In recent years, donor-advised funds have become one of the fastest-growing tools in American philanthropy. Promoted as flexible and tax-efficient giving vehicles, these funds allow wealthy individuals and families to contribute money or assets while deciding later which charitable causes will ultimately receive the funds. However, a new lawsuit involving a $21 million charitable account is raising questions about how much control donors actually retain after contributing to these funds.

The legal dispute was initiated by Philip Peterson, a 63-year-old resident of Kansas, who filed a lawsuit in January in federal court in Colorado. Peterson claims that the nonprofit organization managing his family’s donor-advised fund stopped communicating with him and refused to process grant recommendations he submitted starting in early 2024. The account in question reportedly held approximately $21 million in assets at the end of 2023.

According to the lawsuit, the fund is administered by WaterStone, a Christian nonprofit organization based in Colorado Springs that was originally established as the Christian Community Foundation. Peterson alleges that the organization cut off his access to financial information regarding the account, leaving him uncertain about how the fund’s assets have performed since the end of 2023.

Attorneys representing WaterStone responded by stating that the organization has consistently honored the wishes of the fund’s original donor, Peterson’s father, who established the charitable account in 2005 and passed away in 2019.

The dispute highlights both the rapid expansion and the potential complications surrounding donor-advised funds, commonly known as DAFs. These philanthropic vehicles have grown dramatically in popularity over the past decade. According to the most recent annual report from the DAF Research Collaborative, Americans contributed nearly $90 billion to donor-advised funds in 2024 alone. Combined assets held by these funds reached approximately $326 billion during the same year.

For donors seeking both philanthropic impact and tax advantages, donor-advised funds are often marketed as a convenient solution. Instead of donating directly to a nonprofit organization, individuals contribute cash, stocks, or other assets to a donor-advised fund account. Donors receive an immediate tax deduction for the contribution, even though the money may be distributed to charities years later.

Many financial advisors describe these accounts as charitable savings accounts. Donors can recommend grants to qualified nonprofits over time while the funds remain invested within the account. This structure offers significant flexibility compared with traditional charitable giving.

However, donor-advised funds differ from private foundations in one important way: there is no legal requirement that the funds be distributed within a specific time frame. Critics argue that this lack of a mandatory payout requirement allows large sums of charitable money to sit unused for long periods, effectively turning DAFs into vehicles for wealth preservation rather than immediate philanthropy.

The Peterson lawsuit illustrates another key issue: control. Although donors may suggest which charities should receive grants, the assets legally belong to the organization that administers the donor-advised fund. These organizations, often referred to as sponsors, have final authority over how the funds are managed and distributed.

In practice, most sponsors typically follow donors’ recommendations. But legally they are not required to do so. If disagreements arise, donors may find that they have limited legal options.

Ray Madoff, a tax scholar and professor at Boston College Law School, explained that many donors misunderstand the nature of donor-advised funds.

“These accounts are often presented as if the donor maintains control,” she said. “But in order to receive the tax deduction, the donor must give up legal ownership of the assets. That creates a gap between what people think they have and what the law actually allows.”

According to Peterson, the conflict with WaterStone began with a disagreement about how the fund’s money should be distributed. He claims that in early 2024, WaterStone’s chief executive officer, Ken Harrison, proposed preserving the principal of the fund indefinitely and distributing only the investment income generated by the assets.

Peterson said this proposal would dramatically reduce the amount of money going to charities each year. Historically, the fund had made annual grants ranging from approximately $2.3 million to $2.5 million. If only investment income were distributed, those grant amounts would likely decline.

Peterson rejected the proposal. He later informed Harrison during a Zoom meeting that he intended to transfer the donor-advised fund to a different sponsoring organization. Peterson alleges that the conversation ended abruptly, with Harrison telling him not to contact WaterStone again.

Peterson is now asking the court to restore his advisory privileges and allow him access to the account’s information. Ultimately, he hopes the court will require WaterStone to transfer the fund to another organization that will process his charitable recommendations.

The fund was originally created by Peterson’s father, Gordon Peterson, a real estate investor known for his strong Christian faith. The elder Peterson established the fund to support evangelical Christian organizations and ministries.

