Lawsuit Highlights Risks of Donor-Advised Funds

Philip Peterson, a Kansas resident, has filed a lawsuit against WaterStone, a Christian nonprofit that administers his family's donor-advised fund (DAF), alleging that the organization has failed to communicate with him and has not honored his grant recommendations since early 2024. The lawsuit, filed in January 2026 in Colorado federal court, centers around a $21 million charitable fund established by Peterson's late father, Gordon Peterson, in 2005. The case underscores the growing popularity of DAFs and the potential risks associated with them.

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Donor-advised funds have become a significant part of American philanthropy, with nearly $90 billion donated to DAFs in 2024 alone. These funds allow donors to contribute cash and other assets, receiving immediate tax deductions while retaining the ability to recommend how the funds are distributed to charities over time. However, unlike private foundations, DAFs are not mandated to distribute assets within a specific timeframe, leading to criticisms that they serve as vehicles for wealth hoarding.

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The conflict between Peterson and WaterStone escalated in early 2024 when Peterson alleges that WaterStone's CEO, Ken Harrison, informed him that the organization intended to retain the fund's principal indefinitely and only distribute income generated from investments. Peterson opposed this plan, arguing it would prevent the customary annual grants of $2.3 million to $2.5 million. Following a Zoom call in March 2024, where Peterson expressed his desire to transfer the DAF to another sponsor, Harrison allegedly instructed him not to contact WaterStone again.

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Peterson's lawsuit seeks to assert his advisory privileges and compel WaterStone to transfer the DAF to another organization. His attorney, Andrew Nussbaum, argues that the case could set a precedent affecting billions of dollars in DAFs if the court upholds WaterStone's stance that designated successors lack advisory privileges. WaterStone's legal counsel maintains that the organization has consistently honored the wishes of the original donor, asserting that Peterson is not the donor himself.

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Critics of DAFs, including law professor Roger Colinvaux, argue that donors seeking control over DAF assets are attempting to benefit from tax advantages while retaining oversight. Colinvaux emphasizes that DAF sponsors operate as independent charities, with obligations not directly to the donors. Additionally, Dana Brakman Reiser, a professor at Brooklyn Law School, notes that while Peterson's experience is unusual, larger DAF sponsors typically prioritize donor satisfaction as long as it does not conflict with legal obligations.

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WaterStone has declined to comment on the specifics of Peterson's allegations, stating that it has acted in accordance with the wishes of the original donor. Peterson, however, contends that the organization has not honored his father's intentions, claiming delays and denials of grant requests that align with the mission statement established by his father.

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The deadline for WaterStone to respond to the lawsuit is set for mid-March 2026. The outcome of this case may have significant implications for the governance and operational transparency of donor-advised funds in the future.

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