Multimillion-dollar donor-advised fund lawsuit puts spotlight on control risks

A $21 million donor-advised fund tied to a Kansas family has become a test case for how much practical influence donors – and their successors – really have over charitable dollars they earmark for giving.

The dispute arrives as DAF usage and grant volumes hit record highs, raising new questions for advisors who steer clients toward these vehicles.

In a lawsuit filed in Colorado federal court, 63-year-old Philip Peterson alleges that WaterStone, a Colorado Springs-based Christian nonprofit, cut off his access to information and has declined to carry out his grant recommendations since early 2024, CNBC has reported.

The fund, created in 2005 by his late father, real estate investor Gordon Peterson, reportedly held $21 million at the end of 2023 and was dedicated to evangelical Christian causes.

Peterson claims a breakdown began when WaterStone’s leadership proposed keeping the principal in perpetuity and distributing only investment income, which he argues would not sustain the fund’s customary annual grants of roughly $2.3 million to $2.5 million. After he raised the prospect of moving the account to a different sponsor, he says a Zoom call with WaterStone chief executive Ken Harrison ended with an instruction never to contact the organization again.

“I made a promise to my father. I promised him that if I was the remaining person on the account that I would direct the funds as I knew that he would 100% approve,” Peterson told CNBC. “I want to be a man of my word.”

WaterStone has declined to address specific allegations, but its legal counsel said the organization has followed the donor’s original instructions. “WaterStone has consistently carried out the articulated wishes of the donor since the donor advised fund in question was established,” counsel said in a written statement. “The plaintiff in this case is not the donor.”

The clash underscores one of the core trade-offs of DAFs: Donors get an immediate tax deduction and ongoing advisory privileges, but the sponsor charity owns and controls the assets. That gap between expectation and reality is where advisors may need to do more client education.

“It’s sold to the public as, ‘This is your account, and you can decide where it goes, and you can move it, and you maintain full control.’ But if you don’t give up dominion and control, you don’t get the tax benefits,” Ray Madoff, a tax scholar at Boston College Law School, told CNBC. “There’s a disconnect between the legal rules that govern it and the understanding of the parties. And this case is a perfect example of it.”

DAFs have become a central pillar in US philanthropy. Figures from the DAF Research Collaborative show Americans contributed nearly $90 billion to DAFs in 2024, and total DAF assets reached about $326 billion. Large sponsors have been reporting rapid growth in grants as well: DAFgiving360, formerly Schwab Charitable, said its donors distributed $9.9 billion to more than 165,000 charities in 2025, a 28% jump from the prior year, while Vanguard Charitable has touted nearly $4 billion in grants that same year.

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Yet critics argue that, systemwide, too many dollars remain warehoused in intermediaries. The Institute for Policy Studies estimates that DAFs and private foundations together captured 38% of all individual giving in 2024 and could absorb half of such gifts by 2028, with combined assets topping $2 trillion as soon as 2026.

"Donors can take tax deductions up front when they put money into them, but then the money can sit for a very long time before making its way out to charities on the ground," the IPS said in a note earlier this month.

"Through the charitable deduction, we taxpayers subsidize gifts to foundations and DAFs," the think tank said. "But despite our subsidies, overall giving has remained essentially flat, and an ever smaller share of it is going directly to working charities."