Frazer Ryan Goldberg & Arnold LLP

See also: Optimized Gift Trust (OGT) Frequently Asked Questions

But a lesser known estate-planning tool— optimized charitable lead annuity trusts , or OCLATs—can help professional athletes, people selling their businesses, and high-net-worth individuals achieve their financial and philanthropic goals. If executed well, this strategy can deliver two to three times the initial invested sum at the end of its term. OCLATs are a version of the traditional CLAT offering, which has been a staple in the tax-planning strategies of the wealthy, including famous figures like Jacqueline Onassis, since it was introduced into the tax code in 1969. A CLAT, in its most basic form, is a charitable trust that disburses a fixed annuity or sum of money to one or more charities over a specific period of time. Once this term has come to an end, the residual assets in the trust are transferred to a noncharitable beneficiary. The OCLAT stretches the boundaries of the CLAT structure as far as IRS case law allows by making most of the charitable gifts in the latter years of the trust, thus giving investments more time to grow and more time to build family wealth. OCLATs are perfect for younger philanthropic high-earning Americans, those with large liquidity events, and those with substantial income tax obligations each year but a long time-horizon to invest. Yet despite their advantages, OCLATs are not widely used, primarily due to their perceived complexity. Indeed, many certified public accounts are unaware of their existence. This is gradually changing as more is written about this peer-reviewed income tax reduction strategy, and more professionals learn about, and recognize, its benefits. OCLATs offer a dollar-for-dollar tax deduction in the funding year (immediate tax savings of up to 30% adjusted gross income); a projected return of two to three times the original contribution (per Monte Carlo model projections accounting for the triple tax savings and assets compounding for 30 years); relief from the 40% federal gift/estate tax (because assets are removed from the taxable estate); and protection of transferred assets from bankruptcy, personal creditors, and divorce. OCLATs may not be ideal for individuals not motivated by philanthropy or those who do not have adequate personal assets outside the OCLAT. However, if the client is in a profession with a high income or has sold a highly appreciated asset and could benefit from a big state/federal tax deduction, is philanthropic, has ample savings outside the OCLAT, and would like to minimize inheritance taxes paid by children, then this is a textbook OCLAT use case. For example, if an athlete with a multiyear guaranteed contract moved $1 million of stock into an OCLAT account in 2024, he or she would save approximately $500,000 in income taxes for that year. If the stock in the OCLAT earns about 8% annually over 30 years, it leaves the athlete with $3 million for charitable donations, and some $5 million that would be transferred to the heirs tax-free (meaning no income tax or gift inheritance tax). In the event of unforeseen circumstances, like an injury that affects income, the IRS allows for the early termination of an OCLAT—with the condition of fulfilling all remaining charitable payments. Conversely, if the OCLAT investments do exceptionally well—a so-called “home run CLAT”—the vehicle can be shut down early so long as the charity gets the payment it was promised—and in any case the client still keeps the 30% income tax deduction. Interest rates could fall enough this year to bring the IRS charitable hurdle rate roughly in alignment with the 10-year Treasury yield, making the OCLAT an attractive way to maximize wealth while ensuring a lasting legacy and achieving significant tax savings.

FRGA Attorney Jimmy Cool was interviewed by David Abbot of the Arizona Mirror about Senate Bill 1262. This proposed legislation aims to fix problems with Arizona marijuana industry’s social equity ownership program, which called for the Arizona Department of Health Services to develop a program to promote marijuana dispensary ownership by individuals from communities harmed by the “War on Drugs.” 

Information in this release concerning the case is posted with the client’s permission.

In the January/February 2024 issue of AZ Business magazine, T.J. Ryan and Lisa Reilly Payton are featured in the “Top 100 Lawyers in Arizona.” Click here to read more on pages 96 and 97 of the digital issue.