Recent Legal Developments Highlight Key Donor-Advised Fund Considerations

Donor-advised funds (DAFs) have become one of the most popular charitable giving tools for high-income and high-net-worth taxpayers. They offer immediate tax deductions while allowing charitable contributions to be distributed over time. It was always assumed that the donor maintained complete control on where the funds would eventually be donated.

However, a recent lawsuit involving a large donor-advised fund, has raised important questions about the rights donors retain after contributing assets to these accounts.

How Donor-Advised Funds Work

A donor-advised fund allows individuals to contribute assets such as cash, publicly traded securities, or other investments to an account managed by a sponsoring charitable organization. In return, the donor generally receives an immediate tax deduction.

The contributed assets can then be invested and continue growing tax-free within the account. Over time, donors may recommend grants to qualifying charitable organizations.

This structure has made DAFs particularly attractive for taxpayers looking to manage the timing of charitable deductions. Some donors choose to “bundle” multiple years of charitable contributions into a single tax year to maximize tax benefits while distributing grants gradually over time.

An Important Limitation

While donor-advised funds provide flexibility, many donors overlook an important legal distinction: once assets are contributed to a DAF, the sponsoring organization maintains legal control over the funds.

Donors retain advisory privileges regarding investments and charitable distributions, but sponsors are not legally required to follow every recommendation. In practice, most sponsors approve grants to qualified charitable organizations made by the donor.

The Lawsuit Drawing Attention

A current federal lawsuit in Colorado involving a donor-advised fund valued at more than $21 million is drawing increased attention within the charitable planning community. Peterson v. Christian Community Foundation, Inc. tests the legal rights of DAF advisors. The dispute centers on the son of the original donor, who sued the DAF after the organization suspended his advisory privileges, revoked his access and ceased processing grant recommendations to charities that were supported by the original donor. The sponsoring organization argues that because the assets were irrevocably donated, the adviser does not have enforceable control over the account or distributions.

The case is not focused on whether donors can force grants to specific charities. Instead, it raises broader questions about what rights donors and successor advisers may retain after contributions are made, including:

• Access to account information
• Communication with the sponsoring organization
• Consideration of grant recommendations
• Potential transfer of the account to another sponsor

Planning Considerations

Although the litigation may take years to resolve, the case serves as a reminder that taxpayers should carefully evaluate donor-advised fund sponsors before contributing significant assets.

Important considerations may include:

• How grant recommendations are handled
• Whether successor advisers can be appointed
• Communication and reporting practices
• Policies regarding account transfers
• Administrative fees and investment options

The Growing Role of DAFs

Donor-advised funds continue to play an important role in charitable and tax planning because of their flexibility and potential tax advantages. At the same time, the recent legal scrutiny highlights the importance of understanding how these arrangements operate and what level of control donors maintain after assets are contributed. As charitable planning strategies continue to evolve, careful structuring and due diligence remain important.

How LMC Can Help

At LMC, we help individuals and families evaluate charitable giving strategies, assess tax implications, and align philanthropic planning with long-term financial goals. If you have questions about donor-advised funds or charitable tax planning, contact your LMC advisor to discuss strategies tailored to your situation.