Lawsuit over $21 million donor-advised fund highlights DAF risks

A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.

As donor-advised funds become a popular means of giving for the wealthy, risks and potential conflicts of interest have emerged, and a $21 million philanthropic fund run by a family member is the subject of a lawsuit.

Phillip Peterson, 63, of Kansas, filed a lawsuit in January alleging that the nonprofit that administers the fund his family recommended to donors has refused to communicate with him and has not paid the charitable grants he recommended since early 2024. The lawsuit, filed in federal court in Colorado, alleges that a Christian nonprofit called Waterstones blocked access to information about the accounts and does not know how the funds were disbursed. The fund has been operating successfully since the end of 2023 with $21 million in assets.

Lawyers for Waterstones, which was founded as the Christian Community Foundation, said in a statement that the Colorado Springs nonprofit created the fund in 2005 to honor the legacy of Peterson’s late father, who died in 2019.

The case highlights the growing popularity and dangers of donor-advised funds (DAFs), which have quickly become one of the most powerful forces in philanthropy. Americans contributed nearly $90 billion to DAFs in 2024, according to the DAF Research Collaborative’s latest annual report. DAFs held a total of $326 billion in assets in 2024, according to the most recent data available.

DAFs are marketed as a flexible and easy way for Americans who want to pay back and save money on taxes, and are often referred to as charitable savings accounts or credit cards. Instead of writing a check to a nonprofit, donors donate cash or other assets to a DAF. The tax deduction is immediate, but the funds can be allocated to charity later.

DAFs, unlike private foundations, do not have to distribute assets within a set period of time, a common criticism of opponents that DAFs are a means of hoarding wealth.

The Peterson case provides a warning about trade-offs, especially when it comes to control. Donors can recommend how funds are distributed to charities, but the assets are legally managed by the organization that manages the DAF on their behalf. These organizations, also known as sponsors, typically respect the donor’s wishes, but if they don’t, the donor has little recourse.

“It’s being sold to the public as, ‘This is your account, you can decide where it goes, and you can maintain complete control.’ But if you don’t give up control and control, you don’t get the tax benefits,” said Ray Madoff, a tax scholar and professor at Boston University School of Law. “There is a disconnect between the legal rules governing this case and the understanding of the parties, and this case is a perfect example of that.”

Mr Peterson told Inside Wealth that his rift with Waterstones began over a disagreement over the amount to be distributed.

Mr Peterson alleges that in early 2024, Waterstones CEO Ken Harrison told him the organization intended to hold the fund’s principal forever and generate grants only from investment returns. Peterson said he disagreed with the proposal because it would prevent the foundation from receiving its usual $2.3 million to $2.5 million annual grant.

He also claims that after telling Mr Harrison over Zoom in March 2024 that he wanted to move the DAF to another sponsor, Mr Harrison told him not to contact Waterstones again and abruptly hung up on him.

Mr. Peterson is currently suing to assert his advisory privilege and regain access to the DAF, which was founded by his late father, Gordon Peterson, a real estate investor and devout Christian, to support evangelical Christian causes. Ultimately, Peterson is asking a court to force Waterstone to transfer the DAF to another organization in order to get the fund’s contributions back on track.

He told Waterstones he had applied for a $1 million grant in 2024, but he did not know if that grant, or any grants, were issued in that year. In 2025, Waterstones notified Peterson that it would authorize him to distribute $400,000 from the fund, the complaint said.

“I made a promise to my father that if I remained in the account, I would direct the funds because I knew he would approve 100%,” he said. “I want to be a man of my word.”

Waterstones declined to comment on the details of Peterson’s allegations. Waterstones has a mid-March deadline to respond to the complaint in court or move to dismiss it.

“Waterstones has consistently carried out the donor’s express wishes since the establishment of the donor-advised fund in question,” Waterstones’ lawyers said in a written statement, referring to Ms Peterson’s father. “The plaintiff in this lawsuit is not a donor.”

