Iowa Law Leads Nation in Protecting Charities from IRA Red Tape

Iowa has become the first state in the nation to pass a law protecting charities from delays and invasive demands when collecting IRA gifts from deceased donors. The 2024 reform, introduced by State Representative Bill Gustoff, addresses a growing problem where financial institutions hold up bequests for months or even years, forcing nonprofits to jump through bureaucratic hoops.

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.

Iowa Nonprofits Face Years of Delays

Rob Hilbert, president of the Iowa PBS Foundation, told CNBC that 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.

“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,” Hilbert said. “But we can't do it if we don't receive the funds.”

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.

What Iowa's Reform Law Does

Iowa's law, which passed in 2024, requires financial institutions to transfer assets in a timely manner. Unlike laws in other states, Iowa's version does not explicitly prohibit requiring charities to open accounts, according to lawyer Johni Hays, who has spent a decade helping charities push back against unreasonable custodian policies.

Gustoff, who is also a lawyer, 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. However, he said, there are also financial incentives behind the practice, like collecting fees for managing assets.

“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?”

National Trend Follows Iowa's Lead

In the past two years, six states have passed similar bills. California is set to become the seventh with a donor intent bill sitting on Gov. Gavin Newsom's desk. Charity advocates in Missouri and Florida are working on similar efforts.

Jon Kraus, executive director of gift planning at the University of Denver, 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.”

Financial Firms Push Back on Reform

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.

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.

Hays 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 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.

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 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.

What Donors Can Do

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.”

Frequently Asked Questions

Why do financial institutions delay IRA gifts to charities?

Financial institutions often require nonprofits to open new accounts and provide personal information of employees or board members, citing anti-money-laundering and customer-identification rules. However, experts say custodians are not legally required to make charities open accounts, and some firms are easier to work with than others.

What does Iowa's law do to help charities?

Iowa's 2024 law requires financial institutions to transfer assets in a timely manner. It was the first state-level reform law passed in the nation, though it does not explicitly prohibit requiring charities to open accounts.

How can donors avoid these problems?

Donors can provide charities with a copy of their beneficiary designation form and account number, inform the charity in advance about the designation, and choose financial firms with smoother practices for distributing inherited assets.