Assets in individual retirement accounts (IRAs) remain one of the largest pools of financial wealth in the United States. By the end of the third quarter of 2025, IRA assets totaled an estimated $18.9 trillion, up 5.2% from the prior quarter. This growing pool of retirement savings represents a significant opportunity for charitable organizations when donors designate the charities as the beneficiaries of retirement accounts. Nonprofits can receive these IRA gifts free of income tax, making these designations very tax efficient. However, the process of collecting these assets is often complicated by administrative obstacles and inconsistencies across financial institutions.

For nonprofits, handling these challenges is critical to ensure that a donor’s gifts are received and executed in a manner that honors their intent. Overcoming these challenges will allow nonprofits to better navigate the collection process and in turn advance their mission. This article will touch on the advantages of charitable beneficiary designations, the procedural challenges that nonprofits experience in collecting these gifts and the steps they can take to have a proactive role in the distribution process.

Charitable Beneficiary Designations

When retirement account owners pass away, their traditional IRAs are considered income in respect of a decedent (IRD), which refers to assets that are not taxed during the lifetime of a taxpayer. Because these assets are pre-tax dollars, the distributions are subject to income tax, which reduces the ultimate net value that heirs would receive. For this reason, heirs will prefer other types of assets like capital gain assets such as stocks or real estate, which receive a step-up in basis at death.

With a stepped-up basis at death, heirs can sell their inherited assets with little or no capital gains tax, making it the more tax-efficient choice. On the other hand, when a nonprofit is named as the designated beneficiary of a retirement plan, the nonprofit receives the full value of the IRA, without paying income tax on its distribution. This allows the entire gift to be used to further the nonprofit’s mission. For example, if a $100,000 IRA is left to an heir who is in the 35% income tax bracket, the heir would net a total of $65,000 from the IRA after taxes. If the same gift was left to a nonprofit, the nonprofit would receive the full $100,000.

The benefits of gifting retirement accounts to nonprofits became even more pronounced under the SECURE Act 1.0, which requires most non-spousal heirs to fully withdraw inherited IRA accounts within ten years of the account owner’s death. This requirement effectively eliminated the ability for certain designated beneficiaries to “stretch” their distributions over their lifetime, which would help spread out taxable income. With only a ten-year distribution period, IRA heirs could be pushed to a higher tax bracket. Thus, with the ten-year payout requirement, the heir would pay a substantial tax on the ordinary income.

Documentation and Verification Requirements

Beneficiary designation forms transfer assets directly to named beneficiaries and are common for retirement accounts held by a financial custodian. A beneficiary designation form functions as a contract between the account custodian and the owner of the account. Through this form, the owner identifies the primary and contingent beneficiaries of the account. Upon the owner’s death, and after receipt of appropriate documentation, the custodian releases the funds directly to the named beneficiary, bypassing probate. In theory, the beneficiary designations serve to simplify administration and avoid the lengthy probate process, which works well for individuals. In practice, however, the same does not apply to nonprofit organizations.

Charitable organizations often face a variety of administrative obstacles when attempting to collect a gifted retirement account. While custodians generally require standard identifying documentation that includes the account owner’s death certificate, the nonprofit’s tax-identification number and proof of tax-exempt status, many financial institutions have implemented additional mandatory requirements. Particularly, some custodians will mandate that nonprofits open a new account before the funds are transferred.

While creating a new account may not seem like a tremendous barrier, charitable organizations have faced the burden of having to fill out dozens of forms that are not designed for non-natural persons. Most of the time these forms are formatted in a way that is intended for individual beneficiaries, not charitable organizations. These forms request the beneficiary’s birth date, full name and social security number, which are details that are difficult or even impossible for an organization to provide. Nonetheless, some institutions will cite the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 or the “Know Your Customer” Financial Industry Regulatory Authority (FINRA) Rule 2090 to justify requesting personal information. These rules exist to reduce the risks of funds being used by suspected terrorists. The rules, however, do not apply to U.S. nonprofits that are only receiving a distribution and not setting up a bank or a retirement account.

In some cases, charitable organizations are directed to use their staff’s personal information to fill out the forms, but this option comes with risks. For example, the funds could inadvertently be directed to the staff member’s personal account, which could create potential tax reporting and privacy issues for both the staff member and the nonprofit organization.

