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Posted May 9th, 2016

What Is an Inherited IRA?

By Jon Tidd

This question is important for several reasons. One is that charities named as IRA beneficiaries are often required by IRA custodian financial institutions to establish inherited IRAs in order to receive the benefit to which the charity is entitled.

The answer is provided by section 408(d)(3)(C)(ii) of the Internal Revenue Code:

(ii) Inherited individual retirement account or annuity
An individual retirement account or individual retirement annuity shall be treated as inherited if—
(I) the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and
(II) such individual was not the surviving spouse of such other individual.

The language of this Code section clearly indicates that the term “inherited individual retirement account” is an IRA acquired by an individual. So how can a charity, which is not an individual, establish an inherited IRA? The writer doesn’t know.

It turns out some financial institutions, either as a matter of practice or upon being pressed, will make a direct distribution from an IRA to a charitable beneficiary of the IRA.

Given that IRAs are trusts, the trustee of which must be a bank or other qualified party, a direct distribution to a charitable IRA beneficiary makes sense. Trustees make trust distributions to trust beneficiaries all the time.

Does the Patriot Act require a U.S. charity to establish an inherited IRA in order to receive its beneficiary distribution? No. There is no such requirement in the Patriot Act.

2 Responses

  1. Tom Cullinan says:

    See also the June issue of Planned Giving Today:

    Charity IRA Beneficiaries Navigate
    Stormy Seas to Safe Harbors: Part I
    BY JEFF COMFORT
    Editorial Board member Jeff Comfort knows the bureaucratic roadblocks financial institutions construct for nonprofits receiving end-of-life contributions from an IRA. Needless paperwork and “compliance” issues related to the Patriot Act can be daunting when the charity stands ready to fulfill its donor’s wishes.

  2. The answer is actually fairly simple… it won’t be an inherited IRA because your organization, as a charity, won’t/can’t have an IRA. Instead, they’ll be taking the proceeds distributed from the IRA in a lump sum. Since you’re a charity, the proceeds are (should be) tax-free to you, so all the hoo-haa about a stretch IRA and tax deferral doesn’t matter.

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