5 ms·

Derek's writing influenced me quite a bit in the early 2000s. I bootstrapped a software business from zero to near $10m in annualized revenue, and sold it almos

by tkiley 6y ago

Derek's writing influenced me quite a bit in the early 2000s. I bootstrapped a software business from zero to near $10m in annualized revenue, and sold it almost half a decade ago. I contributed 100% of my equity into a charitable remainder trust because I learned about that idea from his website. Since then, I've done a lot of "puttering". I'm teaching myself jazz guitar, and I'm currently enrolled in law school. I have basically unlimited time to read whatever interests me. If I could go back five years and give myself some advice, I would say that "enough" is not durably satisfying. Purpose is durably satisfying. Purpose arises from constraints. Having "enough" means you lack a particular type of constraint. Thus, enough" can get in the way of developing purpose, particularly if you are somewhat undisciplined like me. (Also, I would abolish charitable remainder trusts from the tax code. I created one for lifestyle reasons not tax reasons, but after experiencing the tax consequences firsthand, I think they are profoundly unfair.)

cheez 6y ago
What are the tax consequences that make it unfair?
skrebbel 6y ago
Wow cool! For those of us who don't regularly create charitable remainder trusts, what are the tax consequences and why are they unfair?
- tkiley 6y ago
  I had a bunch of equity in a startup that had a cost basis of, essentially, $0. Under normal circumstances, I would have sold this for $millions, and would have paid nearly 20% in capital gains taxes immediately. Instead, I contributed my equity to a CRUT. I paid zero capital gains taxes at that moment, and the CRUT pays zero capital gains taxes ever. Also, because a contribution to the trust is a contribution in part to charity (with proportions calculated according to actuarial figures of my life expectancy), I got a charitable tax deduction of many million dollars which I was able to carry forward for many years. Each year I owe taxes on the 5% which the CRUT distributes to me every year, but since this is capital gains income, it is taxed at a very low rate -- which is effectively reduced even further because it is offset by the charitable deduction which I have been able to carry forward. The net effect is that I'm paying capital gains taxes in a tiny trickle over the remainder of my lifetime, and I also got a giant charitable deduction to offset those capital gains taxes. When I die, the principal in the trust goes to charity. The IRS will never get the kind of bite at this equity that I would intuitively expect it to get. I don't understand how this capital gains tax loophole could be beneficial to society. I think it should be removed from the tax code. Another side effect of the CRUT I hadn't anticipated: Occasionally, I note the intrusive thought that my continued life is the one and only barrier which is keeping a decent amount of capital from serving charitable purposes right now. That's honestly pretty depressing sometimes.
  - DennisP 6y ago
    Whether that's bad depends on how you feel about the way your government spends tax money. Because you used a CRUT, the money that doesn't support you will go to some worthy charity, instead of funding a series of wars, pervasive surveillance, and cages for kids. Of course the government also does many worthwhile things, but your extra money will be spent entirely on worthwhile things, and not at all on horrific ones.
    - tkiley 6y ago
      That's true! I'm happy that I am paying low taxes. It just seems ridiculous that my effective tax rate is so much lower than the effective tax rate paid by other people. As best I can make out, a CRUT reduces your tax burden dramatically if 1) you are young, and 2) you fund the CRUT with equity that has a very low cost basis. I don't think the tax code should contain a special magic wand that reduces tax liability so low for this particular situation, because this advantage seems unfair to people who accrue their wealth over a lifetime by more traditional means.
      - DennisP 6y ago
        Seems it'd be a substantial savings even if only (2) is true. A 55-year-old who's retiring a bit early after holding Amazon for twenty years could avoid a lot of capital gains.
    - rapind 6y ago
      The problem with this thinking is that only those privileged enough to take advantage of it get to pick how their tax money is spent. I disagree with (even despise) some of the ways government spends our money, but should I get to choose like some special snowflake while most don't have the same opportunity? This just enforces a rigged economy... and guess what? Many of the privileged few would support government programs the rest of the so called democracy wouldn't. Your tacit assumption is that wealthy individuals who can take advantage of bullshit tax favoritism will spend that extra money in worthwhile (subjective) ways.
toast0 6y ago
> I would abolish charitable remainder trusts from the tax code. They've been reducing the scope of new trusts over time. When I looked into it around 2014, a young person couldn't actually make a lifetime income CRUT because the requirement for 5% distribution, and the low interest rates at the time made the actuarial calculations show a zero balance for the charity at the end, but you need to show at least 10% for the charity at the end. A fixed term just doesn't seem as good. I ended up just paying federal cap gains and CA income on most of it, but I did donate some of the near $0 basis stock to a DAF, and sold a small portion of the equity after moving to WA. Some of that was QSBS which was nice, but having seen the 2001 stock market, leaving it undiversified to save on taxes didn't seem worth it.
- pottertheotter 6y ago
  They reduced the scope of new ones but leave old ones alone? Seems like it should apply to all or none.
  - sjg007 6y ago
    These things are grandfathered in.
  - toast0 6y ago
    Charitable remainder trusts are setup as irrevocable, if properly drafted. It would be difficult to equitably unwind them after the fact. Changing how CRUTs are treated ex-post facto would also raise doubts about how Roth IRAs will be treated. There's already people who don't trust that the federal government will keep those tax free.
    - pottertheotter 6y ago
      There are all sorts of decisions made based partially on taxes that the government later changes going forward. And those changes cause a ton of issues. Just seems like should all be one way or the other.

