FAQ Index


1.



The Basics

2. IRS Approval and the Upfront Tax Deduction


3.



The Charitable Lock-Up Period


4.



Remainder Assets, Tax Filings, Logistics, Fees

IS THIS IRS-APPROVED? HOW MUCH RISK IS INVOLVED?


Has the OCLAT been approved by the Tax Code?




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 Journal






article



.





Is this a peer-reviewed strategy?




Yes. As part of the publishing process for the



Estate Planning Journal



article, there was a lengthy six-month peer-review process. The OCLAT strategy and legal article were critiqued by more than a dozen attorneys at four different law firms and financial firms throughout. All attorneys uniformly agreed that the OCLAT passes 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 two and three times additional wealth[3] by funding a 30-year OCLAT versus doing nothing, all things being equal.




[3] his 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.



Will an OCLAT trigger an IRS audit?



As of January 2022, Mr. Morrison has funded approximately 100 OCLATs without a single known IRS audit.[4] In the event of 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.


[4] IRS Circular 230: audit risk should not be considered when making a tax planning decision; we cannot guarantee the absence of an audit.

THE UPFRONT TAX DEDUCTION

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.


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 $1 million 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% California) translates to $500,000 less taxes paid when the tax return is filed next April.


I make $1 million per 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, this is a common transaction. But to eliminate the $600,000 of Roth conversion income with a $600,000 OCLAT, you’ll need to have $2 million of total income for the year (recall that the OCLAT deduction is limited to 30% AGI, or $600,000 if you have $2 million of income). Therefore, many of our clients will wait to convert an IRA to a Roth in a tax year when they know they will have a large capital gain (such as the sale of a business) and have adequate AGI.