Philip Peterson says he feels a personal responsibility to continue his father’s philanthropic legacy.

“I promised my father that if I became the remaining advisor, I would direct the funds the way he would have wanted,” Peterson said. “Keeping that promise matters deeply to me.”

Peterson claims that he requested a $1 million grant from the fund in 2024 but has no way of knowing whether the grant was actually issued. In 2025, he says WaterStone informed him that only a $400,000 distribution would be permitted from the fund.

WaterStone has declined to comment on the specific allegations raised in the lawsuit. However, in a written statement, the organization’s legal counsel emphasized that the nonprofit has consistently followed the intentions of the original donor.

“The donor in this case was Gordon Peterson,” the statement noted. “The plaintiff is not the donor.”

Andrew Nussbaum, Peterson’s attorney, argues that the case could have far-reaching consequences if the court rules in WaterStone’s favor. According to Nussbaum, Gordon Peterson formally appointed both his wife, Ruth Peterson, and his son Philip as successor advisors before his death.

After Ruth Peterson passed away in 2021, Philip became the sole advisor. Nussbaum says that for several years WaterStone approved all of Philip Peterson’s recommended grants without issue.

If the court determines that successor advisors have no meaningful advisory authority, Nussbaum argues, it could affect billions of dollars currently held in donor-advised funds across the United States.

Supporters of donor-advised funds often emphasize their efficiency and accessibility. However, critics believe the structure can create misunderstandings about control and accountability.

Roger Colinvaux, a law professor at the Columbus School of Law at the Catholic University of America, argues that the legal framework behind donor-advised funds is clear.

“The sponsoring organization is an independent charity,” he explained. “Its legal responsibilities are not to the donor but to its own charitable mission.”

Colinvaux notes that donors who want to maintain direct control over charitable assets have another option: establishing a private foundation. While private foundations come with stricter regulations and reporting requirements, they allow donors greater control over investment decisions and grantmaking.

Dana Brakman Reiser, a professor at Brooklyn Law School, believes the Peterson case represents an unusual situation. Large donor-advised fund sponsors affiliated with financial institutions—such as Fidelity Charitable or Schwab Charitable—generally aim to maintain strong relationships with donors.

These organizations typically approve donor recommendations as long as they comply with IRS regulations. For example, donor-advised funds cannot be used to purchase tickets to charity galas or pay for personal expenses such as college tuition.

Even so, the financial incentives of fund sponsors and donors do not always perfectly align. Sponsors typically charge administrative or investment fees based on the size of the assets they manage. As a result, critics argue that sponsors may have an incentive to keep funds invested rather than distributing them quickly.

Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies, believes the competitive landscape has also influenced the growth of donor-advised funds. Community foundations, which originally pioneered the model, now compete with large financial firms offering lower fees.

“As more donors open donor-advised funds, many foundations depend heavily on those assets staying in place for long periods,” Collins said.

Although Peterson’s lawsuit is drawing attention, it is not the first legal dispute involving donor-advised funds.

In 2018, a hedge fund couple filed a lawsuit against Fidelity Charitable, alleging the organization violated an agreement by selling nearly two million donated shares too quickly. Fidelity Charitable argued it had acted lawfully, and the court ultimately ruled in the organization’s favor.

Another controversy occurred in 2009 when a Virginia nonprofit called the National Heritage Foundation declared bankruptcy. The organization had managed about 9,000 donor-advised funds totaling roughly $25 million. When the nonprofit collapsed, those funds were used to pay creditors.

Legal challenges brought by donor advisors over fund management or grant decisions have generally been unsuccessful in court. Judges have typically ruled that donors relinquish legal control over their contributions when they receive a tax deduction.

Peterson acknowledges that the legal odds may not be in his favor. Nevertheless, he believes pursuing the case is necessary to clarify the rights and responsibilities associated with donor-advised funds.

“People place a huge amount of trust in these organizations,” he said. “This case may help define what they are allowed to do and what they cannot do.”

For Peterson, however, the issue goes beyond legal principles or industry standards. His primary goal, he says, is simply to continue the charitable mission his father started two decades ago.

“All I want is the opportunity to carry forward my father’s legacy,” he said.