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.“
FAQ INDEX
- The Basics
- IRS Approval and the Upfront Tax Deduction
- The Charitable Lock-Up Period
- Remainder Assets, Tax Filings, Logistics, Fees
IS THIS IRS-APPROVED? HOW MUCH RISK IS INVOLVED?
Is the OCLAT approved by the Tax Code? Yes – and your tax advisors can review the details and legal citations in our technical OCLAT article that was published on the cover of the national Estate Planning Journal.8 Although there are more aggressive ways to structure a CLAT,9 all aspects of this “optimized” CLAT variant fall within IRS limits. In fact, one of our articles in Fortune magazine details our in-person interview with former IRS Commissioner John Koskinen where he stated that his CLAT (which was extremely similar to the OCLAT) “worked out perfectly and he would choose the same strategy again in today’s economy, without a doubt.”10
Is this a peer-reviewed strategy? Yes. As part of the publishing process for the Estate Planning Journal article, there was a lengthy 6-month peer-review process. The OCLAT strategy and legal citations 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 passed muster.
Are these tax and economic benefits measurable? Yes. In our Estate Planning Journal article, we published results using JP Morgan’s stochastic Monte Carlo software that proves that a family has between 2-3x additional wealth11 by funding a 30-year OCLAT versus doing nothing, all things equal.12
Will an OCLAT trigger an IRS audit? As of September 2026, we have funded an estimated 250+ OCLATs without a single known IRS audit.13 In the event of audit, our law firm (which is one of the largest tax and trust planning law firms on the West Coast) has multiple former IRS litigators who have reviewed the OCLAT strategy and stand ready to defend it. In the rare event of audit, the fee covers up to $10,000 of legal expenses to defend the audit which is expected to be sufficient.
THE UPFRONT TAX DEDUCTION
How much can I put into the OCLAT? The max is 30% of your adjusted gross income (AGI). Example: suppose you sold a business for $9M and have $1M of wages for a total AGI of $10M – you could put $3M into the OCLAT and reduce your taxable income from $10M to $7M.
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 (5) tax years. (In fact, in years with very low IRS hurdle rates, 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 save taxes next April 15th.
If I put $1M into the OCLAT, do I save $1M of taxes? No, it is a $1M tax deduction, not a $1M tax credit. For example, a $1M deduction for a California 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 $1M/year as a surgeon, but I also sold some Tesla stock for a $3M long-term capital gain. If I put $1M into the OCLAT, I’d like my $1M tax deduction to apply first to my $1M ordinary income – is that possible? Great news – 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.
FOOTNOTES
8 https://www.frgalaw.com/wp-content/uploads/optimized-clat-1.pdf
9 For example, the OCLAT does not qualify as a “shark fin CLAT” (which is a more aggressive variant that has not been expressly approved by the IRS). It’s notable that a 30-year shark fin CLAT produces a ~10% incrementally larger return compared to a 30-year OCLAT, and therefore we do not believe the added risk of a shark fin CLAT is justified.
10 https://fortune.com/2023/12/27/former-irs-boss-optimizes-charitable-trust-to-support-alma-mater-give-assets-children-tax-free-succession-tax-jonathon-morrison/
11 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 ~2-3x as much wealth at year 30 by funding the OCLAT depending on their tax bracket in the year of funding.
12 This 2-3x phenomenon is true, regardless of asset performance or IRS hurdle rates, assuming the donor was otherwise going to donate the same amounts, on the same schedule, regardless of whether the OCLAT was implemented or not.
13 IRS Circular 230: audit risk should not be considered when making a tax planning decision; we cannot guarantee the absence of an audit. The absence of any audits does not demonstrate uniform IRS acceptance (although the supporting peer-reviewed Estate Planning Journal article would provide unusually strong legal support for the OCLAT in event of audit).
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
