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.
OCLAT Resources
- OCLAT – Infographic (Q4 2024)
- Optimized CLAT – Estate Planning Journal Article (Sept 2020 Issue)
- OCLAT Overview
- OCLAT Podcast for Tax Professionals
- OCLAT Podcast for Non-Tax Professionals
FAQ Index
- The Basics
- IRS Approval and the Upfront Tax Deduction
- The Charitable Lock-Up Period
- Remainder Assets, Tax Filings, Logistics, Fees
BASIC FAQs
What is the ideal client profile for the OCLAT? The ideal OCLAT client (i) has a high income (or is selling a highly-appreciated asset) and needs a large federal/state tax deduction, (ii) is philanthropic, (iii) has sufficient savings outside the OCLAT, and/or (iv) wants to minimize inheritance taxes paid by children.
Why should I fund an OCLAT? Upon funding the OCLAT, you enjoy 3 main benefits: (i) you receive a federal and state income tax deduction,1 (ii) the OCLAT assets are removed from your estate (the OCLAT is immediately exempt from the 40% gift/inheritance tax), and (iii) the OCLAT assets are exempt from your personal creditors, lawsuits and bankruptcy.
How does this work? You open a new investment account in the name of the OCLAT and put assets equal to your desired tax deduction amount into the OCLAT. You select an initial charitable term (also known as the “charitable Lock-Up Period”) for a term of years (typically 20-30 years). During the charitable term, you continue to control the investments of the OCLAT assets, but each year you must donate a portion of the OCLAT assets to charities pursuant to a fixed schedule (discussed on page 4). After the charitable period is over, there should be assets inside the OCLAT account equal to 2-5 times the amount of your initial contribution (assuming conservative 5-7% investment rates of return). These assets can be either (i) returned to you (without income taxes), or (ii) gifted to your children or other family members, including in continuing trusts that you still control (without income taxes and without the 40% federal gift/inheritance tax).
Can you give me a simple example? Suppose in September 2022 you transfer stocks worth $1M into an OCLAT account. You enjoy a $1M federal & state deduction, saving you ~$500k in taxes.2 Assuming you select a 30-year charitable term, (i) you would be required to donate ~$2.4M3 from the OCLAT to your preferred charities during the 30-year charitable term, and (ii) there would be ~$5M4 left in the OCLAT account at year 30 to either return back to you (without income taxes) or to transfer to your children or other heirs (without income taxes and without the 40% federal gift/inheritance tax).
…and you call that the “1-2-5” Rule? Yes – it’s an easy rule of thumb – for every $1M contributed, there is a $1M tax deduction, ~$2M to charity, and we expect ~$5M returned to you at year 30.
This kind of sounds like a retirement account with a charitable component – is this better than my 401(k)? You should still fund your other retirement accounts (IRA; 401(k); profit sharing plan). The problem is the funding limit: you can only move ~$60,000 per year into those vehicles. The OCLAT, on the other hand, can be funded with 30% of your annual income, regardless of how much you make (i.e. if you earned $10M this year, you could put up to $3M into the OCLAT). Another major advantage of the OCLAT is that, unlike your other retirement plans, there are no income taxes or gift/estate taxes when the OCLAT assets are paid out at the end of the charitable term. Your retirement assets, on the other hand, are subject to 40-50% ordinary income tax upon withdrawal and the 40% estate tax upon death – effectively, a ~70% tax.
This seems too good to be true, what’s the catch? There’s no magic. As further discussed on page 4, the OCLAT simply leverages the near-all-time-low IRS-set charitable hurdle rate (3.6% in September 2022) which is locked in at funding and fixes the charity’s payments. If the OCLAT investments do not outperform the IRS hurdle rate, all will go to charity and there will be nothing in the OCLAT returned to you at the end of the charitable term. The IRS basically says “we don’t think your OCLAT investments will outperform 3.6% per year, and if they do, you can keep the excess.”
I understand that I have until 12/31 to fund the OCLAT to enjoy a deduction this year – can’t I just wait? The problem is that the IRS changes the charitable hurdle rate each month (it roughly tracks movements in the 10-year Treasury yield). Since you lock in the hurdle rate in the month you fund the OCLAT, there is urgency to act ASAP (at least if you believe rates will increase).
Why shouldn’t I fund an OCLAT? The OCLAT is not a good fit if (i) you are not charitable,5 or (ii) you do not have sufficient personal assets or savings outside the OCLAT (during the charitable Lock-Up Period, you cannot withdraw or borrow the OCLAT assets).
What is a CLAT? And how is this “optimized”? The charitable lead annuity trust (CLAT) has been in the Tax Code since 1969 and is most famously associated with Jackie Onassis and the Kennedy family. Over the past 50 years, favorable IRS rulings and regulations have allowed us to make the CLAT much more attractive. There are many ways to structure a CLAT, but the “optimized” version stretches the “CLAT chassis” as far as IRS caselaw allows to maximize the tax and financial benefits enjoyed by the contributor and minimize the charitable component. Mathematically and legally, there is no better way to structure a CLAT to “squeeze” out any more performance within IRS-approved caselaw and guidelines; hence, this CLAT variant is optimized.
I wish I had known about this years ago – why didn’t my CPA tell me I could save 30% of taxes each year? The CLAT is a notoriously underutilized vehicle – most tax lawyers and CPAs have only seen a couple of CLATs in their entire career, particularly because the CLAT is viewed as a complex vehicle reserved for the ultra-wealthy (Jackie Onassis famously funded a CLAT) and interest rates have never been this low.
It wasn’t until 2016 when Silicon Valley-trained attorney Jonathon Morrison discovered that a CLAT could be optimized and repurposed as a synthetic retirement account for both the “working rich” and ultra-wealthy. After hundreds of hours of research and development, the OCLAT was born.
In September 2020, Mr. Morrison’s OCLAT strategy was published and featured on the cover of the national Estate Planning Journal which is widely viewed as the most esteemed professional journal in the tax & estate planning world. The OCLAT has since been featured several times in Forbes magazine. As of September 2022, Mr. Morrison has been involved in more than 150 CLAT transactions and has funded ~120 OCLATs.
FOOTNOTES
1 A very small number of states do not recognize the OCLAT income tax deduction, but most major states do (including CA & NY).
2 Assuming you are in the top federal tax bracket (37%) and a California resident (13.3% top rate).
3 This amount is fixed based on the September 2022 IRS-set “charitable hurdle rate” of 3.6% further discussed below.
4 Assumes a 7.5% annual rate of return which is a reasonable assumption given the extended 30-year term, backloading of charitable donations (discussed on page 4), and moderately more aggressive class of investments typical of OCLATs.
5 The Tax Code clearly requires that the creator of the OCLAT possess bona fide charitable intent – if not, all the tax benefits are forfeited. Our law firm has a strict policy that we will not assist clients with OCLAT planning if we sense that philanthropy is not a key objective.
FAQ INDEX
- The Basics
- IRS Approval and the Upfront Tax Deduction
- The Charitable Lock-Up Period
- Remainder Assets, Tax Filings, Logistics, Fees
Are you interested in taking the next step? View our
OCLAT Client Information form .
