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You Got the Tax Deduction. But Do You Still Control the Money?
A new lawsuit is raising questions about one of the most popular charitable giving strategies in America: donor-advised funds.
For years, donor-advised funds (DAFs) have been promoted as a flexible way to support charitable causes while maximizing tax benefits. Wealthy donors can contribute appreciated assets, claim an immediate charitable deduction, avoid capital gains taxes, and decide later which charities ultimately receive the money.
But a recent legal dispute involving a $21 million donor-advised fund is highlighting something many donors may not fully understand:
Once the money goes into a donor-advised fund, it no longer legally belongs to the donor.
What Is a Donor-Advised Fund?
A donor-advised fund is a charitable giving account sponsored by a public charity.
Here's how it works:
A donor contributes cash, stock, real estate, or other assets.
The donor receives an immediate tax deduction.
The assets can be invested and grow tax-free.
The donor recommends grants to charities over time.
DAFs have exploded in popularity because they allow donors to separate the tax deduction from the timing of charitable gifts. They are often used by taxpayers who want to "bunch" several years of charitable giving into a single tax year.
As of 2024, donor-advised funds held more than $326 billion in assets nationwide, making them one of the fastest-growing vehicles in philanthropy.
The Lawsuit That's Getting Attention
The current dispute centers on a $21 million donor-advised fund administered by WaterStone, a Colorado-based charitable foundation.
According to court filings, Philip Peterson became the successor advisor to a donor-advised fund established by his late father. Peterson alleges that the sponsoring charity stopped communicating with him and refused to consider his recommendations regarding future charitable grants. WaterStone maintains that the original donor agreement gave the organization full discretion over grant decisions and that it is not legally obligated to follow donor recommendations.
The case could help clarify how much authority donor advisors and successor advisors actually possess once assets have been contributed to a DAF.
The Important Tax Reality Many Donors Miss
The lawsuit is drawing attention because it highlights a fundamental feature of donor-advised funds:
They are donor-advised, not donor-controlled.
When assets are contributed to a DAF:
The gift is generally irrevocable.
The donor receives the tax deduction immediately.
Legal ownership transfers to the sponsoring charity.
Future grant recommendations are advisory rather than binding.
In practice, most DAF sponsors follow donor recommendations. However, the sponsoring organization ultimately retains legal authority over the assets and grantmaking decisions.
Why This Matters for Estate Planning
The case is especially relevant for families who intend to use donor-advised funds across multiple generations.
Many DAF sponsors allow successor advisors—children, grandchildren, or other family members—to continue recommending grants after the original donor's death.
However, policies vary widely among sponsoring organizations. Some permit multiple generations of advisory privileges, while others impose limits on successor advisors or eventual fund termination.
The lawsuit serves as a reminder that donors should understand these policies before contributing significant assets.
Questions Donors May Want to Ask
For taxpayers considering a donor-advised fund, financial advisors often recommend asking:
Can successor advisors be named?
How many generations of advisors are permitted?
Can the fund be transferred to another sponsor?
Under what circumstances can grant recommendations be denied?
What happens to the fund if no successor advisor is named?
What discretion does the sponsoring charity retain?
The answers can vary substantially depending on the organization administering the fund.
Donor-Advised Funds Remain Popular
Despite the lawsuit, donor-advised funds remain one of the most effective charitable planning tools available.
They can help taxpayers:
Receive an immediate charitable deduction
Donate appreciated assets without triggering capital gains tax
Simplify charitable recordkeeping
Create a long-term philanthropic strategy
Manage charitable giving during high-income years
Recent tax law changes have also increased interest in charitable planning strategies, prompting many advisors to revisit DAFs with their clients.
The Colorado lawsuit isn't necessarily a sign that donor-advised funds are flawed. Instead, it's a reminder of something many donors overlook:
Once assets are contributed to a donor-advised fund, the donor receives the tax benefits immediately, but legal control shifts to the sponsoring charity.
For taxpayers using donor-advised funds as part of a long-term charitable or estate planning strategy, understanding those rules before making a contribution may be just as important as understanding the tax deduction itself.
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