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February 16, 2011

Nevada Court Says Donor-Advised Funds Can Ignore Donor Advice

The Nevada Supreme Court last week decided in favor of a donor-advised fund that was sued by a client for going against his wishes on spending his contributions, Dow Jones Adviser reports.

The court ruled that Ray Styles could not recover $2.5-million from Friends of Fiji, a Danville, Calif. fund, because he had signed an agreement giving up control of the money. Such agreements are standard for donor-advised funds.

Through donor-advised funds, people give money to a community fund or other nonprofit and then are allowed to recommend where the money will go—leading many people to think of the funds as a charity checking account. But to get the tax deduction, the donor cannot control the money, and that has led to numerous disputes.

Friends of Fiji used Mr. Styles’s contribution to pay $600,000 in salaries for its two directors and cover legal fees in its fight with the donor, he alleged. While the fund had acted badly, the court said, it “had the discretion to reject any of his recommendations for the donation's use.”

Jerry J. McCoy, a lawyer in Washington, said the case showed that "donors need to take steps to protect themselves when making restricted gifts."

Richard L. Fox, a Philadelphia lawyer who represented Mr. Styles, called the outcome of the case "scary." However, he said Mr. Styles does not plan to appeal.