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 to what extent the OCLAT investments outperform the IRS-set charitable hurdle rate (which is fixed upon funding). For CLATs funded in September 2022, the hurdle rate is relatively low (3.6%) such that a 30-year $1 million OCLAT returning 7.5%/year would return ~$5 million to the family at year 30.
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.10 Moreover, if you set up your OCLAT so that it transfers the remainder assets to your children or other family members, the 40% gift tax and estate tax does not apply.
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 a “Trust Protector” who is typically a close friend of yours or non-immediate family member.11
10 The OCLAT’s tax basis in the assets simply transfers to the remainder beneficiaries. Once the assets are sold in the hands of the beneficiaries, there could be capital gains.
11 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.
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 annual federal tax filings (Forms 5227, 1041-A) and perhaps state tax filings (depending on your residence). We provide these details in the final “instruction manual” memo that is sent out at the end of the process and copy your tax preparer. (We also have sample redacted Form 709 and Form 5227 to share with your tax preparer, upon request.)
My CPA has no idea how to do those tax filings – do you have a referral? Yes, we have a number of referral partners.
LOGISTICS
I am busy – how easily can we create the OCLAT? After completing approximately 100 OCLATs and putting hundreds of hours into fine-tuning the OCLAT documents and process, Jonathon Morrison has streamlined the process so that it takes just a couple of hours of your time. In most cases, the OCLAT account is ready to be funded within a couple of weeks (or more quickly if necessary to meet a deadline).
Your law firm is located in Arizona – can you help me even though I don’t live in Arizona? Yes, we frequently set up OCLATs for clients around the country.
Who prepares my OCLAT documents? CLAT planning is notoriously complex – there are perhaps less than a dozen attorneys in the country that have a total and complete mastery of the CLAT vehicle, but there are countless ways for a CLAT to be disqualified through improper document drafting or faulty administration. To minimize risks, you work exclusively with Mr. Morrison who personally drafts all OCLAT documents and related memoranda from start to finish – you do not work with a junior attorney or paralegal. Mr. Morrison also interfaces with all your financial and tax advisors to make sure the OCLAT is set up and administered properly.
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 (which is subject to change).
We 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? We cover 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.
The fee does not cover special transactions (such as early termination of the OCLAT) or the tax filings for the OCLAT (which must be paid to your tax preparer).
What is the fee if I want to fund another OCLAT in the future? There is no charge. Effective January 1, 2022, our initial OCLAT fee now covers up to five duplicate/cloned OCLATs (although the IRS-set charitable hurdle rate will likely change between now and then).
Where do I deduct the legal fee that I pay your firm for setting up my OCLAT? Most tax preparers deduct the OCLAT setup fee on either Schedule E (legal fees attributable to business income) or Schedule A (deemed contribution to the OCLAT resulting in cash charitable deduction) of the individual’s Form 1040 tax return.
Are there any ongoing fees? No (other than relatively small annual OCLAT tax preparation fees paid to your tax preparer).
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.
