8 ms·

Why I gave away my company to charity

328 points by sivers 17y ago

Psyonic 17y ago
Can we assume it actually makes more than 5% interest every year? Otherwise he's slowly draining it of its value, and if he lives long enough may empty it. It probably does, but it's a thought.
- ryanwaggoner 17y ago
  Yeah, asset managers generally advise withdrawing no more than 4% annually to preserve wealth. However, I'm guessing that this is classified similar to a foundation, which must pay out 5% of its assets each year. EDIT: Just read the wikipedia article he links to, and as the value of the trust is recalculated each year, and his annuity is based on the recalculated value (as opposed to the original value) it's effectively impossible to deplete the value. Also, you can setup a net-income CRUT that pays out the lesser of the annuity income percentage, or the trust's net income for the year, thus ensuring that your annuity doesn't reduce the value of the trust from year to year.
  - sivers 17y ago
    Exactly. I'm required to pay out 5% per year to myself, but then I don't have to spend the whole 5%. I can reinvest it or whatever.
    - tsuraan 17y ago
      Can you re-invest it in the non-profit that you created? i.e., accept the 5% and then just give most of it right back?
  - ippisl 17y ago
    but it's possible that the value at the end would be just a small fraction of the original sum.
- sivers 17y ago
  Unwise to passively assume. It's my responsibility to make sure it grows by at least 5% or that defeats the whole purpose! :-) http://sivers.org/book/SmartestInvestmentBook http://sivers.org/book/SmartestInvestmentBook http://sivers.org/book/InvestorsManifesto http://sivers.org/book/InvestorsManifesto http://sivers.org/book/FourPillarsOfInvesting http://sivers.org/book/FourPillarsOfInvesting
  - Psyonic 17y ago
    Good links, and I'm not at all surprised that you've put a lot of thought into it. Of all the writers that appear here on a regular basis, you have the highest signal/bullshit ratio I've seen. When you say you're giving back, I believe you.
- ksvs 17y ago
  That's what I was thinking. 5% is the upper limit of the fraction of his wealth that a rich person could safely spend each year anyway. So his income is no different than if he'd kept the money. The only thing he has lost is the ability to change his mind about where the principal goes when he dies.
  - sivers 17y ago
    Intentionally lost my ability to do something stupid with more than 5% the principal while I'm alive. :-)
  - drp 17y ago
    That kind of salary still lets him build substantial personal wealth, so if he manages it wisely there will likely still be quite a large sum to pass to his heirs.
- gvb 17y ago
  He should live so long. :-D As pointed out elsewhere, this is an exponential decay so it will never go to zero. Bashing numbers helps me visualize this... Looking at (nearly) the worst case, if the trust earns zero interest, he will be draining it by 5% per year, so the principle will be 0.95^y * 22e6 where y is the number of years. If he lives for 40 more years... 0.95^40 * 22e6 = 2.8e6 (13% of the original sum is left). A less drastic case would be earning 4% but paying out 5%, i.e. losing 1% per year. 0.99^40 * 22e6 = 15e6 (67% of the original sum is left). OK, the absolute worst case is he invests the whole amount in subprime mortgages and loses it all. We won't bash those numbers, obviously he is a lot smarter than that.
michael_dorfman 17y ago
Wow, talk about a classy move. Major props to Derek. "The best things in life aren't things"
- nazgulnarsil 17y ago
  status is a thing >_> isn't derek signaling high status by giving away something valuable? <_<
  - misuba 17y ago
    sort of. but everything humans do can be argued as a status move, so it's unwise to get super hung up on it. (me, i just marvel at the 1337 tax-evasion skillz. :-)
    - gojomo 17y ago
      Let's do Sivers the favor of precision in our language: he engaged in rational tax avoidance for a good cause. When you say 'tax evasion', it generally means the steps taken were illegal.
      - skorgu 17y ago
        Or at least focused on avoiding taxes for personal profit if not outright illegal.
  - aaronblohowiak 17y ago
    Polysemy -- "thing" is an overloaded term.
  - araneae 17y ago
    Yup, he is. Now all the ladies will be after him.
  - wehriam 17y ago
    I don't think that is what they mean by "things." Derek is signaling generosity by being generous.
MikeCapone 17y ago
5% * 22 million = 1.1 million Not bad.
