We are a 501(c)(3) rare disease nonprofit. Our disease causes conditions that often cause our members to pursue getting an organ transplant. We host fundraising pages for our members undergoing a transplant and it is the members’ responsibility to get donations. The funds raised are designated to that individual and are solely used for the expenses of their transplant. However, if the transplant fails or the member dies before receiving the transplant, the funds raised are disbursed to a pre-designated person, usually a spouse. We send donors thank you letters that say their donations are tax deductible. Is this correct?
Unfortunately, probably not. Gifts earmarked for specific individuals, even if given to a public charity, are not normally deductible. Gifts normally have to be given dispassionately, for general charitable purposes, in order to be deductible. If your organization had an organ transplant fund and selected the individual beneficiaries on some neutral criteria, rather than based on the amount they had raised for their own benefit, the gifts would probably be deductible, but as a practical matter you would probably raise less in overall amount.
The program you are running is not illegal, assuming you have the written approval of the intended beneficiaries (for charitable solicitation registration purposes). But saying the gifts are deductible charitable contributions is probably wrong and could get you and your donors into trouble with the IRS. Check out your specific program with a good tax-exempt organization lawyer. You may be able to modify it so that the gifts are deductible, or you may want to continue it without deductibility. Saving lives is more important than deductions.