Can I Donate to a Nonprofit and then Direct My Donation To An Individual of My Choosing?
I’m entering another season of loss in my life, and this time it is painful in a very different way. In my 40’s I lost my father, two beloved uncles, and my grandfather in the span of 18 months. As difficult as those years were, this time around the loss is of peers. I suppose back then 60’s and 70’s seemed old, but now, my goodness, 50 seems so young.
As a community, our hearts and minds turn to how we can help, how do we show the children of our peers that they are not alone and that we are here to support them? Last week I received a well meaning question: can we donate to our local church/mosque/synagogue/temple and then direct them to pass the funds on to the family of the deceased? The query came from someone who had seen this done before. The answer is probably not, and here’s why:
Making a donation to a nonprofit for the purpose of having them pass the funds directly to a specific individual, is considered a prohibited "private benefit" or "pass-through payment" that risks the nonprofit's tax-exempt status.
I say probably not, and not a hard no, because a nonprofit organization can, through its charitable programs, offer grants, services, or financial assistance to individuals in need to further its charitable mission. So if the person in need is for example, a parishioner, and the house of worship has a grant program or a direct services program that the individual qualifies for, then assisting an individual is permitted.
Donations to a nonprofit for these programs are generally tax-deductible for the donor, but a donation intended for a specific individual without the nonprofit's independent control over the funds may not be.
Why Direct Payments to Individuals Are Problematic
Inurement Rule:
The IRS prohibits 501(c)(3) organizations from having their net earnings inure to the benefit of any private shareholder or individual, which in simple terms just means the person will receive advantages. A "pass-through" payment where a donor directs funds to a specific person through a nonprofit violates this rule.
Tax-Deductibility:
Gifts made directly to an individual are not tax-deductible. If the nonprofit simply passes a donation from a donor to a specific individual without discretion, the donor loses their potential tax deduction.
So How Do We Help?
Although this goes beyond the scope of nonprofits, the question has come up often enough under the donation category that it’s worth exploring.
For groups of friends or family seeking to crowdfund there are the ever popular Facebook fundraisers and Go Fund Me campaigns.
Here’s what to know about Go Fund Me:
It can be great for raising money quickly
It’s easy to use
There aren’t really any checks and balances for how the money will be used
The transaction fees are 2.9% PLUS $.30 per transaction for Go Fund Me and $1.99 PLUS $.49 for Facebook fundraisers
Also, a bereaved family may not want or need a public vehicle like a Go Fund Me or Facebook fundraiser set up.
What if we are trying to create something that is longer lasting, safer, better funded, with some protections? We hear the term “setting up a trust” thrown around a lot. While a trust for the benefit of the children can certainly be set up, a primary consideration is how much the initial investment is going to be as trusts can be expensive, and depending on the type of trust, require a bit of management.
UTMA or UGMA custodial account
While these are not trusts, a custodial account is a simple way for friends and family to make donations for a minor's benefit.
How it works:
Easy setup: These accounts are easy to establish through a brokerage or financial institution.
Custodian manages assets: A designated custodian (an adult) manages the assets on behalf of the minor.
Automatic transfer at legal age: When the child reaches the age of majority in their state (typically 18 or 21), they get full control of the account with no restrictions. This may be a disadvantage if you believe the minor is not financially mature enough to handle the funds at that age.
If the beneficiary doesn’t survive to an age of majority: In Maryland if the minor beneficiary of an UTMA account dies, the funds become part of the deceased minor's estate and are distributed to heirs under Maryland law typically requiring a probate process.
Trusts
There are two types of trusts that can work well in a situation where there is more funding.
Section 2503(c) trust
This type of trust offers gift-tax benefits specifically for minors but has strict requirements.
How it works:
Tax-free gifts: Any donor can contribute up to the annual gift tax exclusion limit ($19,000 in 2025) to the trust without having to file a gift tax return.
Automatic payout at age 21: To qualify for the annual gift tax exclusion, the trust's assets and income must be made available to the beneficiary when they turn 21. If the beneficiary dies before age 21, the assets must pass to their estate.
Limited control: This type of trust works well for those who want to avoid tax reporting for smaller gifts but are comfortable with the beneficiary receiving the assets outright at age 21.
Extension of trust term: If the beneficiary chooses to extend the term of the trust beyond the age of majority he or she can do so, however the trust then becomes a grantor trust taxable to the beneficiary.
Creditor protection: during the term of the trust, the assets are not reachable by creditors
Financial Aid: assets of the trust WILL be considered for purposes of financial aid, so this should be evaluated in totality with all other funds available for college
"Crummey" trust
This strategy is more flexible than a 2503(c) trust but involves more administrative work.
How it works:
Withdrawal right: When a donor makes a gift, the beneficiary (or their legal guardian) must be notified and given a limited window (e.g., 30–60 days) to withdraw the gifted assets. This withdrawal right turns the gift into a "present interest," qualifying it for the annual gift tax exclusion.
Ongoing control: Unlike a 2503(c) trust, the withdrawal right only applies to the new gift, not the entire trust balance. If the withdrawal right expires, the assets remain in the trust to be managed by the trustee according to your instructions.
Flexible payout: A Crummey trust can specify distributions at ages beyond 21, or other milestones, giving you more control over how and when the beneficiary can access the funds.
Administrative burden: The trustee must send a notice to the beneficiary each time a donation is made, which requires consistent record-keeping.
A point about the withdrawal rights: the beneficiary or their guardian has a right, NOT a requirement, to make the annual withdrawal. In fact, it makes more sense NOT to use other funds and not make the withdrawals from a tax and creditor protection perspective.
The benefit of this is that if, as in our cases, there is a surviving parent serving as the trustee, and the funds are not needed they can continue to grow in the trust. However, if the funds are needed for an expense that year, the option is there to make a withdrawal. When a family’s financial future is uncertain, that flexibility can be very reassuring even if it is never needed.
Steps for setting up a trust
Consult an estate planning attorney. Remember, I’m an attorney, but I’m not YOUR attorney, so this isn’t legal advice! Because of the legal and tax complexities, an attorney in your jurisdiction can help you choose the best type of trust for your specific situation and ensure it is properly drafted and legally valid.
Select a trustee. While a parent may be the obvious choice, they are not the only choice, particularly in a case where the parents were no longer married at the time of death or some other concerns. You can choose a financially savvy, trustworthy, and impartial adult to manage the trust's assets. You can name yourself as the initial trustee and appoint a successor to take over if needed. A professional or corporate trustee is another option.
Draft the trust document. Your attorney will prepare the legal document that outlines how the trust operates, including how and when distributions will be made to the minor(s).
Fund the trust. Open a bank or investment account in the trust's name and transfer the initial assets into it. Once established, you can provide the trust's name and account details to friends for them to contribute.
Manage and administer the trust. The trustee is responsible for managing the trust's investments, keeping records, and filing taxes.
While raising money or helping a friend during a difficult time is certainly kind and charitable, it is not necessarily charity in the legal sense and therefore not a deductible expense.
