Donor-advised funds (DAFs), a popular vehicle for charitable giving that offers tax advantages, are facing renewed scrutiny following a federal lawsuit filed in Colorado involving more than $21 million in assets. The case raises questions about the extent of donor advisory rights and the role of fund sponsors in managing the assets.

DAFs allow donors to contribute assets—including cash, securities, or illiquid holdings—to an account managed by a sponsoring public charity. Donors receive an immediate tax deduction for the contribution, while the funds grow tax-free until grants are recommended by the donor-adviser. However, donors relinquish legal control over the funds once contributed, as the sponsoring charity holds ultimate authority on disbursements. While most sponsors generally approve grant recommendations directed to eligible 501(c)(3) organizations, the legal parameters surrounding donor influence remain ambiguous.

The current lawsuit was brought by Philip Peterson, who became the sole adviser of a DAF established by his late father, Gordon Peterson, in 2005. Gordon Peterson chose WaterStone, a Christian community foundation operating under the name Christian Community Foundation, as the DAF sponsor, aligning with his evangelical priorities and a preapproved list of charitable recipients. Philip Peterson took over advisory responsibilities following the deaths of his parents, but claims that WaterStone ceased communication with him in March 2024 after a confrontation with the foundation’s CEO.

Philip Peterson’s legal counsel argues that he should be able to transfer the fund and continue recommending grants consistent with his father’s intent. WaterStone, however, maintains that under tax law and the terms agreed upon by Gordon Peterson, the sponsor is not obligated to consider grant requests or provide detailed account information to advisers. The foundation has filed a motion to dismiss the lawsuit, emphasizing that it adheres strictly to the donor’s original instructions and complies with all legal requirements.

Industry observers note that the outcome of the case could clarify ongoing uncertainties about the authority of donor-advisers. “It shines light on what advisory rights DAF donors actually have, and whether sponsors can revoke them,” said Richard Fox, an attorney specializing in charitable planning.

For current and prospective donors, policies on DAF management and grant approvals vary widely among sponsors. Large national sponsors such as Vanguard Charitable, Fidelity Charitable, and Schwab’s DAFgiving360 typically service broad donor bases and allow transfers of funds between sponsors. Grant requests are generally honored unless they involve prohibited recipients, such as political campaigns or advocacy groups. For example, recent pauses on grants to the Southern Poverty Law Center by Fidelity and Vanguard followed a federal indictment alleging financial misconduct by the organization.

Community foundations that sponsor DAFs often focus on geographical or mission-based priorities and employ staff expertise to vet grant recommendations. Simeon Banister, CEO of the Rochester Area Community Foundation, highlighted that while donor wishes are respected, the foundation provides added value through its knowledge and stewardship.

Donors are advised to carefully review their sponsor’s terms concerning successor advisers, transferability of funds, grant restrictions, and communication policies, especially given the evolving legal landscape that this lawsuit is bringing to the forefront.