by tkiley 6y ago

cheez 6y ago

What are the tax consequences that make it unfair?

skrebbel 6y ago

Wow cool! For those of us who don't regularly create charitable remainder trusts, what are the tax consequences and why are they unfair?

tkiley 6y ago
I had a bunch of equity in a startup that had a cost basis of, essentially, $0. Under normal circumstances, I would have sold this for $millions, and would have paid nearly 20% in capital gains taxes immediately. Instead, I contributed my equity to a CRUT. I paid zero capital gains taxes at that moment, and the CRUT pays zero capital gains taxes ever. Also, because a contribution to the trust is a contribution in part to charity (with proportions calculated according to actuarial figures of my life expectancy), I got a charitable tax deduction of many million dollars which I was able to carry forward for many years. Each year I owe taxes on the 5% which the CRUT distributes to me every year, but since this is capital gains income, it is taxed at a very low rate -- which is effectively reduced even further because it is offset by the charitable deduction which I have been able to carry forward. The net effect is that I'm paying capital gains taxes in a tiny trickle over the remainder of my lifetime, and I also got a giant charitable deduction to offset those capital gains taxes. When I die, the principal in the trust goes to charity. The IRS will never get the kind of bite at this equity that I would intuitively expect it to get. I don't understand how this capital gains tax loophole could be beneficial to society. I think it should be removed from the tax code. Another side effect of the CRUT I hadn't anticipated: Occasionally, I note the intrusive thought that my continued life is the one and only barrier which is keeping a decent amount of capital from serving charitable purposes right now. That's honestly pretty depressing sometimes.
- DennisP 6y ago
  Whether that's bad depends on how you feel about the way your government spends tax money. Because you used a CRUT, the money that doesn't support you will go to some worthy charity, instead of funding a series of wars, pervasive surveillance, and cages for kids. Of course the government also does many worthwhile things, but your extra money will be spent entirely on worthwhile things, and not at all on horrific ones.
  - tkiley 6y ago
    That's true! I'm happy that I am paying low taxes. It just seems ridiculous that my effective tax rate is so much lower than the effective tax rate paid by other people. As best I can make out, a CRUT reduces your tax burden dramatically if 1) you are young, and 2) you fund the CRUT with equity that has a very low cost basis. I don't think the tax code should contain a special magic wand that reduces tax liability so low for this particular situation, because this advantage seems unfair to people who accrue their wealth over a lifetime by more traditional means.
    - DennisP 6y ago
      Seems it'd be a substantial savings even if only (2) is true. A 55-year-old who's retiring a bit early after holding Amazon for twenty years could avoid a lot of capital gains.
  - rapind 6y ago
    The problem with this thinking is that only those privileged enough to take advantage of it get to pick how their tax money is spent. I disagree with (even despise) some of the ways government spends our money, but should I get to choose like some special snowflake while most don't have the same opportunity? This just enforces a rigged economy... and guess what? Many of the privileged few would support government programs the rest of the so called democracy wouldn't. Your tacit assumption is that wealthy individuals who can take advantage of bullshit tax favoritism will spend that extra money in worthwhile (subjective) ways.

toast0 6y ago

> I would abolish charitable remainder trusts from the tax code. They've been reducing the scope of new trusts over time. When I looked into it around 2014, a young person couldn't actually make a lifetime income CRUT because the requirement for 5% distribution, and the low interest rates at the time made the actuarial calculations show a zero balance for the charity at the end, but you need to show at least 10% for the charity at the end. A fixed term just doesn't seem as good. I ended up just paying federal cap gains and CA income on most of it, but I did donate some of the near $0 basis stock to a DAF, and sold a small portion of the equity after moving to WA. Some of that was QSBS which was nice, but having seen the 2001 stock market, leaving it undiversified to save on taxes didn't seem worth it.

pottertheotter 6y ago
They reduced the scope of new ones but leave old ones alone? Seems like it should apply to all or none.
- sjg007 6y ago
  These things are grandfathered in.
- toast0 6y ago
  Charitable remainder trusts are setup as irrevocable, if properly drafted. It would be difficult to equitably unwind them after the fact. Changing how CRUTs are treated ex-post facto would also raise doubts about how Roth IRAs will be treated. There's already people who don't trust that the federal government will keep those tax free.
  - pottertheotter 6y ago
    There are all sorts of decisions made based partially on taxes that the government later changes going forward. And those changes cause a ton of issues. Just seems like should all be one way or the other.