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It may sound like gossip, but some financial advisors warn that it can be the case when it comes to funds recommended by donors.
Donor-advised funds (DAFs) are like charitable investment accounts that allow donors to donate cash, securities, and other assets to a DAF and claim an immediate tax deduction without having to distribute them to a charity. Instead, the funds can be invested for growth tax-free until the donor is ready to make a gift.
In most cases, DAFs work well. But if not, many may wish they had read the fine print more carefully.
“Under DAF rules, you’re relinquishing 100% control over the funds,” said Patrick Simasko, an attorney and financial advisor with the Simasko Law Firm. This means that once the organization sponsoring your DAF receives your funds and assets, it has no obligation to make the contributions you requested or even to speak to you again, he said.
A cautionary tale?
Philip Peterson, 63, learned the pitfalls of DAFs the hard way. he submitted Lawsuit filed in January He filed a lawsuit in federal court in Colorado against the nonprofit Christian Community Foundation, also known as Waterstones, over the family’s DAF, which was established by his late father.
Mr. Peterson alleges that Waterstones, which manages his family’s DAF, has refused to communicate with him and failed to award him the charitable grants he has recommended since early 2024, contrary to his father’s written statement of purpose. Peterson also said he doesn’t know how much the DAF is worth because the nonprofit stopped providing account information after 2023, when the DAF was worth $21 million.
Waterstone told USA Today in an email that “the donor-advised fund at issue has consistently carried out the donor’s express wishes since its inception. The plaintiff in this lawsuit is not a donor.”
Due to the pending litigation, Waterstones said it would not be commenting further, adding: “Any further position on this matter will be made through Waterstones’ submissions to Mr. Peterson’s complaint, which will be filed in due course.”
What are DAF rules and why are they so strict?
According to the National Association of Real Estate Planners and Council, a nonprofit industry group, DAF laws are clear.
- Donations are irrevocable and non-refundable.
- The organization that sponsors the DAF exclusively owns and controls the donated assets and proceeds.
- DAF Sponsors will approve or reject grant recommendations in their sole discretion.
- Donors have no legally enforceable rights to compel grants, control investments, or directly determine timing.
- Sponsor may limit, suspend, or terminate advisory privileges.
The reason donors have to relinquish control of their assets to sponsoring organizations is because the IRS requires it in exchange for an immediate tax deduction, Simasko said.
“It’s like donating money to the Red Cross, and the Red Cross uses that money to pay the board,” he says. “There are no restrictions and you can spend your money on whatever you like. You have to consider the pros and cons when using this system to get (tax) relief.”
Could the Peterson v. Waterstone case lead to a loosening of the rules?
History has shown that courts have typically sided with DAF sponsors in disputes. Examples include:
- In 2009, a court upheld the National Heritage Foundation’s use of $25 million from 9,000 DAFs to pay creditors after it filed for bankruptcy.
- In 2021, a couple lost a lawsuit against the Fidelity Charitable Donor Advised Fund. They accused the DAF of selling $100 million in stock in publicly traded companies it donated, despite promising not to sell the stock unless the donor directed it.
- In 2021, a court ruled that the Schwab Charitable Foundation (SCF) cannot be sued by donors over SCF’s investment choices, even if they result in increased fees to DAFs. When a donor donates assets to a DAF, they relinquish legal control of those assets.
However, the Peterson case may not fall within these categories of disputes. Unlike previous court decisions, the Peterson case focuses on DAF agreements that include advisory privilege, or the right for representatives of donors or successors to make recommendations, said George Beup, senior legal trust advisor at Greenleaf Trust.
“Most DAF sponsors are good at respecting advisory privileges because they have a business incentive to do so,” he said in the post. “It will be interesting to see how enforceable, if any, the federal courts will give donor advisory privileges.”
Is DAF still worth using?
DAFs remain the preferred tool among Americans for streamlining their charitable giving and managing their tax burden, and the total number of DAF accounts will reach an all-time high of 3.56 million in 2024, according to the Donor Advised Fund Research Collaborative, a nonprofit academic organization.
However, donors should be careful and fully understand their rights.
“Transparency regarding the pros and cons of various philanthropic efforts is critical,” Alex Delcolo, a financial advisor at Diamond State Financial Group, wrote on LinkedIn. “Although it is not common for sponsors to deny requests, it is important to notify donors of this possibility before setting up a DAF.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
