Maximizing Tax Planning Strategies with CLATs, OZs, and DAFs | Savvy
Charitable Lead Annuity Trusts (CLATs), Opportunity Zones (OZs),and Donor-Advised Funds (DAFs) are all viable options for tax planning, each offering its own merits.
- CLATs, which allow you to reduce your taxes after selling an asset, tend to be high ROI but have the longest path to liquidity.
- OZs have a good ROI and offer more initial liquidity but less diversification. They allow you to reduce your taxes after the fact and in future tax years
- DAFs give you the freedom to donate (and take a tax deduction) now without committing funds to a particular charity, and the funds can be invested in the meantime.
How does a Charitable Lead Annuity Trust work?
CLATs are trusts that allow you to donate assets in exchange for an immediate tax deduction. You put money into the trust, deduct up to 100% of the value of your donation, spread your donations out over many years, invest the money in the meantime, and receive what’s left over at the end of the trust’s term. Because you can’t withdraw your money until the end of the trust’s term, most people treat a CLAT like a retirement account.
How does an Opportunity Zone work?
OZs are a way to defer capital gains taxes on capital gains you’ve recently realized. If you roll eligible gains into a Qualified Opportunity Fund within 180 days of realizing the gain, two forms of tax incentive are available:
Capital gains may be deferred until the investment is sold or exchanged, or the end of 2026, whichever comes earlier. e freedom to donate (and take a tax deduction) now without committing funds to a particular charity, and the funds can be invested in the meantime.
You can save even more through an adjustment in cost basis of your investment. If you hold the investment for at least 10 years, you can avoid taxes entirely on the sale of the OZ investment.
How do Donor-Advised Funds work?
DAFs exist for the sole purpose of supporting charitable organizations. The main benefits are twofold: 1) When you contribute cash, securities or other assets to a DAF, you are usually eligible to take an immediate tax deduction, just as if you had donated the funds directly to a charity. 2) At the same time, you’ll be able to invest the funds, they’ll grow tax free, and you can give the additional gains to charity in the future, tax free.
Comparing the ROI of Each Structure
Post-tax return on investment after 10 years (discounted by the time value of money to calculate their net present value.
Goal: Evaluate each of these tax planning structures based on post-tax return on investment after year 10 years. (Any payouts that might happen after 10 years are discounted by the time value of money to calculate their net present value in 10 years.)
The individual is 35 years old, based in California, with $1m of appreciated assets at a $0 cost basis. They expect a 35% tax rate and for the stock market to grow 10% annually, while an OZ investment would appreciate 9% annually (after fees).
- CLAT (30-year term): $1,971,897 – additional 44% return
- OZ: $1,828,845 – additional 33% return
- DAF: N/A — you are donating your funds
- No Tax Planning: $1,373,934