"The great wealth transfer has begun! By the end of the decade, there will be approximately $5 trillion passed down to Millennials, and over the coming decades, Baby Boomers will transfer another $30-$68 trillion marking the greatest wealth transfer in history," said Grayson Hofferber, President of Millennial Wealth Management. "Wealthy millennials generally are very philanthropic and focus on what their money's impact is on the world," said Hofferber.
Philanthropic and impact-investment-driven Millennials with high incomes are increasingly turning to a strategy known as the optimized charitable lead annuity trust or OCLAT, a special version of a charitable lead annuity trust that optimizes the tax and economic benefits to the contributor.
By opening an OCLAT investment account and shifting assets to it equal to their desired tax deduction, Millennials create both a triple tax-advantaged retirement account that can grow exponentially over time and a giving-engine that donates increasingly more to charity, usually over 20-30 years. This tax deduction strategy (perhaps most famously associated with Jackie Onassis) is IRS-approved and has many benefits that make it attractive to high-earning Millennials, including a high-funding limit (30% of annual income) and charitable giving, retirement savings and generational wealth transfer components. Specifically:
The individual funding the OCLAT receives a tax deduction equal to the amount contributed to the OCLAT that year, which provides immediate tax savings.
The OCLAT assets are exempt from the funder's personal creditors, lawsuits and bankruptcy.
The individual selects an initial charitable period and invests the OCLAT funds while making required donations of a portion of the OCLAT assets to charities they select (such as an alma mater, a child's school or a church).
At the end of the 30-year term (near retirement age), the funder can typically expect to receive back two to five times the initial contribution to the OCLAT, which may be transferred back to them (without any income taxes) and/or they can give the assets to their children or other heirs (without any income taxes or the 40% federal gift/inheritance tax).
"About a quarter of my OCLAT clients are high-income Millennials that understand the importance of playing the long game with their finances," said the OCLAT's lead architect Jonathon Morrison. "For example, one client in the top tax bracket sold his business in 2022 and decided to shift $1 million of stock into an OCLAT account, which resulted in a $1 million income tax deduction and will save him roughly $500,000 in taxes on his 2022 tax return. Over the 30-year charitable term, his $1 million is invested on his own platform inside the OCLAT, and he is required to make donations to his favorite charities totaling approximately $2.4 million. This simultaneously propels his philanthropic legacy while also compounding his investments. This client was thrilled to learn at year 30, he will also have about $5 million remaining inside the OCLAT account, assuming a 7.5% annual rate of return. This amount may be transferred back to him or his family income tax-free and free of any gift or estate tax," said Morrison.
In addition to funding an OCLAT to reduce the tax burden on annual income, many wealthy Millennials are also using the OCLAT to offset taxes due on a conversion of their traditional IRAs (or 401[k]s) to a Roth IRA while values are depressed. This is a powerful transaction since Roth IRA withdrawals are tax-free in retirement.
"Millennials have the power of time and the compounding growth opportunities for this group are off the charts. Almost all tax management and wealth building techniques are all on the table and the OCLAT is a very powerful tool for building generational wealth," said Larry Lytle, Financial Advisor at RBC Wealth Management.
The OCLAT needs to be funded by December 31 to enjoy a 2022 income tax deduction.
A senior partner at Frazer Ryan Goldberg & Arnold, Forbes Finance contributor, and Best Lawyers® honoree, Jonathon's practice is focused on tax, business and estate planning for UHNW clients with large or complex estates. He is licensed in both Arizona and California and is a Certified Specialist in Estate Planning, Trust and Probate Law in California
After a decade practicing with preeminent estate planning law firms in Silicon Valley, Jonathon gained a mastery of modern, advanced estate and tax planning strategies. With his unique background, Jonathon enjoys a reputation for developing advanced estate planning solutions for high-income and high-net worth clients whose objectives include income tax and estate tax minimization, charitable and philanthropic giving, business exit, succession planning, and asset protection.
Jonathon is also a frequent speaker and nationally recognized authority with respect to a specific type of charitable vehicle: the Optimized CLAT. Jonathon is frequently engaged by clients, advisors and attorneys around the country to implement and provide advice with respect to OCLAT planning.
About Frazer Ryan Goldberg & Arnold
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