What the $21 Million Donor-Advised Fund Lawsuit Teaches Us About Risk — and When a Private Foundation Might Be a Better Fit

A recent CNBC lawsuit spotlight — involving a family’s $21 million donor-advised fund (DAF) — has raised important questions about the legal and structural limits of DAFs as vehicles for charitable giving. The dispute, filed this year in federal court, centers on a donor’s claim that the nonprofit sponsoring his DAF cut off his access to information and has not honored his grant recommendations, highlighting risks that donors should carefully consider before choosing this philanthropic path.

Donor-Advised Funds: Popular but Imperfect

Donor-advised funds have surged in popularity among wealthy donors and advisors because they provide a simple, tax-efficient way to give. A donor contributes cash, securities, or other assets to a DAF, gets an immediate tax deduction, and then recommends grants to qualified charities over time. The sponsoring organization — typically a public charity — administers the account and executes the recommended grants.

However, as the lawsuit illustrates, donor “advisory privileges” are not the same as legal control. By IRS design, a donor’s recommendations to a DAF sponsor are advisory only, and the sponsor retains ultimate legal authority over the assets and grant approvals. That can lead to situations — like the pending case — where donors feel shut out or uncertain about how their funds are managed.

Other common criticisms of DAFs include:

• Lack of binding control: Donors cannot legally compel a sponsor to make grants according to their wishes.

• No payout requirement: Unlike private foundations, DAFs are not required to distribute any minimum amount each year, so funds could remain invested for long periods before reaching operating charities.

• Potential opacity: Because donors give to the sponsoring charity, not directly to sub-accounts, who ultimately gets the money — and when — may not be transparent.

Despite these issues, DAFs remain attractive for many taxpayers because they are easy to establish, involve little administrative oversight, and often carry favorable deduction limits relative to private foundations.

Comparing DAFs With Private Foundations

Below is a high-level comparison of the two most common charitable vehicles used by families and individuals:

1. Tax Treatment and Deductions

• DAFs: Donors enjoy higher charitable deduction limits — typically up to 60% of adjusted gross income (AGI) for cash gifts and 30% for appreciated securities — and avoid capital gains on gifted assets.

• Private Foundations: Donors can deduct up to 30 % of AGI for cash and just 20 % for appreciated securities, making the tax benefit generally more modest for equivalent gifts.

2. Control

• DAFs: Donors recommend where funds go, but the sponsoring organization retains final legal authority.

• Private Foundations: The donor (and successor directors) control investment decisions, grantmaking decisions, and foundation operations, subject to IRS rules.

3. Administrative Burden

• DAFs: Little to no setup, no separate entity to manage, and administrative tasks are handled by the sponsor.

• Private Foundations: Require incorporation, governance structures, annual tax filings, recordkeeping, and compliance with rules like minimum charitable distributions each year.

4. Costs

• DAFs: Typically lower costs and no separate legal entity; sponsors charge administrative fees.

• Private Foundations: Can incur substantial annual legal, accounting, and investment costs, and also pay an excise tax on net investment income.

5. Public Disclosure and Legacy

• DAFs: Donor activity or grants can often remain private.

• Private Foundations: Must file detailed public returns (Form 990-PF) showing contributions, grants, and compensation, which can be valuable for transparency but less desirable for donors seeking privacy.

Which Is Right for Your Clients?

DAFs often are an excellent fit for clients seeking simplicity, lower cost, and immediate tax benefits without the administrative overhead of running a separate entity. They can also be ideal for donors who want flexibility in the timing of grantmaking while maximizing current tax deductions.

However, for families or individuals who want:

• Total control over assets and grant decisions,

• A multigenerational philanthropic legacy,

• Or deep involvement in grantmaking and operations,

a private foundation may be more appropriate — provided they are willing to accept the additional administrative and regulatory obligations that come with that control.

Conclusion

The recent DAF lawsuit underscores an important reality: while donor-advised funds are an increasingly common charitable tool, they come with limits that donors need to understand. Proper planning and legal counsel can ensure that clients choose the right vehicle for their philanthropic goals — whether that’s a DAF for ease and tax efficiency or a private foundation for control and legacy.