Decoding the Intricacies of Donor-Advised Funds

Donor-advised funds (DAFs) have become a preferred vehicle for wealthy individuals aiming to combine philanthropy with tax benefits.Yet, recent legal challenges reveal underlying complexities and potential conflicts within these charitable instruments.

The Expanding Role and Challenges of Donor-Advised Funds

In 2024, contributions to donor-advised funds in the United States approached $90 billion, with total assets surpassing $326 billion. This rapid growth highlights dafs’ important footprint in modern philanthropy. Often described as “charitable investment accounts,” they enable donors to claim immediate tax deductions while postponing decisions about which nonprofits will receive grants.

Unlike private foundations that face mandatory payout requirements, DAFs are not legally bound to distribute funds within any set period. Critics warn this flexibility can result in considerable sums accumulating without timely deployment toward charitable causes-potentially stalling impactful giving when it is most needed.

Legal Disputes Expose Control Complexities

A prominent lawsuit involves Philip Peterson from Kansas who challenged WaterStone, a Christian nonprofit managing his family’s $21 million donor-advised fund. As early 2024, Peterson alleges the organization has ignored his grant recommendations and limited distributions contrary to his late father’s original intent focused on evangelical Christian missions.

Peterson contends that WaterStone unilaterally decided to preserve the fund’s principal indefinitely while only distributing income-generated grants-considerably less than prior annual disbursements ranging between $2.3 million and $2.5 million. After expressing plans during a March 2024 video call to move the fund elsewhere, he claims he was abruptly cut off from further dialog.

This case underscores a basic tension: although donors provide guidance on how their contributions should be allocated, legal ownership resides with sponsoring organizations administering these funds-meaning ultimate authority may diverge from donor expectations.

The Gap Between Advisory rights and Legal Authority

“DAFs are frequently enough portrayed as personal accounts granting full control over distributions,” explains Ray Madoff, an expert in tax law at Boston College Law School. “However, donors must surrender legal dominion over assets for tax advantages; this disconnect fuels many misunderstandings.”

The High Stakes Behind Grant Approvals

• Philip Peterson insists he has faithfully upheld his father’s philanthropic vision and seeks judicial intervention either to restore advisory privileges or transfer management so giving aligns with original goals;
• He requested a $1 million grant in 2024 but remains uncertain whether it or other grants were fulfilled;
• waterstone approved only approximately $400,000 for distribution that year;
• The nonprofit maintains adherence to Gordon Peterson’s directives as inception;
• This dispute raises broader questions about successor advisors’ rights after original donors pass away or lose capacity.

Diverse Perspectives on Donor Control Within the Industry

• Roger Colinvaux, law professor at Catholic University: “DAF sponsors operate as independent charities whose fiduciary responsibilities do not extend directly toward donors.” He notes private foundations offer more direct control but lack some tax benefits available through dafs;
• Dana Brakman Reiser, Brooklyn law School professor: Institutional sponsors like Fidelity Charitable generally strive to honour donor requests unless compliance issues arise; IRS regulations prohibit using DAF assets for non-charitable expenses such as gala tickets or funding private enterprises;
• Chuck Collins, director at Institute for Policy Studies: Sponsors earn fees based on asset size creating incentives against rapid payouts; community foundations compete with low-fee commercial sponsors encouraging longer retention periods of donated assets.

Lawsuits Highlight Increasing Scrutiny Amid Limited Legal Precedents

1. A notable 2018 lawsuit involved hedge-fund investors contesting Fidelity Charitable’s swift liquidation of nearly $100 million worth of donated shares; courts sided with Fidelity citing regulatory compliance;
2. An earlier bankruptcy case involving National Heritage Foundation resulted in loss of thousands of smaller DAF accounts totaling millions;
3. Court rulings consistently affirm that once donations are made claiming deductions under current laws, donors relinquish legal control over those assets;
4. Lawsuits focusing specifically on advisory rights-as opposed to investment decisions-remain relatively rare but could redefine industry standards if successful.

Navigating Trust Issues When Entrusting Large Donations Through Intermediaries

“Donors place immense trust in these organizations without fully grasping their limitations,” says Philip Peterson regarding his experience. “My hope is this case clarifies organizational responsibilities-and safeguards my father’s philanthropic legacy.”

The Road Ahead: Transparency and Governance improvements Needed

• Sponsors face balancing fiduciary duties alongside maintaining positive relationships with advisors expecting influence over grant allocations;
• Pursuing enhanced transparency around approval processes may reduce misunderstandings between stakeholders;

  and

  donors seeking tighter control might consider alternatives like private foundations despite higher administrative costs;

  regulators could revisit policies governing payout timing requirements or disclosure standards amid growing public scrutiny.