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Bills / Cases / IRS

How Charities May Collect IRA Beneficiary Designations

Letter if IRA Custodian Requires Nonprofit IRA Account

January 1, 2019

Favorite Charity
123 Oak Street
Chicago, IL 00000


Dear General Counsel:

We have been informed that Favorite Charity is a beneficiary of the IRA of Jane Doe. The IRA account number is 123-45-678. We request that you liquidate the funds held for our benefit in the trust account and deliver them by check within 30 days to our organization at this address: Favorite Charity, Bequest Administrator, 123 Oak Street, Chicago, IL 00000.

Favorite Charity is not required to open an IRA account with a custodian to receive an IRA distribution. Under Reg. 1.408-2(b), an IRA account must be created "for the exclusive benefit of an individual or his beneficiaries." A charity is a nonprofit corporation and is defined as a "Person" under the IRC, but a charity clearly is not an individual and therefore not permitted to set up a Sec. 408 IRA account. In addition, as custodian you are trustee of an IRA trust under Reg. 1.408-2(b) and required by federal and state law to comply with trustee fiduciary responsibilities. If you fail to make the distribution as required in your contract with the IRA owner, you are potentially in breach of your duty of fiduciary responsibility.

Favorite Charity is not subject to the USA Patriot Act (Pub. L. 107-56). Sec. 326 of the USA Patriot Act requires banks and other custodians to determine that a person opening an account is not on the suspected terrorist list. First, IRC Sec. 408 does not permit a nonprofit to open an IRA account. Therefore, the Patriot Act does not apply to an IRA distribution to charity. Second, we are a U.S. recognized tax exempt charity and not on a suspected terrorist list.

Finally, IRA custodians may withhold 10% of a distribution to individuals and remit that amount to the Internal Revenue Service. We are tax exempt and elect under IRS Form W-4P to not have tax withheld.

Because we are tax exempt, there is no income tax on our IRA distribution and no requirement for withholding on your part. Enclosed is a copy of our IRS tax exemption letter. Our IRS identification number is 00-1234567. If you are not able to issue a computer-generated IRS Form 1099, we will accept one that is manually produced.

Because we are not permitted to open an IRA account, the USA Patriot Act does not apply to a qualified exempt U.S. charity and withholding is not required, we request that you remit within 30 days the full distribution to the above address. If we are a partial beneficiary of the IRA, we waive and release all rights to divided future interests or odd shares earned after the date of death and request prompt distribution of our IRA proceeds prior to completion of actions by other beneficiaries. If you are unable to distribute our vested IRA funds within 30 days, then, in a manner similar to Sec. 6662(a), we request remittance of the IRA funds and a 20% penalty amount. After the 30-day period, because you are in obvious breach of contract and breach of trustee fiduciary responsibility due to noncompliance with the IRA agreement, we are willing to settle for the IRA funds plus the 20% penalty.

If you feel you are unable to make this prompt distribution as requested, please have your Legal or Compliance Department provide us with your legal basis for holding these funds and not distributing them to us. We remind you again that this is a trust and you are potentially subject to a breach of fiduciary responsibility claim.

Sincerely,

Susan Officer
Vice President, Favorite Charity


Letter if IRA Custodian Does Not Require Nonprofit IRA Account


January 1, 2019

Favorite Charity
123 Oak Street
Chicago, IL 00000


Dear General Counsel:

We have been informed that Favorite Charity is a beneficiary of the IRA of Jane Doe. Your financial institution serves as the IRA custodian. Under Reg. 1.408-2(b), an IRA account must be created "for the exclusive benefit of an individual or his beneficiaries." A charity is a nonprofit corporation and is defined as a "Person" under the IRC, but a charity clearly is not an individual and therefore not permitted to set up a Sec. 408 IRA account. Therefore, we appreciate your organization's decision that our charitable organization will receive our share of the deceased's IRA without the need to open an Inherited IRA.

The IRA account number is 123-45-678. We request that you liquidate the funds held for our benefit in the trust account and deliver them by check within 30 days to our organization at this address: Favorite Charity, Bequest Administrator, 123 Oak Street, Chicago, IL 00000.

While IRA custodians often withhold tax on a distribution to individuals, as a nonprofit we are tax exempt and elect under IRS Form W-4P to not have tax withheld. Because we are tax exempt, there is no income tax on our IRA distribution and no requirement for withholding on your part. Enclosed is a copy of our IRS tax exemption letter. Our IRS identification number is 00-1234567. If you are not able to issue a computer-generated IRS Form 1099, we will accept one that is a manually produced. If we are a partial beneficiary of the IRA, we waive and release all rights to divided future interests or odd shares earned after the date of death and request prompt distribution of our IRA proceeds prior to completion of actions by other beneficiaries.

If you feel you are unable to make this prompt distribution as requested, please have your Legal or Compliance Department provide us with your legal basis for holding these funds and not distributing them to us. We remind you that this is a trust and you are potentially subject to a breach of fiduciary responsibility claim if you do not comply with the terms of the IRA agreement.

Sincerely,

Susan Officer
Vice President, Favorite Charity



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