Our son was diagnosed with a rare disease. We'd like to set up a foundation to raise money. What's the best approach?

Coping with the news that a child is seriously ill is difficult enough without worrying how to pay for it. However, creating a foundation might not be possible, for reasons we'll discuss. But there might be other ways to raise money for health-care costs.

Let's start with foundations. These are nonprofit organizations that accept contributions from individuals or corporations for the benefit of a cause, such as medical research for a specific illness, help for a specific region, or other things. Contributions are tax-deductible to the donors.

The catch: To be approved for nonprofit status by the IRS, which allows a foundation to accept tax-deductible contributions, the foundation can't be set up for the benefit of individual people, says Andrew Schulz, deputy general counsel of the Council on Foundations, an industry group for the nonprofit sector. "You can set up a foundation to provide assistance, but you can't limit it to one or just a small handful of people." In other words, if you were to go the foundation route, you would have to direct the funds toward a broader purpose, say, medical research for your child's disease or donations to the medical facility where he receives treatment.

And forming a foundation is no simple matter. Apart from obtaining nonprofit status — also known as 501(c)(3) status — from the IRS, you have to file annual reports with the department of state where the foundation is located, and in many states, with the attorney general, explains Jeffrey Hurwit, an attorney and nonprofit expert in Newton, Mass. A foundation needs to be incorporated and have a governing board and bylaws. And if it raises $25,000 a year or more from donations, it must file a tax return with the IRS. That's a lot of work, and often requires the help of a qualified attorney, according to Hurwit. (For more on how to establish a charitable organization, go to the IRS web site.)

As an alternative, Hurwit suggests establishing a fund in your child's name. That's as simple as opening a savings account or a trust fund designated for the benefit of your child. "If you really do have one person in mind, it will be a lot easier, simpler and cost-effective to accept funds on the basis of non-tax-deductible gifts," says Hurwit.

The bad news: Unlike a foundation, a fund doesn't provide a tax break for the donors. Now the good: Donations are considered gifts and are not taxable income to the beneficiary, according to Martin Nissenbaum, national director of personal income tax planning for Ernst & Young. (For the donor, the gift will trigger the gift-tax rules if it exceeds $11,000 in 2005, meaning that any dollar amount that's above that limit will reduce one's $1 million lifetime gift-tax exemption. (In contrast, contributions to 501(c)(3) charities don't trigger gift-tax issues.)

Here's another option: You could search for funding from already existing charitable organizations that target your particular need, recommends John Scales, vice president of development at the Texas Children's Hospital in Houston. "There have been foundations set up for almost everything, so it would certainly be wise to research what's already there," he says.

One helpful resource is GuideStar.org, which maintains a comprehensive online database of more than 1.5 million nonprofit organizations. You can search by keyword — such as the name of the disease — and get a list of charities that work in that area. You can also pull each organization's Form 990, filed annually with the IRS, for information on the amount of grants given out each year to other charities or individuals and the names of the organizations that have received the largest distributions. Those records are available free of charge, but a subscription is needed for access to more detailed reports or search capabilities.