By Isnaini Azizah 
The rapid ascent of donor-advised funds (DAFs) as the preferred philanthropic vehicle for America’s ultra-wealthy has hit a significant legal and ethical crossroads, epitomized by a high-stakes lawsuit over a $21 million family legacy. Philip Peterson, a 63-year-old resident of Kansas, has initiated legal action against WaterStone, a prominent Christian nonprofit, alleging that the organization has effectively seized control of a charitable fund established by his late father. The case, filed in a Colorado federal court, serves as a stark warning to high-net-worth investors: the very tax advantages that make DAFs attractive are rooted in a legal surrender of control that can lead to devastating consequences when the interests of the donor and the fund sponsor diverge.
At the heart of the dispute is a $21 million account managed by WaterStone, an organization originally founded as the Christian Community Foundation. Peterson alleges that since early 2024, the nonprofit has systematically cut off his access to information, refused to honor his grant recommendations, and ceased all meaningful communication. According to the complaint, the relationship soured following a disagreement over the rate of distribution. Peterson claims that WaterStone’s CEO, Ken Harrison, informed him that the organization intended to preserve the fund’s principal in perpetuity, distributing only the investment income. This move would drastically reduce the fund’s impact, preventing the customary annual grants of $2.3 million to $2.5 million that the Peterson family had established as a standard for their evangelical outreach.
The legal friction reached a boiling point during a Zoom call in March 2024. Peterson alleges that when he expressed a desire to move the DAF to a different sponsor—a common practice in the industry—Harrison abruptly ended the call and instructed Peterson never to contact the organization again. Since that moment, Peterson claims he has been left in the dark, unaware of the fund’s performance or whether any of his $1 million in grant requests for 2024 were ever fulfilled. WaterStone, for its part, has maintained a firm stance. In a statement through legal counsel, the nonprofit asserted that it has consistently honored the wishes of the original donor—Philip’s father, Gordon Peterson—and pointedly noted that the plaintiff, Philip, is not the original donor.
This case highlights the explosive growth and inherent risks of DAFs, which have fundamentally reshaped the American philanthropic landscape. According to the DAF Research Collaborative’s 2025 annual report, Americans contributed nearly $90 billion to these funds in 2024 alone. Total assets held within DAFs have swelled to an estimated $326 billion. The appeal is rooted in a unique tax arbitrage: donors receive an immediate fair-market-value tax deduction upon contributing assets—be they cash, appreciated stocks, or even complex assets like real estate—but they are not required to distribute that money to actual working charities within any specific timeframe.
While DAFs are often marketed to the public as "charitable checkbooks" or "personal foundations for the middle class," the legal reality is far more rigid. To qualify for the federal tax deduction, a donor must make a "completed gift," meaning they must relinquish all "dominion and control" over the assets. The sponsoring organization—whether it is a community foundation like WaterStone or a commercial giant like Fidelity Charitable—becomes the legal owner of the funds. The donor is downgraded to the status of a "donor-advisor," possessing only the privilege to "recommend" how the money is invested and where it is granted.
Ray Madoff, a tax scholar and professor at Boston College Law School, argues that there is a profound "disconnect" between how these funds are sold and how they are governed. "It’s sold to the public as, ‘This is your account,’ but the legal rules require you to give up control to get the tax break," Madoff notes. The Peterson case is a "perfect example" of what happens when that disconnect results in a total breakdown of trust. If a sponsor decides to ignore a successor’s recommendations, the successor often finds themselves with zero legal recourse because, in the eyes of the law, the money no longer belongs to the family.
The controversy surrounding DAFs extends beyond individual disputes to systemic criticisms of "wealth hoarding." Unlike private foundations, which are legally mandated by the IRS to distribute at least 5% of their assets annually, DAFs have no minimum payout requirement. Critics, including billionaire philanthropist John Arnold, have campaigned for legislative reform, arguing that DAFs allow the wealthy to front-load tax benefits while the public waits decades, or even centuries, for the charitable benefits to manifest. In the Peterson case, the allegation that WaterStone wants to keep the $21 million principal "in perpetuity" aligns perfectly with these criticisms, suggesting that the sponsor may be more interested in the management fees and asset base than in active grant-making.
The financial incentives for DAF sponsors are significant. Most sponsors charge administrative fees based on a percentage of the assets under management. This creates a structural conflict of interest: the more money that stays in the fund, the more revenue the sponsor generates. Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies, points out that community foundations are increasingly pressured to compete with commercial DAFs like those run by Fidelity and Schwab (recently rebranded as DAFgiving360). "Their business model now depends on people parking their assets for longer periods of time," Collins observes.
The human element of the Peterson suit adds a layer of emotional complexity. Philip Peterson’s father, Gordon, was a successful real estate investor and a devout Christian who viewed the fund as a vehicle to support evangelical causes long after his death. Before his passing in 2019, Gordon worked with WaterStone to appoint his wife, Ruth, and his son, Philip, as successor-advisors. Following Ruth’s death in 2021, Philip became the sole advisor. For years, the arrangement functioned smoothly, with WaterStone approving Philip’s recommendations. The sudden shift in 2024, according to Peterson’s lawyer Andrew Nussbaum, threatens to set a "chilling precedent." If the court agrees that WaterStone can unilaterally strip a designated successor of their advisory privileges, it could mean that billions of dollars in successor-led DAFs are essentially at the mercy of the sponsoring organizations.
History shows that Peterson faces an uphill battle. Courts have historically sided with DAF sponsors, citing the "completed gift" doctrine. In 2018, a high-profile case involving a hedge fund couple and Fidelity Charitable ended in favor of the sponsor. The couple had sued after Fidelity liquidated $100 million worth of donated shares in a manner the donors claimed violated a verbal agreement. The court ruled that Fidelity had the legal right to manage the assets as it saw fit. Even more catastrophic was the 2009 collapse of the National Heritage Foundation, a Virginia-based sponsor that filed for bankruptcy and used $25 million in DAF assets—belonging to 9,000 different donors—to pay off its own creditors. In that instance, the donors learned the hard way that their "charitable accounts" were actually just unsecured assets of a failing corporation.
Roger Colinvaux, a professor at the Columbus School of Law and a frequent critic of DAF structures, suggests that donors who want the level of control Philip Peterson is seeking should opt for a private foundation instead. "The DAF sponsor is an independent charity… its duties are not to the donor," Colinvaux states. However, private foundations come with significantly higher administrative costs, lower tax deduction limits, and public disclosure requirements that many donors wish to avoid.
As the Peterson case moves toward a potential showdown in March—the deadline for WaterStone to respond to the complaint—the philanthropic community is watching closely. Philip Peterson maintains that his father would never have utilized a DAF had he known it would lead to a legal blockade. "I made a promise to my father," Peterson said, emphasizing his desire to be a "man of his word" and ensure the $21 million continues to support the specific evangelical missions his father championed.
The outcome of this litigation could influence future IRS regulations or congressional oversight of DAFs. Currently, the Treasury Department is considering new rules that would clarify the definition of a "donor-advisor" and potentially limit the types of distributions that can be made. For now, the Peterson saga serves as a cautionary tale for families planning their multi-generational giving. It underscores the necessity of due diligence when selecting a DAF sponsor and the importance of understanding that, in the world of high-end philanthropy, the price of a massive tax break is often the loss of the right to say how the money is spent. For Philip Peterson, the fight is no longer just about the money; it is about the integrity of a legacy that he believes is being held hostage by the very institution entrusted to protect it.