“A recently filed federal complaint involving a donor-advised fund (DAF) exceeding $21 million puts squarely at issue a question that has remained largely dormant in DAF practice: whether a donor’s or successor advisor’s advisory privileges—though nonbinding—constitute a legal interest that must be honored in good faith by the sponsoring organization.

DAFs function on a dual premise. For tax purposes, sponsoring organizations must retain exclusive legal control over contributed assets; yet, in practice, donors and successor advisors exercise meaningful influence over charitable distributions. Sponsors almost universally honor grant recommendations, and advisory privileges ordinarily operate without friction. When the mechanism breaks down, however—as alleged in the Peterson complaint—the dormant legal question becomes explicit: are advisory privileges merely discretionary as a matter of practice, or do donors and successor advisors possess a legally cognizable right to exercise them?”

 

Richard L. Fox provides members with an analysis of the legal issues raised by a recently filed federal complaint involving a donor-advised fund (DAF) exceeding $21 million. The complaint squarely presents the largely untested question whether a donor’s (or successor advisor’s) advisory privilege—while nonbinding—is nonetheless a legal right that must be respected, administered, and exercised consistent with the implied covenant of good faith and fair dealing.

Richard L. Fox is an attorney and founding partner of the Law Offices of Richard L. Fox, LLC (www.richardfoxlaw.com). He is the author of the treatise Charitable Giving: Taxation, Planning and Strategies (Thomson Reuters/Warren, Gorham & Lamont) and Bloomberg Tax Management Portfolio Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects (Portfolio 452). He writes and speaks frequently on issues involving philanthropy, charitable-giving vehicles, estate and gift planning, and nonprofit organizations. Richard also serves on the editorial board of the Estate Planning Journal and is a Fellow of the American College of Trust and Estate Counsel (ACTEC).

Here is his commentary:

EXECUTIVE SUMMARY:

A recently filed federal complaint involving a donor-advised fund (DAF) holding more than $21 million—Peterson v. Christian Community Foundation d/b/a WaterStone—raises a largely untested legal question: whether a donor’s or successor advisor’s advisory privileges—while nonbinding—nonetheless constitute legally enforceable rights that a sponsoring organization must respect and administer in good faith.

The legal question has remained largely dormant because the underlying conflict almost never arises in practice. Although DAF agreements and acknowledgments must recite that the sponsoring organization has “exclusive legal control” over contributed assets for tax purposes, the economic and operational reality is that sponsors nearly always honor donor recommendations. In effect, sponsoring organizations routinely cede functional control over distributions to donors (or successor advisors), and the advisory model works precisely because recommendations are treated as dispositive in the ordinary course. Peterson is therefore unusual: it challenges not the tax formalities, but the practical advisory bargain that has sustained the DAF model in practice.

This scenario is uncommon. Advisory privileges generally operate without friction, which is why the legal issues have remained largely untested.

Earlier DAF litigation—most notably Styles, Fairbairn, and Pinkert—has addressed aspects of sponsor discretion and donor expectations, but none has directly adjudicated the enforceability of advisory privileges as such. Pinkert recognized advisory privileges as a legally cognizable interest for standing purposes, but the court did not reach whether such privileges are enforceable rights under contract principles or otherwise. Whether and to what extent advisory privileges are legally protected has implications for DAF governance, sponsor discretion, and donor expectations.

FACTS:

A. Statutory Structure of DAFs and Advisory Privileges

Donor-advised funds (DAFs) are a charitable giving vehicle administered by a tax-exempt “sponsoring organization.” To establish a DAF, a donor contributes assets to the sponsor, takes an immediate charitable deduction, and may thereafter recommend grants to qualified charities. Under applicable tax rules, a DAF must be owned and controlled by the sponsoring organization, and a charitable deduction is conditioned on the donor relinquishing dominion and control over contributed assets. IRC § 4966(d)(2)(A)(ii) defines a DAF as an account “owned and controlled” by the sponsor, and under IRC § 170(f)(18)(B), a charitable deduction for a contribution to a DAF “shall only be allowed” if the sponsor acknowledges that it has “exclusive legal control” over the assets contributed.

Consistent with this statutory structure, DAF agreements and program policies typically provide that:

 

• contributions are irrevocable and nonrefundable;
• the sponsoring organization has exclusive ownership and control over contributed assets and earnings;
• the sponsor retains sole discretion to approve or deny grant recommendations;
• donors have no legally enforceable right to compel grants, control investments, or direct timing; and
• the sponsor may restrict, suspend, or terminate advisory privileges.

