One Foundation Lawsuit That Rewrote a Billionaire Donor's Charitable Intent

In June 2022, MacKenzie Scott's legal team filed a lawsuit against a community foundation that had received a $1.7 billion pledge two years earlier. The complaint alleged that the foundation had held the funds without distributing them to working charities, violating Scott's explicit instructions to move money quickly to smaller, under-resourced grantees. The case, decided in Delaware Chancery Court in 2023, did not just resolve a dispute between a billionaire and a nonprofit. It rewrote the legal assumptions underlying donor-advised funds, the fastest-growing vehicle for charitable giving in the United States, and prompted wealth advisors to revise their standard agreements to include binding payout commitments.

The $1.7 Billion Pledge That Came With Strings

In July 2020, MacKenzie Scott announced that she had donated roughly $1.7 billion to a community foundation, a type of public charity that manages donor-advised funds. The foundation, known for its work with low-income communities, seemed aligned with Scott's stated mission to support organizations focused on racial equity, economic mobility, and gender equality. The structure was a donor-advised fund, or DAF, a vehicle that allows donors to take an immediate tax deduction while recommending grants over time. In theory, DAFs offer flexibility: donors can contribute assets, get the tax benefit, and then decide later which charities to support.

Scott attached conditions. According to the lawsuit, she required that the foundation distribute the funds within a stated period—the complaint referenced a four-year timeline—and that the money go to smaller, less well-known charities, not to large institutions that already had robust fundraising operations. The foundation, however, treated the gift as an unrestricted contribution to its general endowment, subject to its own board's discretion. By late 2021, only a fraction of the pledged amount had reached working charities. Scott's legal team argued that the foundation had breached a binding agreement by holding the funds for too long and by directing them to larger grantees that did not fit Scott's criteria.

The foundation's board faced a classic tension between fiduciary duty and donor intent. As a public charity, the board had a legal obligation to act in the best interest of the organization as a whole. That duty includes maintaining financial stability, which sometimes means building a rainy-day fund rather than immediately spending down a large gift. But Scott's lawyers countered that the donor's explicit instructions should carry legal weight, especially when the gift was made with a specific charitable purpose. The case highlighted a fundamental flaw in DAFs: the donor's recommendation is not legally binding, and the sponsoring organization retains final say over distributions.

The lawsuit was filed in Delaware, where the foundation was incorporated. Scott sought a court order requiring the foundation to distribute the remaining funds to a list of pre-approved grantees, plus damages for breach of contract. The foundation responded that it had acted prudently and that Scott's wishes were merely recommendations, not contractual obligations. The case attracted national attention because it tested the limits of donor control in a DAF structure, a question that had long troubled estate planners and charity regulators.

The outcome surprised many in the philanthropic world. In early 2023, the Delaware Chancery Court ruled largely in Scott's favor, ordering the foundation to redirect the bulk of the funds to smaller grantees as originally intended. The judge emphasized that the foundation had accepted the gift with explicit written instructions and that its discretion was not unlimited. The ruling did not require the foundation to distribute every dollar immediately, but it set a precedent that donor intent could be enforced in court when properly documented.

How a Donor-Advised Fund Became a Legal Trap

Donor-advised funds were created to simplify charitable giving. A donor contributes assets—cash, stock, real estate—to a sponsoring organization, which holds the assets in a separate fund. The donor can then recommend grants to qualified charities over time, taking the tax deduction up front. DAFs have exploded in popularity: according to the National Philanthropic Trust, assets in DAFs exceeded $200 billion as of late 2024, up from roughly $50 billion a decade earlier. Wealth managers love them because they consolidate giving into one account and require no legal fees for setup, unlike private foundations.

But the flexibility of DAFs creates a concentration of power in the sponsor. The sponsoring organization—often a community foundation or a commercial entity like Fidelity Charitable—has ultimate authority over whether to honor a donor's recommendation. In practice, most recommendations are approved, but the sponsor can refuse if a grant violates its policies or if it deems the charity unsuitable. The sponsor also has no obligation to distribute funds within any specific time frame. Some DAFs have sat idle for years, accumulating investment returns while the donor's intended beneficiaries wait.

Scott's case exposed this structural tension. The foundation had received a $1.7 billion gift but treated it as a permanent endowment, using the investment income to cover operating expenses and making only modest grants. Scott's lawyers argued that the foundation had a conflict of interest: by holding the funds, it could charge annual administrative fees—typically around 1% of assets—and generate revenue for itself. The wealth manager who advised Scott on the gift later testified that the foundation had never disclosed its fee structure or its policy on payout timing during the initial negotiations.

Until 2020, there was no federal requirement that DAF sponsors distribute any minimum amount each year. The SECURE 2.0 Act, passed in 2022, included a provision that exempted DAFs from certain excise taxes if they met a payout requirement, but the rules are complex and apply only to funds above a certain size. Most DAFs still operate without a mandatory payout floor. The Scott lawsuit demonstrated that without a contractual payout timeline, a donor's intent can be effectively ignored by the sponsor.

