You think you own the money in your donor-advised fund. You don't. That’s the hard lesson Philip Peterson is learning right now in a Colorado federal court. His family’s $21 million charitable fund is at the center of a legal brawl that should make every high-net-worth donor take a very long, uncomfortable look at their paperwork.
Peterson is suing WaterStone, a Christian nonprofit that acts as the "sponsor" for his family’s fund. He says they’ve ghosted him. He claims they stopped communicating, ignored his grant recommendations, and—here is the kicker—decided they were going to keep the $21 million principal forever and only give away the interest.
If you’ve ever been told a donor-advised fund (DAF) is just like a "charitable bank account," you’ve been sold a lie. It's a gift. Once the money leaves your hand, it belongs to the sponsor. You’re just a guest in the house you built.
The $21 million ghosting
The Peterson story isn't just about a family disagreement; it’s a technical breakdown of how DAFs actually function. Gordon Peterson, Philip’s father, started the fund in 2005. For fifteen years, things were fine. The fund hummed along, giving away between $2.3 million and $2.5 million annually to evangelical causes.
Then Gordon died. Then his wife, Ruth, died. Philip became the sole "successor advisor." That’s when the relationship with WaterStone reportedly soured. According to the lawsuit, WaterStone’s CEO told Peterson the organization planned to shift the strategy to a "perm-fund" model—preserving the principal and only distributing investment income.
Peterson hated the idea. He wanted to keep the high-impact giving his father started. When he suggested moving the $21 million to a different sponsor, he says he was told to never contact the organization again. Imagine losing the ability to direct $21 million of your family's legacy because of a Zoom call.
The legal trap of advisory privileges
The IRS is very clear about one thing: if you want the tax deduction, you have to give up "dominion and control."
Most donors focus on the "Advised" part of Donor-Advised Fund. The law focuses on the "Sponsor" part. When you put $1 million into a DAF at Fidelity, Schwab, or a community foundation, you get a tax receipt immediately. That receipt is your proof that you no longer own that money.
Why the sponsor holds all the cards
- Legal Ownership: The sponsoring organization has "exclusive legal control." They own the assets. They aren't a bank holding your cash; they’re a charity that has accepted your gift.
- Advisory vs. Mandatory: Your "right" to suggest where the money goes is actually a "privilege." Most sponsors follow donor recommendations 99% of the time because it’s good for business, but they aren't legally forced to.
- The Standing Problem: Courts have historically been brutal to donors who sue. In cases like Pinkert v. Schwab Charitable, judges have ruled that because the donor gave the money away, they no longer have "standing" to sue over how it's managed.
Peterson’s legal team is trying a different angle. They aren't just complaining about investment returns; they're arguing that his "advisory privileges" are a specific contractual right that was breached. If he wins, it changes the game for donor rights. If he loses, it reinforces the reality that DAF sponsors are the ultimate bosses.
The hidden risks of specialized sponsors
Commercial DAFs like Fidelity or Vanguard are generally "cause-neutral." They don't care if you give to a cat shelter or a soup kitchen, as long as it’s a 501(c)(3).
Religious or "mission-driven" sponsors are different. They often have specific doctrinal requirements. WaterStone, for example, is an evangelical organization. Problems often start when the donor’s vision (or the heir’s vision) drifts away from the sponsor’s specific mission.
If you use a specialized sponsor, you’re marrying their mission. If you decide you want to support a cause they find objectionable, they can—and will—block the grant. In Peterson's case, it wasn't even a cause disagreement; it was a math disagreement. The sponsor wanted to keep the capital; the son wanted to spend it.
How to protect your legacy
Don't wait for a $21 million lawsuit to check your DAF agreement. You need to be proactive before the money hits the account.
- Read the Succession Clause: Most people name their kids as successor advisors and call it a day. But what happens if the sponsor doesn't like your kids? Or if your kids want to move the fund? Look for language that allows for a "portability" or transfer of the fund to another 501(c)(3) if the relationship sours.
- Define the Granting Minimums: If you want your fund to be spent down during your lifetime (or your children's), put that in writing. Don't leave it to the sponsor’s "discretion" if you can avoid it.
- Diversify Your Sponsors: If you’re giving eight figures, don't put it all in one basket. Use a community foundation for local giving and a national commercial sponsor for the rest. It gives you leverage. If one sponsor becomes difficult, you still have a relationship with the other.
Is the DAF still worth it
Honestly, for most people, the answer is still yes. The tax benefits are too good to ignore. You get the deduction now, you avoid capital gains on appreciated stock, and the money grows tax-free.
But the "Peterson vs. WaterStone" case is a loud reminder that the "set it and forget it" mentality is dangerous for large funds. Philanthropy is a relationship, but when $21 million is on the line, it’s a contract. Treat it like one.
Check your current DAF agreement for "portability" language today. If your sponsor doesn't allow you to move the fund to another charity if you're unhappy, you might want to stop adding money to that specific account.
