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What Rights Do Donors Have Over Donor-Advised Funds?

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A current lawsuit in California brought against Fidelity Investments Charitable Gift Fund (“Fidelity Charitable”) may give a new perspective on the rights donors retain when they donate property to a donor-advised fund, whether it is in the form of cash, stock, bonds, real estate, etc.; or this case may raise more unanswered questions. Fairbairn v. Fidelity Charitable. A donor-advised fund or DAF is a giving vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Fidelity Charitable is the largest institution offering DAFs. Outside of DAFs, donors have two options to accomplish their philanthropic goals. One way is to engage in private philanthropy such as by creating a private foundation, giving donors complete control over their charitable giving by contributing assets at any time and receiving the immediate tax deduction and then spreading the distribution over a longer period. The other way is to donate to a public charity that has the advantage of immediately benefiting the organization without having to deal with the complicated rules of administering a private foundation.

In December 2017, Emily and Malcolm Fairbairn donated $100 million worth of cash and other assets. A large portion of these other assets included 1.93 million shares of a publicly-traded company, Energous, a wireless charging technology company that substantially appreciated in value when the FCC approved its technology. In the lawsuit, the Fairbairns argued that Fidelity Charitable assured them that it would liquidate the shares gradually, using “sophisticated, state of the art methods,” including price limits to ensure the stock did not decrease substantially in value.” Fidelity Charitable actually liquidated the shares immediately after the donation, which led to the shares decreasing in value by almost $20 million. In its defense, Fidelity argued that its express policy is to liquidate any securities or other non-cash assets immediately upon receipt, and their representatives communicated this to the Fairbairns.

The Fairbairns brought their case in the United States District Court of Northern California suing Fidelity Charitable on various counts including (1) Misrepresentation, (2) Breach of Contract, (3) Promissory Estoppel, (4) Negligence, and (5) the California Unfair Competition Law. Fidelity Charitable moved to dismiss the lawsuit. The court denied the motion to dismiss the case, stating that the Fairbairns stated a cause of action, thereby allowing the case to move forward to trial. What may seem like a mere procedural victory for the Fairbairns is actually a significant victory for them and has broader consequences. By allowing the case to go to trial, the court is saying that donors may have rights in overseeing how donor-advised funds are managed. Some commentators have said that this may force greater accountability among the sponsoring institutions of DAFs such as Fidelity Charitable. The traditional school of thought has been that a donor loses any legal standing to oversee how their donation is managed once the money is transferred to a donor-advised fund.

As the Fairbairn vs. Fidelity Charitable case plays out in the coming months, some questions will be answered about the legal rights donors retain over the management of donor-advised funds while other questions will emerge and remain unanswered such as how should charitable giving be best incentivized in the interest of the public good.

About the Author

Christopher R. Mitchell is admitted to the Massachusetts bar and concentrates his practice in the areas of estate planning, trust and estate administration, tax planning, and business succession planning.

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