Lawsuit Initiated Over Donor-Advised Fund
Philip Peterson has filed a lawsuit against WaterStone, a Christian nonprofit that administers his family's $21 million donor-advised fund (DAF). Peterson alleges that WaterStone stopped communicating with him and failed to make recommended charitable grants since early 2024. The fund held $21 million in assets at the end of 2023.
Understanding Donor-Advised Funds and Control Dynamics
Donor-advised funds have become significant philanthropic tools, attracting nearly $90 billion in donations in 2024 and collectively holding $326 billion in assets. DAFs allow donors to contribute assets for an immediate tax deduction, with the flexibility to allocate funds to charities at a later time.
Unlike private foundations, DAFs are not required to distribute assets within a specific timeframe, a characteristic that has drawn criticism.
While donors recommend how funds are distributed, the assets are legally controlled by the administering organizations.
Tax scholar Ray Madoff highlights a discrepancy between public understanding of donor control and the legal rules governing DAFs.
Details of the Dispute
Peterson states the conflict began in early 2024 over the amount of grant distributions. He alleges that WaterStone CEO Ken Harrison proposed maintaining the fund's principal indefinitely and granting only from investment income, which would prevent the customary annual grants of $2.3 million to $2.5 million. Peterson further claims Harrison ended communication after he expressed a desire to move the DAF to another sponsor.
Peterson is seeking court intervention to transfer the DAF to a different organization and to restore the fund's giving schedule. He reported requesting a $1 million grant in 2024 and was informed by WaterStone of a $400,000 distribution for 2025.
WaterStone's Stance and Legal Repercussions
WaterStone's legal counsel indicated that the nonprofit has consistently honored the intentions of Peterson's late father, Gordon Peterson, who established the fund in 2005. They assert that the plaintiff is not the original donor.
Andrew Nussbaum, Peterson's lawyer, noted that WaterStone had previously approved Philip Peterson's grant requests and helped Gordon Peterson designate his wife and son as co-advisors.
Nussbaum suggests that if the court upholds WaterStone's position that designated successors lack advisory privileges, it could establish a precedent affecting billions in DAF assets.
Legal and Expert Perspectives
Law professor Roger Colinvaux states that DAF sponsors are independent charities whose duties are not primarily to the donor, suggesting that a private foundation structure offers the type of control Peterson appears to seek. Dana Brakman Reiser, another law professor, views Peterson's situation as uncommon, noting that major DAF sponsors typically aim to satisfy donors' requests. The IRS prohibits using DAF assets for certain purposes, such as purchasing gala tickets or supporting private foundations.