Take-Away: A donor who makes a contribution to a donor advised fund (DAF) does not possess legal standing to sue the fund for breaching its fiduciary duties. The sponsoring charity possesses ‘exclusive ownership and rights of control’ over DAF assets.

Background: A donor advised fund (DAF) is a charitable giving vehicle that allows a donor to take a present-year income tax charitable deduction, which distributes the funds to a charity at a later time. [IRC 170(a)(1). To establish a DAF, the donor must donate funds to a ‘sponsoring organization’ which is a nonprofit organization that is affiliated with a private asset manager. [IRC 4966(d)(2)(A)(ii).] The sponsoring organization then holds those funds in a separately identified fund or account that is ‘owned and controlled by the sponsoring organization.’ [IRC 4966(d)(2)(A)(ii).] Although the sponsoring organization is a nonprofit organization, it generally does not perform charitable works itself. Rather, it acts in effect as a charitable saving account where assets are held, and invested temporarily before they are later distributed to another charity. Consistent with general principles that govern charitable income tax deductions, a donation to a DAF is tax-deductible only if the sponsoring organization ‘owns and controls’ the assets that are donated and the sponsoring organization provides the donor with a contemporaneous written acknowledgment that such organization has ‘exclusive legal control’ over the assets contributed.[ IRC 170(f)(18).] At the same time, the primary feature of a DAF is that the donor “has or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund.” Consequently, this means that the donor can advise the sponsoring organization with regard to how it should invest the funds and where it should donate them. Yet the sponsoring organization is not legally obligated to comply with the donor’s advice. Sometimes donors lose sight over the reality that they no longer have control, or any property rights with regard to their DAF. A recent federal Court of Appeals decision is a reminder of what the donor gives up when making a contribution to a DAF.

Philip Pinkert v. Schwab Charitable Fund et al., Ninth Circuit Court of Appeals, No. 21-16299 (September 14, 2022)

Facts: Mr. Pinkert opened a DAF at Schwab Charitable in 2007. The assets held in Mr. Pinkert’s DAF were subject to two kinds of fees: an administrative fee and an investment fee. The administrative fee covered the expense of operating the DAF account and processing charitable donations, which was charged annually as a percentage of assets held in the account. The investment fee was charged as a percentage of assets invested in particular investment funds. Mr. Pinkert did not claim that he did not agree to pay these fees, that the amount of fees was not disclosed, or that the sponsoring organization or the investment advisor charged higher fees than he agreed to. Rather, Mr. Pinkert claimed that Schwab Charitable and its Investment Oversight Committee breached their fiduciary duties by partnering with Schwab & Co.- a legally separate but closely related company, for brokerage, custodial, and administrative services. Mr. Pinkert claimed that this self-dealing arrangement resulted in the sponsoring organization, Schwab Charitable,  and its investment advisor,  charging higher fees than they would have charged if Schwab Charitable had complied with its fiduciary duties. Mr. Pinkert’s claims was ‘more expensive and poorly performing investment options.” Thus,  these excessive fees injured Mr. Pinkert by leaving him with less money in his DAF to later direct to charities. Mr. Pinkert also claimed that Schwab Charitable imprudently selected suboptimal investments options. Based on these claims Mr. Pinkert filed a lawsuit in federal court alleging Schwab Charitable’s breach of fiduciary duties.

District Court: The federal judge dismissed the lawsuit. The judge held that Mr. Pinkert lacked standing to file the lawsuit.

Appeals Court: The federal Court of Appeals affirmed the District Court’s conclusion that Mr. Pinkert lacked standing to file his breach of fiduciary duty claims.

Lack of Standing to file the Lawsuit: The Court looked at whether Mr. Pinkert had Article III standing. To have such standing in the federal courts, the plaintiff has the burden to show that: (i) he suffered an injury in fact that is concrete, particularized and actual or imminent; (ii) the injury was likely caused by the defendant; and (iii) the injury would likely be redressed by judicial relief.

No Cognizable Injury: With regard to the claim that Mr. Pinkert may have to contribute more funds to carry out his philanthropy and that his reputation suffered by not being able to make larger charitable contributions, the Court found that these theories of injury were not cognizable since Mr. Pinkert did not allege that he has experienced or will experience any of these “purported injuries.” Nor were such future charitable contributions and any corresponding injury imminent. Mr. Pinkert did not claim that he had any such plans, nor did he provide the details necessary to show that any such future giving plans are ‘concrete.’ Thus, his claims of future injury were only speculative. [One appellate judge questioned that his claim of reputational damage might suffice as a present injury, but he concurred in the dismissal.]

No Property Rights Retained: Nor did the Court find that Mr. Pinkert had retained any property rights in his DAF. While he claimed that he retained the right to direct how the donated funds would be invested among the menu of available investment options, and also the right to determine which charitable organizations would ultimately receive the donations (and in what amount), the Court focused on the Schwab Charitable Program Policies which provided that “all contributions are subject to the exclusive legal authority and control of Schwab Charitable as to their use and distribution… and all contributions are irrevocable and unconditional. Schwab Charitable retains final authority over the distribution of all grants and may decline or modify a grant recommendation that is inconsistent with the Program Policies or for any other reason.” Accordingly, Mr. Pinkert did not retain any ‘property right’ to direct where the funds will be invested or donated.

“Pinkert conceives of his advisory rights different. He suggests that his advisory rights entitle him to advise where every cent he contributed to Schwab Charitable will go, and that by charging excessive fees and mismanaging his account, Schwab has deprived him of the ability to advise with respect to the amount that his account would otherwise have contained. But this understanding of his advisory rights is not consistent with the Program Policies…The Policies also disclose that donors may ‘recommend how assets are invested’ but only by choosing among the ‘investment pools selected as appropriate investment choices by Schwab Charitable.’ Thus, Pinkert did not reserve the right to advise where the funds necessary to pay the fees would go. In other words, he did not reserve the right to ‘advise’ Schwab Charitable to donate those funds to another charity rather than collect them as fees. Instead, he agreed at the time he donated to Schwab Charitable that some of the funds he donated would be used to pay the fees and that the funds would be invested in Schwab Charitable’s predetermined options. Therefore, the defendants did not deprive Pinkert of any advisory rights.”

Conclusion: Millions of individuals no carry out their philanthropy through charitable gifts to DAFs. Unfortunately for many of those donors, they conflate their right to advise the sponsoring organization with their continued ownership and control of their DAF. Short of some unique facts, it is pretty clear that they do not retain any property rights in their DAF’s, and federal courts are highly unlikely to entertain lawsuits that attack how the sponsoring organization handled the funds held in the DAF.