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
RETURN OF OCLAT REMAINDER ASSETS AT END OF CHARITABLE TERM
How much can my family expect to receive back from the OCLAT? This depends on how well you invest the money inside the OCLAT. For OCLATs funded in Q3 2026, a 30-year $1M OCLAT returning 8% per year would return ~$4.5M to the family at year 30 (after donating ~$3.5M to charities). You have a long time horizon before most of the OCLAT’s charitable payments are donated which has two primary benefits: (i) you have plenty of time before large donations must be made so you can be a bit more aggressive with investments, and (ii) if there are bad markets in early years, variable/stochastic financial models show there is plenty of time to catch up for 20+ year OCLATs.
How does the transfer of remainder assets out of the OCLAT work? It’s simple – the OCLAT account terminates and the assets are transferred, in-kind, to you or your heirs.
Are there taxes on the money my family receives from the OCLAT? Zero. Unlike an IRA or 401(k), there are no income taxes when the assets transfer back to you or your family (although the subsequent sale of the assets could result in capital gains).16 Moreover, if you set up your OCLAT so that it transfers the remainder assets to your children (or other family members), you do not pay the 40% gift tax and estate tax on the transfer.
If I initially name my children as remainder beneficiaries of the OCLAT, but later decide that I want to give the assets to my siblings…or maybe even get the remainder assets back for myself. Can I do that? Yes; however, for tax reasons, these types of changes usually require the consent of a special powerholder called an “independent Trust Protector” who is typically a close friend of yours or non-immediate family member.17
TAX FILINGS FOR OCLAT
What tax filings are required for the OCLAT? It’s simple. Your CPA must file a one-time gift tax return (Form 709) and the OCLAT has an annual federal tax filing (Form 5227) and perhaps state tax filings (depending on your residence). We provide these details in the final “instruction manual” memo that is sent out to you and all of your tax advisors at the end of the process explaining, in detail, how the OCLAT works, tax filings, prohibited transactions, and best practices. We also have sample redacted OCLAT tax returns to share with your tax preparer, upon request. Our one-time OCLAT fee also includes discussions with your CPA and review/comment of the OCLAT tax returns.
My CPA has no idea how to do those tax filings – do you have a referral? Yes, we have several referral partners.
LOGISTICS
I am busy – how easily can we create the OCLAT? After completing 250+ OCLATs and putting hundreds of hours into fine-tuning the OCLAT documents and process, we have streamlined the process so that it takes 2 short Zoom calls. In most cases, the OCLAT account is ready to be funded within a couple of weeks (or, if absolutely necessary to meet a funding deadline, in as short as 48 hours, although considerably more time is recommended so you can be thoughtful with your decision).
Can you help me even though I don’t live in your state? Yes, we can set up OCLATs for clients in all 50 states.
Who prepares my OCLAT documents? CLAT planning is notoriously complex – there are perhaps less than a dozen attorneys in the country that have a complete mastery of the CLAT vehicle, but there are countless ways for a CLAT to be disqualified and/or trigger 200% tax penalties through improper document drafting or faulty administration. To ensure the highest level of quality control and responsiveness, you work exclusively with OCLAT creator Jonathon Morrison who personally drafts all OCLAT documents and related memoranda from start to finish (unlike most law firms that rely on junior attorneys or paralegals for document preparation). Mr. Morrison also interfaces with all your advisors to make sure the OCLAT is set up and administered properly.18 We have never missed a 12/31 funding deadline after nearly 10 years of funding 250+ OCLATs. To address “key man risk” if Mr. Morrison is unavailable, (i) there is an “instruction manual” memo that is sent out at the end of the process, and (ii) the law firm has several attorneys who understand OCLAT mechanics and stand ready to assist.
FEES
What are the setup fees for the OCLAT? Our law firm charges a one-time flat fee to set up the OCLAT based on our published fee schedule that is then in effect. We may also offer a discount for multiple family members or business partners that engage us at the same time for OCLATs.
What is included in your setup fee? As explained in the separate Process document, the fee covers the entire setup process, from start to finish. Additionally, our fee covers (i) annual review meetings, (ii) review and comment on draft OCLAT tax filings, and (iii) all future communications with you and your advisors related to the OCLAT administration. If you are audited (which has never occurred to our knowledge after 250+ OCLATs), we cover up to $10,000 of legal expense to defend the audit.
Do you charge me if I want to fund another OCLAT next year? No – after the initial OCLAT, you may continue to create as many OCLATs as you like, at no cost. (Some of our clients with recurring high incomes will fund a new OCLAT every tax year as a retirement strategy.)
Are there any ongoing fees? No – except relatively small annual OCLAT tax preparation fees paid to your tax preparer.
FOOTNOTES
16 The OCLAT’s tax basis in the assets transfers to the remainder beneficiaries without step-up (unless the assets are intentionally included in your taxable estate using the Trust Protector’s power to confer a general power of appointment).
17 Please refer to page 6 and footnote 17 of the author’s Optimized Gift Trusts & Funding Designs article in the May 2024 issue of Estate Planning Journal for Trust Protector best practices and defenses which are incorporated into the OCLAT trust document. Rest assured, the Trust Protector cannot make these changes without notice to you and typically the consent of your attorney. You also have the power to remove the Trust Protector at any time (subject to once every 24 months without cause). A successor independent Trust Protector may be nominated by your attorney at the time with respect to the CLAT.
18 Including, without limitation, analysis of income tax deduction, AGI capacity, and optimization of deductions (i.e., ordinary income, capital gains, carryforwards, state tax treatment, and estimated taxes); opening and funding accounts; ensuring annual charitable payments are satisfied; ensuring tax compliance (review of draft returns; supply of redacted specimen tax filing forms; detailed instructions for all required tax filings).
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