Mr Peterson’s lawyer, Andrew Nussbaum, said Waterstone helped Gordon Peterson appoint his wife Ruth and son Philip as co-counsels on the DAF before his death. Ruth Peterson passed away in 2021, leaving Philip Peterson as her sole successor and advisor. Nussbaum said Waterstones approved Philip Peterson’s grant application before 2024.

Nussbaum said the case could set a chilling precedent if the court upholds Waterstone’s argument that a named successor does not have advisory privilege.

“If Waterstone’s claims are correct, billions of dollars would be beyond the legal scope for the original endowed advisors or their successors to exercise any oversight related to the fund,” Nussbaum said.

Mr Peterson also said he believed Waterstones was not respecting his father’s wishes. He claims Waterstones delayed or refused to recommend grants, even though they met a mission statement written by his father that included a list of approved charities.

“I can tell you this: My father would never have established a donor-advised fund if he had known it would turn out like this. He was very passionate about this,” he said.

Roger Colinbaugh, a law professor and DAF critic, said he believes donors seeking control of DAF assets are trying to have their cake and eat it too.

“Whether you like DAFs or not, DAF sponsors are independent charities. They are independent organizations, and their obligations do not rest with the donors,” said Colinbaugh, a professor at the Columbus School of Catholic University of America. “If the plaintiffs want the kind of control they want, as outlined in the complaint, there is a structure for that, and that is a private foundation.”

Dana Blackman Reiser, a professor at Brooklyn Law School, cautioned that Mr. Peterson’s story is a rare scenario. He said the biggest DAF sponsors, such as Fidelity Charitable and Schwab Charitable (now DAFgiving360), are affiliated with financial institutions and generally tend to try to keep donors happy.

“As long as honoring the donor’s request does not embarrass the sponsor, it is in their interest,” she said. Blackman Reiser added that the IRS prohibits the use of DAF assets to buy tickets to galas or support private foundations or non-501(c)(3) organizations.

Still, the interests of sponsors and donor advisors are rarely perfectly aligned.

Sponsors typically charge fees for managing DAF assets, creating an inherent financial incentive to spend fewer assets, said Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies, a progressive think tank. Community foundations pioneered the DAF model, but now compete with larger commercially affiliated sponsors for donations, he added.

“Increasingly, we’re having to compete with commercial DAFs like Fidelity, which have very low overheads and don’t charge as many fees. So what is the business model for a community foundation where 80% of the donations that come in are from people who want to create a DAF?” he said. “In fact, their business model now relies on people parking their assets for long periods of time.”

Although Mr. Peterson’s case is unusual, it is not the first legal challenge to DAFs.

In 2018, a hedge fund couple sued Fidelity Charitable, claiming the sponsors broke an agreement to gradually liquidate donated shares and instead sold 1.93 million shares in a matter of hours, a position originally worth $100 million. Fidelity Charities argued that they followed the law and that the lawsuit was decided in their favor.

In another notable debacle, in 2009, a Virginia-based charity called the National Heritage Foundation wiped out 9,000 DAFs worth a total of $25 million to repay creditors after filing for bankruptcy.

Donating directly to a charity does not necessarily guarantee that the assets will be used according to the donor’s intentions. But adding intermediaries to the equation adds even more complexity.

Several lawsuits brought by donor advisors over how DAF assets are spent and invested have so far had few successes in court.

In short, Colinvaux said, the court upheld the donor’s relinquishment of any control to qualify for the tax break. If the donor had the right to manage the assets rather than the privilege of advising, he said, he would not be able to claim a deduction.

Nussbaum said Peterson’s case is different because it focuses on his right to advise grants, rather than control over how assets are invested.

Mr. Peterson said he tried to resolve the dispute with Mr. Waterston for about two years before going to court. He said he knew his case was heavily stacked against him, but felt he had no other choice.

“People have a lot of trust in these companies, and we want to find out what these companies can and cannot do,” he said. “It could have a huge impact on the industry, but I don’t want to be that person. All I want to do is carry on my father’s legacy.”