 

Although the advisory privileges granted to donors are contained in legal documents governing DAFs, consistent with the ownership and control required to be retained by the sponsoring organization, such documents make it clear that the advisory privileges are not legally binding upon the sponsoring organization. Rather, they convey influence—through recommendations on grants, investments, and successor advisors—without conferring control over contributed assets. These privileges are distinct from enforceable rights: they are intended to allow donors to participate in charitable decision-making without compromising the sponsor’s exclusive legal control required for DAF status. Importantly, the mere ability to make recommendations does not, by itself, constitute a legally enforceable right over contributed assets.

The disqualifying feature identified in the legislative history is the conferral of enforceable rights with respect to the assets themselves, rather than the recognition of advisory privileges concerning distributions or investments. The Joint Committee’s Technical Explanation to IRC § 4966(d)(2)(A) confirms that an agreement between a sponsoring organization and a donor that provides enforceable legal rights with respect to contributed assets goes beyond mere “advisory privileges” and will disqualify a fund from being treated as a DAF. See Technical Explanation of H.R. 4, the “Pension Protection Act of 2006” (Joint Comm. on Tax’n, Aug. 3, 2006).  For DAF qualification purposes, therefore, advisory privileges relating to grants or distributions would not be treated as enforceable property rights in the contributed assets, even though such privileges may constitute a legally cognizable interest for purposes of contract, standing, or injunctive relief.

B. Prior Litigation Involving DAF Advisory Privileges

The limited litigation involving DAFs has centered on the legal significance of advisory privileges and the scope of sponsor discretion.

Styles v. Friends of Fiji (Nev. 2019). In Styles, a donor alleged that the sponsoring organization ignored bona fide recommendations and used DAF assets for purposes of its own choosing. The Nevada Supreme Court held that the sponsor had breached the implied covenant of good faith and fair dealing, notwithstanding contractual language granting the sponsor “complete ownership” of contributed funds and “ultimate control, authority, and discretion” over distributions. The court explained that discretion “must be exercised in good faith and in accordance with the reasonable expectations of the parties,” and could not be invoked to defeat the donor’s advisory expectations. The dispute centered on impairment of advisory privileges rather than investment performance or mismanagement.  The donor sought a return of the contributed assets, effectively a refund. On remedy, the court denied damages because the donor had relinquished ownership of the assets, taken a charitable deduction, and thus retained no continuing economic interest in the funds.

Fairbairn v. Fidelity Charitable (N.D. Cal. 2021). In Fairbairn, donors alleged that Fidelity Charitable made specific promises to induce a ~$100 million contribution of appreciated public company stock, and that Fidelity’s subsequent liquidation of the stock breached those promises and violated a duty of care. After denying summary judgment on a tax estoppel theory, the court conducted a bench trial and entered judgment for Fidelity. The court held that the alleged promises were not proven and, even if they had been, the donors could not establish reasonable reliance. On the negligence claim, the court examined whether a “special relationship” could exist between a DAF sponsor and a donor sufficient to support a purely economic loss claim. The court indicated that such a relationship could exist in the DAF context, but ultimately concluded that no duty-of-care breach occurred on the facts presented and did not reach the existence of the duty. Importantly, Fairbairn did not involve impairment of advisory privileges; rather, the alleged injury was purely economic (reduced sale proceeds and diminished charitable impact). The case therefore did not address the legal status of advisory privileges themselves.

Pinkert v. Schwab Charitable (9th Cir. 2022). In Pinkert, the donor sued Schwab Charitable alleging excessive fees, imprudent investment options, and related mismanagement that purportedly diminished the value of the donor’s DAF. The Ninth Circuit affirmed dismissal for lack of Article III standing. The court held that the donor, having irrevocably transferred assets to the sponsor, taken a charitable deduction, and retained only advisory privileges, lacked any continuing property interest sufficient to support standing to recover for economic losses in the DAF account. Critically, the Ninth Circuit distinguished economic mismanagement from impairment of advisory privileges, noting that the donor had not alleged that Schwab failed to consider or honor his recommendations. In denying standing on a property-rights basis, the court stated that Pinkert “does not allege that the right he does have—the right to provide nonbinding advice—was infringed.” Thus, the court implicitly recognized that having advisory privileges with respect to a DAF can constitute a legally recognized advisory right, although it was not the core focus of the holding because such right was not asserted as being infringed. Because Pinkert did not involve impairment of that interest, the court had no occasion to address what legal consequences, if any, would attach to interference with advisory privileges.

