A lawsuit was recently filed by Philip Peterson, a 63-year old resident of Kansas, against the sponsor organization that administers his family's donor-advised fund (DAF) for failure to make charitable donations to nonprofits based on his recommendations. 

This lawsuit showcases one of the biggest risk with donating through a DAF -- the ability to only "advise" sponsoring organizations on how to disburse funds. This is because sponsor organizations, unlike private foundations, are not legally required to distribute funds as recommended by the actual donor. Although most sponsor organizations do adhere to the donor's requests, because this is not legally required, some donors are noticing that DAFs come with limitations that they may not be aware of when they decide to pursue this donation vehicle.

With DAFs quickly gaining in popularity due to the immediate tax deduction provided to the donor, individuals and nonprofits should carefully consider the risks and limitations associated with DAFs. In addition, nonprofits are learning that accounting for DAFs also come with their own set of requirements.