Keep Your Donor’s IRA from Going MIA
Don’t assume IRA plan administrators will contact heirs
[First published in the Portland Business Journal.]
Kathy Saitas is a Portland attorney serving as Advancement Counsel and Senior Director of Gift Planning at ºìÌÒÊÓƵ
Since the Pension Protection Act of 2006, traditional IRAs have been in the spotlight as perfect assets to give to charity. If you are a charitable planner, you are well aware of the tax benefit to making qualified charitable distributions (QCDs) from an IRA to satisfy annual required minimum distributions (RMDs); in addition, naming a charity as IRA beneficiary can be a smart tax-saving strategy.
A traditional IRA can be the most highly taxed estate asset. If left to a non-spouse individual, estate and income taxes can substantially diminish the size of the gift. If left to charity, no income tax is due so the entire amount of the IRA transfers. The gift value is preserved, and its impact maximized. Further, the estate may be eligible for a federal estate charitable deduction decreasing the estate’s tax burden. When properly executed, leaving an IRA to charity can be an excellent arrangement.
Unfortunately, proper execution is not a given. Due to an overlooked practice among many IRA plan administrators, this arrangement can fall apart for the unwitting IRA planowner and, often, for charitable beneficiaries.
Over the past decade, countless donors have notified our organization we are named beneficiary of their IRAs. Only rarely has a plan administrator notified us upon the planowner’s death of our beneficiary status. Gradually, we have come to understand the reason for this discrepancy: Most leading IRA plan administrators assert they do not have an affirmative obligation to notify IRA beneficiaries of their interest.
Ignoring the fact that IRAs are non-probate assets, these plan administrators assert that notifying beneficiaries is not their responsibility but that of the decedent’s personal representative. They assert it is too great of an administrative burden for them to identify and inform far-flung beneficiaries. After all, how could they possibly identify which of the millions of John Smiths in the world is the John Smith named as beneficiary? (They could request social security or tax identification numbers for all beneficiaries on their beneficiary designation forms, but many do not.) This argument, weak as it is, falls entirely flat when they assert administrative burden for not finding a unique institution such as a college.
Not every estate has a personal representative. Not often does a charity know it has been named as IRA beneficiary. When these two circumstances coincide, the likelihood of the charity receiving its gift diminishes. Even when a charity knows it’s a beneficiary, if there is no personal representative to help claim that interest, the charity will face formidable barriers to accessing it. For starters, IRA plan administrators require the deceased IRA planowner’s social security number, date of death, and death certificate before confirming whether the charity is a beneficiary. For a charity, these can be hard to come by. Charities who cannot provide them can be blocked—even if the plan administrator is looking at the charity’s name on a beneficiary designation form. By not making an effort to find beneficiaries and, when found, by creating administrative barriers to beneficiaries claiming interests, IRA plan administrators are keeping these assets under management (generating fees for themselves) often until state unclaimed property laws kick in. In other words, non-notification is a moral hazard.
IRA plan administrators are fiduciaries. Yet through this approach, which they have no reason to change, they can directly frustrate the clear and express intent of the person whose money they "administer." To insure a donor's intention is carried out, a few additional steps ought to be taken. Charitable planners should encourage donors to clarify agreements governing IRA accounts. Most agreements are silent on notifying beneficiaries. A few expressly disclaim this responsibility. Donors should notify their professional team of all beneficiaries with up-to-date contact information; include account names and numbers with estate documents; and if possible, notify beneficiaries directly and in advance. Finally, charities should regularly check their state unclaimed property databases. Our search this month revealed five “unclaimed” gifts.
This practice of non-notification won’t change unless or until regulators require IRA plan administrators to collect identifying information on beneficiaries up front and to expressly notify IRA planowners of how beneficiaries will receive their distributions. You’ll turn blue holding your breath.