The more than $21 million donor-advised lawsuit highlights the dangers of DAFs

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

As donor-advised money gains popularity as a way for the wealthy to give back, risks and potential conflicts of interest emerge — and are on display in a lawsuit over a $21 million family charitable trust.

Philip Peterson, a 63-year-old Kansas resident, filed suit in January alleging that the nonprofit that runs his family’s donor-directed fund refused to contact him and failed to make charitable grants he recommended since early 2024. The lawsuit filed in Colorado federal court alleges that the Christian nonprofit, called WaterStone, cut off his access to account-related information and that he doesn’t know how the fund has performed since then. The end of 2023, when it had assets worth $21 million.

An advisor to WaterStone, which was founded as the Christian Community Foundation, said in a statement that the Colorado Springs nonprofit respected the wishes of Peterson’s late father, who originally established the fund in 2005 and died in 2019.

This case highlights the growing uptake and risks of donor-advised funds, which are quickly becoming one of the most dominant forces in philanthropy. Americans donated nearly $90 billion to DAFs in 2024, according to the latest annual report from the DAF Research Collaborative. According to the latest available data, DAFs collectively held $326 billion in assets in 2024.

For Americans looking to give back and save taxes, DAFs are marketed as a flexible and simple way to do so, and are often described as charitable savings accounts or credit cards. Instead of writing a check to a nonprofit, donors contribute cash and other assets to a DAF. While the tax deduction is immediate, the money can be allocated to charities at a later date.

DAFs, unlike private foundations, are not required to distribute assets within a certain time frame, a common criticism among opponents who say DAFs are wealth hoarding vehicles.

The Peterson case offers a cautionary tale about trade-offs – especially when it comes to control. While donors are able to recommend how funds are distributed to charity, the assets are legally controlled by the organizations that manage the DAF on their behalf. Although these organizations, also known as sponsors, typically respect their donors’ wishes, donors have little choice if they do not.

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

Peterson told Inside Wealth that the dispute with WaterStone began with a disagreement over the amount of distribution.

In early 2024, Peterson claims WaterStone CEO Ken Harrison told him that the organization would hold the fund’s capital in perpetuity and would make grants solely from investment income. Peterson said he did not agree to the proposal because it would not allow the fund to make the usual annual grants of between $2.3 million and $2.5 million.

He also alleges that in March 2024, after telling Harrison over Zoom that he wanted to move DAF to another sponsor, Harrison told him not to contact WaterStone again and abruptly ended the call.

Now Peterson is suing to assert his consulting privileges and restore access to DAF, which was started by his late father, Gordon Peterson, a real estate investor and devout Christian, to support evangelical Christian causes. Peterson ultimately seeks court to force WaterStone to move DAF to another organization so he can speed up the fund’s donation process.

He said he asked WaterStone for a $1 million grant in 2024 but did not know if that grant — or if any grants existed — was issued that year. In 2025, WaterStone has notified Peterson that it will authorize a distribution of $400,000 from the fund, he said.

“I made a promise to my father. I promised him that if I was the person remaining in the account I would direct the money because I knew he would agree 100%,” he said. “I want to be a man of my word.”

WaterStone declined to comment on the details of Peterson’s allegations. The deadline for WaterStone to respond to the complaint in court or move to dismiss it is mid-March.

“WaterStone has consistently implemented the expressed wishes of its donors since the establishment of the donor fund in question,” WaterStone’s legal counsel said in a written statement, referring to Peterson’s father. “The plaintiff in this case is not the donor.”

Andrew Nussbaum, Peterson’s attorney, said WaterStone helped Gordon Peterson appoint his wife, Ruth, and son, Philip, as co-advisors to DAF before his death. Ruth Peterson died in 2021, leaving Philip Peterson as sole successor and advisor. Before 2024, WaterStone approved grant applications from Philip Peterson, Nussbaum said.

Nussbaum said the lawsuit could set a terrible precedent if the court upholds WaterStone’s argument that designated successors do not have advisory privileges.

“If Waterston is right, you’re talking about billions of dollars being outside any kind of legal access for the original donor advisors or their successors, so that they don’t have any oversight over the money,” Nussbaum said.

Furthermore, Peterson said he believes Waterston did not respect his father’s wishes. He claims WaterStone delayed or rejected his grant recommendations even though they met the mission statement his father wrote, which included a list of approved charities.

“I can tell you this: My father would never have set up a donor-advised fund if he knew this would be the outcome,” he said. “He felt very passionately about it.”

In his view, donors who want to control DAF assets are trying to have their cake and eat it, too, said law professor and DAF critic Roger Colinvaux.

“Whether you like the DAF or not, the sponsor of the DAF is an independent charity,” said Colinfo, a professor at the Columbus School of Law at The Catholic University of America. “It is an independent entity, and its duties are not to the donor.” “If Plaintiff wants the type of control that Plaintiff appears to want, as described in the complaint, there is a structure for that, and this is a private corporation.”

Dana Brackman Reeser, a professor at Brooklyn Law School, cautioned that Peterson’s story is a rare scenario. DAF’s biggest sponsors like Fidelity Charitable and Schwab Charitable (now DAFgiving360) belong to financial institutions and generally tend to keep donors happy, she said.

“This is in their best interest as long as fulfilling the donor’s request will not get the sponsor into trouble,” she added. Brakman Reiser added that the IRS prohibits the use of DAF assets to purchase gala tickets or support private foundations or non-501(c)(3) organizations.

However, the interests of sponsors and donor advisors rarely align perfectly.

Sponsors typically collect fees for managing the DAF’s assets, creating an inherent financial incentive to distribute fewer assets, according to Chuck Collins, director of the Inequality and the Public Good Program at the Institute for Policy Studies, a progressive think tank. While community foundations pioneered the DAF model, they now compete with larger, commercially affiliated sponsors for donor dollars, he added.

“More and more, they have to compete with commercial DAFs like Fidelity that have very low overhead and don’t take a lot of fees. So what’s the business model for a community foundation where, you know, 80% of the donations coming in are from people who want to create DAFs?” He said. “In fact, their business model now relies on people holding their assets for longer periods of time.”

While Peterson’s case is unusual, it is not the first legal challenge surrounding DAFs.

In 2018, a pair of hedge funds sued Fidelity Charitable, claiming that the sponsor had broken an agreement to gradually liquidate their donated shares and instead sold 1.93 million shares, a position originally worth $100 million, within hours. Fidelity Charitable Trust said it followed the law and decided the case in its favor.

In another noteworthy debacle, in 2009, a Virginia-based charitable foundation called the National Heritage Foundation wiped out 9,000 DAFs worth a combined $25 million to repay creditors after it filed for bankruptcy.

A direct donation to charity does not necessarily guarantee that the assets will be used in the donor’s intent. But adding an intermediary to the equation adds another layer of complexity.

The host of lawsuits brought by donor advisers over how DAF assets are spent or invested have so far been largely unsuccessful in court.

In short, according to Colinfo, the courts have held that donors have given up any control in order to qualify for the tax break. He said that if donors had the right to control the assets – rather than the privilege of providing advice – they would not be able to claim the deduction.

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

Peterson said he tried to resolve the dispute with Waterston for about two years before going to court. Although he knew his suit was facing great difficulties, he said he felt he had no other choice.

“People put a tremendous amount of trust in these companies, and we hope to know what these companies can and cannot do,” he said. “It could have a huge impact on the industry, and I don’t want to be that guy. All I want to do is be able to continue my father’s legacy.”