The Optimized CLAT (OCLAT) is a special version of a charitable lead annuity trust (CLAT) that has been designed to optimize the tax and economic benefits to the contributor.
For an overview of the OCLAT strategy and to provide perspective for the FAQs below, we suggest that you first review our short article, "Optimized CLAT: 'Opt Out' of Immediate Income Taxes by Promising to Make Charitable Gifts in the Future."
Has the OCLAT been approved by the Tax Code? Yes. The CLAT has been in the Tax Code since 1969. (In fact, the IRS published a very basic CLAT legal form for use in 2007, and the former IRS Commissioner John Koskinen set up a CLAT in 1998 for Duke University.) The “Optimized CLAT” is a special variant of a CLAT and all aspects are firmly-supported by the Tax Code, Treasury Regulations and/or IRS rulings. Please refer to the legal citations in the Estate Planning article.
Is this a peer-reviewed strategy? Yes. As part of the publishing process for the Estate Planning article, there was a lengthy six-month peer-review process. The OCLAT strategy and legal article were painstakingly critiqued by more than a dozen attorneys at JP Morgan Chase and three separate law firms. All attorneys involved unanimously agreed that the OCLAT passes muster.
Are these tax and economic benefits measurable? Yes. In our Estate Planning article, we published results using JP Morgan’s stochastic Monte Carlo software that proves that a family has 2-3x additional wealth6 by funding a 30-year OCLAT versus doing nothing, all things equal.
Will an OCLAT trigger an IRS audit? As of September 2022, we had funded approximately 120 OCLATs without a single known IRS audit.7 In the event of an audit, our law firm, Frazer Ryan (a preeminent Arizona tax and trust planning law firm), has multiple former IRS litigators who have reviewed the OCLAT strategy and stand ready to defend it.
How much can I put into the OCLAT? The maximum is 30% of your adjusted gross income (AGI). Suppose you sold your business for $9 million and have $1 million of wages/bonuses for a total AGI of $10 million. You could put $3 million into the OCLAT and reduce your taxable income from $10 million to $7 million
What if I accidentally put more than 30% into the OCLAT? Do I lose the excess deduction? No, you don’t lose it – the excess just carries forward for up to five tax years. (In fact, some clients will intentionally over-fund their OCLAT to lock the low IRS-set charitable hurdle rate with the plan to use the tax deduction over multiple tax years.)
Do I have to fund my OCLAT with cash? No – many clients want to preserve their cash, so they will transfer existing stocks/bonds into the OCLAT. This makes it as simple as “moving stocks/bonds from one account to another” to generate a large income tax deduction.
If I put $1 million into the OCLAT, do I save $1 million of taxes? No, it is a $1million tax deduction, not a $1 million tax credit. For example, a $1 million deduction for a California-based client in the top 50% bracket (37% federal; 13.3% CA) translates to $500,000 less taxes paid when the tax return is filed next April.
I make $1 million/year as a surgeon, but I also sold some Tesla stock for a $3 million long-term capital gain. If I put $1 million into the OCLAT, I’d like my $1 million tax deduction to apply first to my $1 million ordinary income – is that possible? Yes – the tax deduction automatically reduces your ordinary income before long-term capital gains.
I have a $600,000 IRA that I’d like to convert to a Roth IRA, but that would result in $600,000 of Roth conversion income – can I use the OCLAT tax deduction to reduce this tax? Yes, the OCLAT combined with a Roth IRA conversion is perhaps the most tax-efficient way to utilize the OCLAT’s tax benefits.
6 This depends on the extent of donations that the client would have otherwise made, with or without the OCLAT in place. A client who would have given the same charitable gifts without the OCLAT has ~3x as much wealth at year 30 by funding the OCLAT. A client who would not have donated at all, absent the OCLAT, still has ~2x at year 30.
7 IRS Circular 230: Audit risk should not be considered when making a tax planning decision; we cannot guarantee the absence of an audit.
Are you interested in taking the next step? View our OCLAT Client Information form.