Adding to the challenge, account custodians are not governed by uniform procedures. Each financial institution may impose its own internal requirements. Some institutions charge fees to open accounts, while others may require additional paperwork to liquidate the account once it is set up. Nonprofits may also be advised that 10% to 20% of the IRA funds must be withheld to pay income taxes, which should not apply to tax-exempt nonprofits. Unexpected fees and the application of erroneous tax can make the distribution process more costly and lengthy, turning what was meant to be a quick transfer into a process that may last for multiple years.

A lack of notice to charitable beneficiaries can also create further delays. Some financial institutions disclaim responsibility to notify beneficiaries of a retirement account. If the donor has not informed the charity in advance, the organization may not even be aware that a gift exists. As such, it is good practice for nonprofits to check unclaimed property funds.

Proactive Approaches for IRA Collection

The RIFT Project

To address these recurring challenges, the Release IRA Funds Timely (RIFT) Project was launched, led by the Executive Vice President of Thompson & Associates, Johni Hays. The RIFT Project is a database of resources found on the National Association of Charitable Gift Planners website that provides information on the most efficient ways to communicate with a financial institution regarding the distribution of IRA assets. The database includes custodian-specific insights like contact information of key individuals, distribution forms, templates for IRA distribution request letters, suggested attachments and relevant tax forms. The RIFT Project also includes detailed success stories where IRA administrators allowed an exemption to their IRA distribution policies after receiving the right pushback from charitable organizations.

Utilizing the RIFT Project

Financial institutions have varying internal procedures for the distribution of IRA gifts. These policies are not legally mandated and, therefore, charitable organizations have been able to seek exceptions to a financial institution’s internal rules. With these exceptions, charitable organizations can avoid delays caused by the custodian’s policies. For example, on the occasion that an IRA administrator rejects an application for an inherited IRA for failure to list a natural person’s social security number, the organization may want to explore if there is an alternative path forward to allow the nonprofit as the new consumer.

While some financial institutions have claimed this personal information is required to abide by federal law, the Financial Crimes Enforcement Network (FinCEN) has released an administrative ruling that established that an inherited IRA account is not required. However, if the custodian requires a new account to release the IRA, then the ruling states “a social security number, for an individual with significant responsibility” may be required as part of the process to verify beneficial owners of a legal entity. While this administrative ruling is not law, it may serve as guidance to financial institutions who deal with IRAs.

The RIFT Project includes templates for letters that nonprofits may send to IRA custodians. These templates include letters that request an exception from an institution’s internal policies as well as a formal payout letter which asserts the charity’s legal right to receive the distribution without opening a new account. The RIFT database shows which templates have been successful with specific institutions and which best supporting documents to attach.

For institutions that do not require a new account, the database provides guidance on exactly which documentation each custodian has asked for previously from nonprofits. This is especially helpful since the requirements vary by institution, and having this information in advance will save nonprofits considerable time and effort.

Nonprofit Notification and Communication

Nonprofits should encourage donors to communicate their planned IRA gifts because notifying beneficiaries can help ensure that the donors’ wishes are efficiently carried out. When donors share their future plans with charitable beneficiaries, they also mitigate the risk that the gift will go unclaimed. Unfortunately, this does not always happen. Because some IRA administrators may not notify beneficiaries, a donor’s notification may be the only way a nonprofit is made aware of a gift, which makes it imperative for nonprofits to maintain contact with their donors to confirm their intentions and be prepared to claim the gift once it vests.

Effective communication is also important when multiple nonprofits are named as beneficiaries. In some cases, IRA custodians will require that all charitable beneficiaries submit their documentation within a certain time frame but will refuse to share the names of the other nonprofits. This type of policy makes coordination between beneficiaries challenging. By maintaining an open line of communication, nonprofits may be better positioned to obtain copies of beneficiary designations or become informed of the other beneficiaries involved.

Conclusion

IRA beneficiary designations are great tax-efficient vehicles for donors looking to support charitable organizations. Although the tax efficiency of charitable IRA beneficiary designations is clear and practical, transferring the assets from the IRA custodian is not as straightforward. Because the collection of IRA gifts has been complicated by inconsistent IRA custodian procedures that were designed without consideration for nonprofit beneficiaries, understanding these challenges will allow nonprofits to take proactive steps to hopefully avoid the roadblocks. When nonprofits anticipate documentation hurdles and utilize resources like the RIFT Project, it can resolve potential delays and work towards a smoother IRA distribution process all while fulfilling the donor’s intentions promptly and responsibly.