I received an e-mail from a client this morning.

Does it make sense to start a foundation? How much would I need to put in it?

It is a great question. Here was my response:

Economically, it does not make sense to start a foundation with less than $10 million. There are legal fees to create, IRS filing fees to be recognized, annual tax returns with both the IRS and the Illinois Attorney General’s office, and a requirement that a CPA firm annually audit you. Initial set up costs around $7,500 with annual compliance costs of at least $5,000 per year.

A far better alternative is a "Donor Advised Fund" (DAF). Banks and brokerage companies alike all sponsor DAFs. There is no cost to establish, no annual tax filing requirements, and no audit requirements.

JP Morgan, Schwab, Fidelity, etc. all have standard DAF funds. They generally charge you 1/2 of 1% per year and take that fee out of the fund. You create a DAF by transferring cash or marketable securities to the fund. It is best to use appreciated marketable securities because you get to deduct the fair market value of the securities. You can donate as little as $10,000 to start the DAF. The securities can then be sold tax free inside of the DAF and reinvested in mutual funds that the DAF may offer. The growth inside of the DAF is tax-free and  you and other family members can be advisors to the fund. As advisors, you identify when and to whom contributions are made. The only limitation is that the check written by the DAF must go to a "public charity" i.e., a school, church, hospital, or other organization that generally receives its support from the public.

NOTE: You cannot send money to private individuals or private foundations. There is no annual requirement that funds must leave the DAF by the end of any year. It is up to you when to put funds in  and it is up to you when the funds go to a public institution. You get your tax deduction when you put funds in the DAF, not when funds leave. You can name your DAF anything you want, so if you want to call it the __________ Family Foundation, then great, you can have a “foundation” and increase the dollars that you want to give to charity at the same time.