodians have to transfer assets within 60 days of receiving an affidavit from the charity claiming the funds.

These laws, except Iowa's, also stipulate that charities cannot be required to open an account, according to Hays.

While Iowa's version faced no opposition, Hays said there has been pushback from lobbyists for the finance industry in other states, especially on requirements to inform charities that they are beneficiaries. Two states, Illinois and Tennessee, successfully included that provision in their laws, she said.

North Carolina's bill, introduced in March 2025, has been stalled in the state Senate since July.

California State Senator John Laird, author of that state's bill on the matter, was optimistic about what reforms lie ahead. He noted that the California bill applies not just to charities but all types of beneficiaries.

"It's considered a niche issue for anybody it doesn't affect, and then when you're affected, it is not a niche issue," he said. "If you were left a large bequest for somebody's house, and you don't know for three years, that is just a problem that needs to be addressed."

And while reform gets underway state-by-state, experts said IRA donors can head off some of the anticipated hurdles before their death.

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.

Hays said donors can vote with their feet and move to financial firms that have smoother practices. She also recommended that donors tell charities in advance about the designation, though some donors can be shy about it.

"They don't want the charity to think that they're getting this wonderful, generous gift, and then the donor had to end up using the money and leave them with nothing," she said. "But the charities are obviously fine with that. It's the donor's money."