The legal trap, as estate planners now describe it, is that a donor who uses a DAF for a large gift may lose control over the very purpose that motivated the gift. The donor takes the tax deduction, but the sponsor holds the reins. If the sponsor changes its mission, faces financial pressure, or simply has different priorities, the donor's charitable vision may be subverted. Scott's lawsuit was a rare instance of a donor fighting back—and winning—but only because she had the resources to litigate and because her instructions were unusually specific.

The Court's Reasoning on Charitable Intent

The Delaware Chancery Court ruling in 2023 turned on the language of the gift agreement. Scott's team had drafted a detailed letter of intent that accompanied the initial contribution, spelling out the three criteria for grantees: organizations led by people of color, those with annual budgets under $5 million, and those focused on systemic change rather than direct services. The foundation had acknowledged receipt of the letter but argued that it was not a binding contract. The judge disagreed, citing the principle that a charitable gift made with explicit conditions creates a legal obligation.

The court drew on a 2018 precedent from the same court: Robertson v. Princeton University. In that case, the Robertson family had donated millions to Princeton for a graduate program in public policy, but the university later used the funds for other purposes. The court ruled that the donor's intent, as expressed in the gift agreement, was enforceable. The Scott case extended that reasoning to DAFs, which had previously been considered a realm of donor recommendations rather than binding instructions.

The judge also considered the foundation's fiduciary duties. Under Delaware law, a charitable corporation's board must act in good faith and in the best interest of the charity. But the court found that the board had breached its duty by prioritizing the foundation's financial stability over the donor's explicit charitable purpose. The foundation had argued that holding the funds was prudent because it needed a reserve for future years. The judge countered that the foundation had accepted the gift with full knowledge of Scott's conditions and could not unilaterally change the terms after the fact.

Another factor was the unrelated business income tax exposure. The foundation had invested the donated assets in a taxable portfolio and had not paid taxes on the investment income, arguing that it was related to its charitable mission. The court noted that holding assets for investment rather than distribution could be seen as a commercial activity, potentially subjecting the foundation to unrelated business income tax. The ruling suggested that DAF sponsors that delay distributions risk not only legal challenges but also adverse tax consequences.

The decision sent a clear message: donor-advised fund sponsors must respect the donor's intent when that intent is documented with sufficient specificity. Vague statements like "support education" would not create a binding obligation, but detailed criteria—such as budget size, geography, or mission focus—could be enforced. For wealth advisors, the ruling meant that any DAF agreement should include a written payout schedule and a clear definition of the charitable purpose, or the donor risks losing control.

Billionaire Philanthropy's New Legal Landscape

In the months after the Scott ruling, donor-advised fund agreements began to change. Sponsors started offering "intent clauses" that explicitly state that the donor's recommendations are binding, subject only to legal prohibitions like grants to non-qualified charities. Some sponsors introduced sunset clauses that require the fund to be fully distributed within a set number of years—commonly five to ten—unless the donor renews the instruction. These changes are most common among community foundations that work with ultra-high-net-worth clients, but commercial sponsors like Fidelity Charitable and Schwab Charitable have also updated their standard agreements.

The case also triggered a wave of similar lawsuits. In 2024, a group of donors filed a complaint against Fidelity Charitable, alleging that the sponsor had delayed distributions on a large DAF for more than three years without explanation. That case is pending, but legal observers expect it to be influenced by the Scott precedent. The IRS has also increased scrutiny of DAFs, issuing guidance in 2024 that reminded sponsors that excessive delay in distributing funds could jeopardize the charitable status of the fund. The agency has not yet issued formal regulations, but its enforcement activity has risen.

For billionaires and their advisors, the new landscape means that the old approach—donate to a DAF, take the deduction, and let the sponsor handle the rest—carries real litigation risk. If a donor dies without specifying a payout timeline, the sponsor may hold the funds indefinitely, and the donor's heirs may lack standing to sue. The Scott case was brought by the donor herself while she was alive; posthumous enforcement is far more difficult. Estate planners now recommend that clients include DAF provisions in their wills or trusts, naming a successor advisor who can enforce the intent.

The ruling also accelerated a shift toward private foundations for large charitable gifts. Private foundations offer donors full control over grantmaking, but they come with higher administrative costs and a mandatory 5% annual payout requirement. For donors who want to ensure their charitable vision is carried out exactly as intended, the trade-off is often worth it. According to a 2024 survey by the Institute for Wealth Management, roughly 30% of high-net-worth clients who had previously used DAFs for gifts above $1 million have since opened a private foundation, up from 15% before the Scott ruling.

But private foundations are not immune to legal challenges. Family disputes, changes in tax law, and the 5% payout rule can create their own problems. The key lesson from the Scott case is not that one vehicle is superior, but that the terms of any charitable gift must be documented with precision and enforced through clear contractual language. The era of the handshake DAF is over.

What Estate Planners Learned From the Fallout

Estate planners who specialize in high-net-worth philanthropy have drawn several concrete lessons from the Scott lawsuit. First, written instructions must be specific. A gift agreement that says "use for charitable purposes" is not enough. Planners now advise clients to include the exact criteria for grantees—geography, mission focus, budget size, leadership demographics—and to state whether those criteria are mandatory or merely aspirational. The Scott case shows that specificity is the difference between a recommendation and a binding condition.

