By Laura Saunders
If you've made charitable contributions to a donor-advised fund or are considering them, pay attention to a current court case involving $21 million -- and ask some key questions.
Donor-advised funds, known as DAFs, have become extremely popular with affluent and wealthy charitable givers. A major reason is that donors can use them to maximize charitable tax breaks by "bunching" donations in one year, which allows them to make fewer, larger gifts instead of smaller annual ones. This helps cope with tax hurdles like ones that took effect this year.
As a reminder, here's how DAFs work. Donors contribute assets such as cash, traded securities or illiquid holdings to a designated account sponsored by an umbrella charity. In return, they get an immediate tax deduction.
The DAF dollars are then invested and grow tax-free, typically until the donor asks the sponsor to make grants to charities they choose. There's no deduction at the time of the grant, even if it is made years later.
But there's a catch. To get the upfront tax deduction, the donor cedes legal control of the donated funds to the DAF sponsor. He or she then becomes an "adviser" to the account.
This means the sponsor isn't legally required to disburse funds as the DAF donor requests. Of course, most sponsors approve most grants, as long as the recipients are eligible 501(c)(3) charities. This group includes churches, schools, healthcare nonprofits and many more.
Now a federal lawsuit in Colorado is considering what the donor's "advisory rights" are -- if any.
This fight isn't over whether donors have a legal right to require grants and specify recipients, because they don't. Instead, it's about whether the donor is entitled to, say, receive information about the funds in the DAF, have grant recommendations considered, and communicate with the DAF sponsor.
The lawsuit was filed by Philip Peterson, the son of DAF donor Gordon Peterson, against the Christian Community Foundation, which does business under the name WaterStone.
Gordon Peterson prospered as a real-estate developer in Kansas. According to the lawsuit, he set up a DAF in 2005 and added millions of dollars he wanted disbursed per his Christian evangelical principles. For this purpose, he chose WaterStone, a Christian DAF sponsor, and provided a list of preapproved charities.
All went well for years. Peterson's son Philip became a successor adviser to the DAF in 2017. He became its sole adviser after his father died in 2019 and his mother, who was also an adviser, died in 202l.
Then came a rupture. According to the complaint, WaterStone has refused to communicate with Philip Peterson since March 2024, when its CEO "used abusive language" and told Peterson he was cutting further communication. As of year-end 2023, the DAF held more than $21 million.
Philip Peterson's lawyer, Andrew Nussbaum of First & Fourteenth, says he wants to transfer the DAF and continue making grants to his father's chosen charities.
In response, WaterStone argues that tax law prohibits DAF donors and advisers from having any control over the assets.
Under the agreement signed by Gordon Peterson, WaterStone says, it doesn't need to consider the son's grant recommendations, provide accountings or allow him to move the account. It has filed a motion to dismiss the case.
"WaterStone takes the wishes of an estate we've been entrusted with very seriously. We have followed the written instructions of the donor exactly as we were instructed," says Matthew Martens, a lawyer with WilmerHale representing the foundation.
Although the Peterson case could take years to resolve, many in the DAF world are watching it closely. "It shines light on what advisory rights DAF donors actually have, and whether sponsors can revoke them," says Richard Fox, a lawyer specializing in charitable planning.
Meanwhile, current and potential DAF donors should check their sponsors' rules, which vary. Here are questions to ask.
What are the restrictions on DAF grants?
In practice, DAF sponsors typically try to accommodate donors. A spokeswoman for Vanguard Charitable says it denies fewer than one in 100 grant requests annually, on average.
Some denied requests likely reflect donor confusion. For example, the law clearly disallows DAF grants to political campaigns or advocacy groups, but some donors request them anyway.
Sometimes grants are halted for other reasons. This week, Fidelity Charitable and Vanguard Charitable said they had paused grants to the Southern Poverty Law Center, a civil-rights group, after federal prosecutors indicted it for alleged financial crimes.
"National" DAF sponsors -- like the charitable arms of Fidelity, Vanguard, and Charles Schwab -- typically make grants to a broad base of eligible charities that donors research themselves.
Other DAF sponsors are community foundations or trusts. Often they have a geographic or special-interest focus and encourage donors to recommend grants based on the foundation's research.
"We honor donor requests, but our deep knowledge offers them a value proposition," says Simeon Banister, CEO of the Rochester Area Community Foundation, a New York-based DAF sponsor with $720 million in assets.
What's the policy for successor advisers?
If you die or become incapacitated, what happens to your DAF? If you named a successor, can that person name another?
Fred Kaynor, a managing director at Schwab's charitable arm, now called DAFgiving360, says its account holders can name up to 10 successors, and successors can name successors. Community foundations also allow successor advisers, says Banister.
What happens to money left in a DAF with no successor advisers?
The money can't be returned to the donor or donor's heirs. The Rochester foundation, like many others of its type, encourages donors to contribute the remainder to its general endowment, but says it will honor specific instructions.
Kaynor says that if other measures fail, Schwab's DAFgiving360 might close an account and transfer remaining assets to charities based on the account's grant history.
Can the DAF be moved to another sponsor?
Both Vanguard Charitable and Schwab's DAFgiving360 say they allow transfers. In that case, the DAF account owner typically grants the remaining funds to an eligible charity, which can be another DAF sponsor. Banister says the Rochester foundation and others also allow them.
Write to Laura Saunders at Laura.Saunders@wsj.com
(END) Dow Jones Newswires
"WaterStone takes the wishes of an estate we've been entrusted with very seriously. We have followed the written instructions of the donor exactly as we were instructed," the nonprofit organization said in a statement. "A Lawsuit Raises Questions About Popular Tax-Saving Charity Funds" at 5:30 a.m. incorrectly attributed the quote to WaterStone's lawyer, Matthew Martens, of WilmerHale.
(END) Dow Jones Newswires
May 01, 2026 15:18 ET (19:18 GMT)
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