Basic FAQs

What is the ideal client profile?



The ideal OCLAT client (i) is philanthropic, (ii) has a high income or is selling a highly-appreciated asset, (iii) has sufficient savings outside the OCLAT, (iv) lives in a high tax state, and/or (v) wants to minimize inheritance taxes paid by children.

Why should I fund an OCLAT?



With the OCLAT, the Tax Code rewards your philanthropic and family wealth legacy goals by giving you immediate tax benefits. Upon funding the OCLAT, you enjoy an income tax deduction (reducing your taxes this year)




and



you remove the OCLAT assets from your estate (the OCLAT is entirely exempt from estate taxes at your death).

How does this work?



During the initial charitable term (also known as the “charitable Lock-Up Period”), you invest the OCLAT assets while also paying a portion of the OCLAT assets to charities. After the charitable period is over, assuming you invested the OCLAT assets at a reasonable 5-7% per year, there will be assets inside the OCLAT account equal to 2-5 times the amount of your initial contribution. These assets can be gifted to your children or other family members (including in continuing trusts that you still control) without paying any income taxes, gift taxes or estate taxes.

Can you give me a simple example?



Say you put $1 million into an OCLAT. You enjoy a $1 million tax deduction, saving you ~$500,000 in ta




xes.[1] Let’s assume you select a 30-year charitable term and fund in February 2022 when the current IRS benchmark rate is just 1.6%




(discussed below).



On these assumptions, the OCLAT must pay just ~$1.5 million to charities over the 30-year term and ~$5 million will be available at year 30 to transfer to children (assuming a 7% rate of return).

[1] Assuming you are i


n



the top federal tax bracket (37%) and a California resident (13.3% top rate).

That 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 $10 million this year, you can put $3 million 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. The OCLAT simply leverages the near-all-time-low IRS benchmark rate which is locked in at funding. If the OCLAT investments do not outperform the IRS benchmark rate, there will be nothing in the account at the end of the charitable term. The IRS basically says, “We don’t think your investments will earn more than 1.6% per year, and if they do, your family may 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 benchmark rate each month (it roughly tracks movements in the 10-year Treasury yield). Since you lock in the IRS 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:

  • you are not charitable[2]; or

  • 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.)



[2] The Tax Code absolutely requires that the creator of the OCLAT possess bona fide charitable intent – if not, all of 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.

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 and enigmatic vehicle reserved for the ultra-wealthy (Jackie Onassis famously funded a CLAT) and interest rates have never been this low.


In 2016, Silicon Valley-trained attorney Jonathon Morrison discovered that a CLAT could be repurposed as a synthetic retirement account for both the “working rich” and ultra-wealthy alike; after hundreds of hours of research and development, the “Optimized CLAT” 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 and estate planning world. As of January 2022, Mr. Morrison has been involved in more than 150 CLAT transactions and has funded approximately 100 OCLATs.