Second, successor advisors need clear guardrails. If the donor dies or becomes incapacitated, who will oversee the fund? The DAF agreement should name a successor advisor—often a family member or a trusted professional—and define that person's authority. Without a successor, the sponsor may become the default decision-maker, and the donor's intent may drift. Some planners now recommend creating a "charitable purpose committee" in the donor's trust, with written instructions for how the committee should exercise its discretion.

Third, trust structures may be safer than DAFs for very large gifts. A charitable remainder trust or a charitable lead trust can provide income to the donor or heirs while also directing assets to charity, and the trust document can include detailed instructions that are legally enforceable. Unlike a DAF, a trust is a separate legal entity with a trustee who has a fiduciary duty to follow the trust terms. The trustee can be an individual or an institution, and the trust can be designed to avoid the conflicts of interest that arise in DAF sponsors.

Fourth, litigation risk is real for large gifts. The Scott case cost both sides millions in legal fees, and the foundation faced reputational damage that may have affected its fundraising for years. For donors, the cost of litigating a DAF dispute can eat into the charitable assets themselves. Planners now recommend that any DAF agreement include an arbitration clause or a dispute resolution mechanism that keeps the case out of court. Some sponsors have started offering mediation services as a standard feature.

Finally, state laws vary on charitable enforcement. Delaware's chancery court is known for its expertise in fiduciary matters, but other states may be less favorable to donors. The Scott ruling applied Delaware law, but a similar case in a different jurisdiction could have a different outcome. Planners must consider where the sponsor is incorporated and whether the donor's state of residence has laws that protect donor intent. Some states, like California and New York, have enacted statutes that give donors more rights to enforce their charitable purposes, but enforcement mechanisms remain inconsistent.

Practical Takeaways for High-Net-Worth Families

For families considering a large charitable gift, the first step is to document charitable intent in the trust or will, not just in a letter to the sponsor. The Scott case succeeded because the donor's instructions were written and acknowledged by the foundation. A verbal understanding or an email may not be enough. The document should include the charitable purpose, the payout timeline, and the consequences if the sponsor fails to comply. Some planners recommend including a provision that allows the donor's heirs to reclaim the assets if the sponsor breaches the agreement.

Using a private foundation gives the donor full control over grantmaking, but it comes with the annual 5% payout requirement and higher administrative costs. For families who want to involve multiple generations in philanthropy, a private foundation can be a valuable educational tool. However, the foundation must file annual tax returns and comply with excise tax rules on investment income. The trade-off is control versus complexity. For donors who want simplicity but also want to ensure their intent is followed, a donor-advised fund with a sunset clause may be the best middle ground.

A sunset clause requires the fund to be fully distributed within a set number of years, typically five to ten. If the donor dies before the sunset, the fund must still be distributed according to the donor's instructions. Some sponsors resist sunset clauses because they reduce the sponsor's fee revenue, but donors can negotiate for them as a condition of the gift. The Scott case has made sponsors more willing to accept such clauses, especially for large gifts.

Review the sponsor's track record for payout delays before making a gift. Not all DAF sponsors are the same. Community foundations vary widely in their payout rates: some distribute more than 20% of assets annually, while others distribute less than 5%. Commercial sponsors tend to have higher payout rates because they do not rely on the assets for operating expenses, but they may have less flexibility in grantmaking. Donors should ask for the sponsor's average payout ratio over the past five years and check whether the sponsor has ever been sued by a donor.

Consult tax counsel on unrelated business income tax and excise taxes. The Scott case highlighted the risk that a DAF sponsor could face UBIT if it holds assets for investment rather than distribution. Donors should also be aware of the excise tax on private foundation investment income, which is typically 1.39% but can be reduced to 1% if the foundation meets certain payout thresholds. A tax advisor can help structure the gift to minimize tax exposure while maximizing control.

Conclusion: The New Rules of Donor Intent

The Scott lawsuit was a landmark event, but it did not solve every problem in donor-advised fund philanthropy. DAFs remain a popular and effective vehicle for charitable giving, especially for donors who want to take a tax deduction in a high-income year and then give over time. The key is to approach the vehicle with eyes open, knowing that the sponsor's interests may not always align with the donor's intent. The law now provides a path for enforcement, but it is a path that requires careful planning and legal documentation.

Ultimately, the case reinforced a timeless principle in philanthropy: the donor's vision matters, but only if it is written down with enough detail to be enforced. For high-net-worth families, the lesson is to treat a charitable gift like any other major financial transaction—with a written agreement, clear terms, and a mechanism for accountability. The era of the informal DAF is over, and the era of the intentional, documented gift has begun.

Important Legal Notice: This article is for informational purposes only and does not constitute legal, tax, or investment advice. The specific legal recommendations discussed—such as including sunset clauses, naming successor advisors, or using private foundations—may not be appropriate for every situation. Laws vary by jurisdiction and are subject to change. Readers should consult with qualified legal, tax, and financial professionals before making any charitable giving decisions. The author and publisher disclaim any liability for actions taken based on the content of this article.