C. Peterson v. Christian Community Foundation d/b/a WaterStone (D. Colo. filed Jan. 15, 2026)

On January 15, 2026, the successor advisor to the Peterson Family Stewardship Fund filed a complaint in federal court against WaterStone, a Colorado-based Christian nonprofit that sponsors donor-advised funds. The complaint involves a fund holding more than $21 million and alleges that WaterStone wrongfully impaired or suspended the successor advisor’s advisory privileges.

The Peterson Family Stewardship Fund was established in 2005 by Gordon Peterson to support expressly evangelical Christian charitable purposes. A detailed written Purpose Statement accompanied the creation of the fund and identified specific doctrinal objectives, including scriptural translation, evangelistic missions, media outreach, and Christian education. A prioritized “preapproved charitable recipient list” was incorporated at inception, reinforcing donor intent and describing the Fund as an instrument for advancing evangelical mission work. Mr. Peterson named his wife, Ruth, and his son, Philip, as co-equal successor advisors. After Ruth’s death in 2021, Philip became the sole successor advisor, and the complaint alleges that for more than fifteen years WaterStone uniformly approved grant recommendations and administered the Fund accordingly.

According to the complaint, the advisor–sponsor relationship deteriorated in 2024. The successor advisor alleges that WaterStone revoked his online access, ceased communications, suspended his advisory privileges, refused to process his grant recommendations, and allowed no charitable distributions from the Fund for the first time since its formation. One specific allegation involves the refusal to process a grant recommendation of approximately $1 million to Operation Mobilization, a long-time grantee consistent with the Fund’s stated evangelical mission. The complaint further alleges that WaterStone’s CEO instructed the successor advisor to cease all contact with WaterStone and that WaterStone declined to provide accountings or copies of governing documents, including the original DAF agreement.

The complaint also alleges that WaterStone imposed undisclosed restrictions, assessed unauthorized fees, and refused repeated requests for an accounting. In 2025, WaterStone approved a single $400,000 distribution, but the complaint asserts that the Fund remained markedly underdistributed relative to prior years and to the donor’s expectations. The successor advisor emphasizes that the Fund was structured to make ongoing charitable distributions and that the alleged refusal to process recommendations frustrated the donor’s evangelical charitable objectives.

The complaint asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligent misrepresentation, declaratory judgment, injunctive relief, accounting, and violation of the Colorado Consumer Protection Act. Among other remedies, the successor advisor seeks a declaratory judgment defining the legal status of advisory privileges, injunctive relief requiring WaterStone to resume charitable distributions consistent with the successor advisor’s recommendations and the Fund’s charitable purposes, transfer of the Fund to another DAF sponsor of the successor advisor’s choosing, and an accounting.

Peterson differs materially from the limited prior DAF litigation. Unlike Fairbairn, the claim does not concern diminution of sale proceeds or charitable value; unlike Pinkert, it does not seek to recover for economic or reputational injury; and unlike Styles, it does not request return of contributed assets. Instead, Peterson centers on the advisory relationship itself—whether successor advisory privileges carry legal content, and whether a sponsor may suspend or disregard those privileges at will.

COMMENT:

The DAF statutory framework requires sponsoring organizations to retain exclusive legal control over contributed assets as a condition of favorable tax treatment. That requirement ensures that a DAF is treated as a component part of a public charity and not as a separate private foundation. DAF agreements accordingly recite irrevocability, sponsor discretion, and the absence of enforceable donor rights. At the same time, those same agreements confer advisory privileges that donors and successor advisors reasonably expect will be honored in practice. The result is a structural tension between the statutory requirement of exclusive legal control and the practical expectation that donor recommendations will guide distributions.

That tension is normally not evident because the advisory mechanism functions smoothly. Sponsors have strong market incentives to honor donor recommendations, and as a practical matter they do so. Indeed, the success of the DAF model depends on sponsors effectively yielding distribution decisions to donors in the ordinary case, notwithstanding the formal retention of exclusive legal control required for tax purposes. Peterson is therefore unusual: it challenges not the statutory tax formalities, but the practical advisory bargain that has sustained the DAF model in practice.

 

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

 

 Richard Fox

 

CITE AS:  

LISI Charitable Planning Newsletter #353 (January 26, 2026) at http://www.leimbergservices.com. Copyright © 2026 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

CITES:

IRC §§ 170(f)(18), 4966(d)(2)(A); Styles v. Friends of Fiji (Nev. 2019); Fairbairn v. Fidelity Charitable (N.D. Cal. 2021); Pinkert v. Schwab Charitable (9th Cir. 2022); Peterson v. Christian Community Foundation, Inc. d/b/a WaterStone (D. Colo. filed Jan. 15, 2026); Technical Explanation of H.R. 4, The “Pension Protection Act of 2006,” Joint Committee on Taxation (Aug. 3, 2006).