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Posted June 24th, 2019

What is an IRA? Part III

Let’s now look at the situation in which Donor names Charity as beneficiary of her IRA.

This is a common situation. Common in large part because charities have promoted heavily the idea of leaving IRA assets to a charitable organization.

When Donor dies, her IRA becomes an inherited IRA, and Charity becomes beneficiary of the IRA.

The IRA custodian should make a prompt distribution from the inherited IRA to Charity. But it doesn’t and refuses to do so. Why? Because its tax reporting software would report the distribution as a distribution to Donor, which would cause problems.

Why would the tax reporting software do this? Because it’s designed to report all distributions from an IRA to the named owner of the IRA. Donor, though dead, is still the named owner of the inherited IRA.

So the custodian demands that Charity set up an IRA in its own name (which the custodian wrongfully calls an “Inherited IRA”).

The problem is that a charitable organization cannot set up and be the named owner of an IRA.  It can’t do so because (a) it doesn’t have earned income (that’s the only thing that a brand new IRA can receive), and (b) as we’ve seen, a charity is not on the list of parties that can establish a brand new IRA.

The real problem for Charity is that in filling out and submitting the paperwork to set up what the IRA custodian calls an “Inherited IRA”, Charity becomes a customer of the custodian that is setting up a new account. That makes Charity subject to the know-your-customer rules of the Patriot Act. And that introduces delay and all kinds of bad things into Charity’s attempt to get its beneficiary distribution.

Next time we’ll look at how charities deal with all these problems.

Click here to read Part II.

by Jon Tidd, Esq

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