quickpost 17y ago
He's getting 5% of $22 million each year to cover living expenses ($1.1million)? Doesn't exactly sound like "living simply" to me.
- drp 17y ago
  Just having money doesn't mean he has to blow it.
  - quickpost 17y ago
    Fair point. However, if that's the case, why not leave more of it in the trust - he's automatically "blowing" 35% of that 5% (350k+) in taxes every year. EDIT: Here's the real answer - http://news.ycombinator.com/item?id=976759 http://news.ycombinator.com/item?id=976759
- ryanwaggoner 17y ago
  He's required to receive at least 5% of the trust's value as his annuity each year. http://en.wikipedia.org/wiki/Charitable_remainder_unitrust http://en.wikipedia.org/wiki/Charitable_remainder_unitrust
  - quickpost 17y ago
    Ahhh, that makes a lot more sense. Thanks!
  - ajju 17y ago
    Does the benefactor have to pay tax on that 5%? If not, this is an amazing deal for the benefactor!
    - sethg 17y ago
      If I am reading the Wikipedia article correctly (and if the article itself is correct), the benefactor does pay tax on that 5%. However, if the OP had kept his startup in his own name, then at the time he sold it, he would have had to pay capital-gains tax on all of his profit, that year. (And then he would have been able to spend the remainder on whatever he wanted, that year.)
edw519 17y ago
Thank you, Derek. One of my all time favorite hn posts. So many good quotes, I won't cite any of them. Just read the whole thing. We spend so much time pushing our customers to answer the question, "What's most important to you?" that we tend to forget to ask it to ourselves. OP's answer might not be my answer, but it's an awfully good one. Working hard is so much easier when you're working toward such an important outcome. Respect.
- Retric 17y ago
  Do the math. He created a trust that pays 5% of 22 million and avoids ~5 million in taxes. That's 1.1 million a year in income and a 5 million tax break at the cost his capital after he dies. It's less liquid right now, but 1.1 million a year is well past FU money and getting a loan with that sort of income stream is easy. If his annual payout was less than 5% then it would have been a sacrifice, but 5% + inflation means he might be extracting more money in real terms than he is generating. This means over a long enough time scale he basically skims most of his money back, and he leaves the tax break some of it's interest to charity. Granted if he generates significantly more than 5% + inflation he does lose some money but he does get 5% of an ever larger pool so it's not all that much of a loss. PS: Which is not to say it’s a bad thing, rather it’s more of a tax loophole than you might think. Afterall his other option was to live off of ~4.5% of 17 million. (Assuming he did not want to run out of money if he lived to be 90.)
  - sivers 17y ago
    Eh. I get taxed fully for everything that gets paid to me. (That annual 5%.) That doesn't avoid taxes at all. Only what will never touch my hands (direct from purchase-event to charity) avoids taxes. So this was just a way of making sure as much of it as possible never touches my hands. (As compared to passing-through me: taking it as income then giving it back out again.)
    - Retric 17y ago
      There are 2 tax advantages. You don't pay taxes on the first sale, and the annuity does not pay taxes when it sell's it's assets. Let's say you are a 30 years old and need to pay taxes on 14 million$ and decide to retire. As you get the money you need to pay taxes for simplicity let's call that 4 million$. You now have 10 million$ if you then buy stocks with a 5% dividend that keep up with inflation your income is 500k /year(which you do pay taxes on). However, if you ever sell those stocks you need to pay tax on how much they appreciated. If on the other hand you setup an annuity it does not pay that 4 million in taxes. If it then buys those same stocks with a 5% dividend that keep up with inflation it's paying you (10m+4m) *.05 = 700k / year (which you do pay taxes on). And if the annuity manager want's to sell the stock and buy something else it does not need to pay taxes on the sale. The final question becomes can you buy a life insurance policy for less than 200k/year that pays out the value of the annuity when you die. Expect your family does not pay death taxes on a life insurance policy so even that has tax advantages. PS: In the real world all those numbers are subject to change, but it was setup by congress as a tax shelter and with proper management it can do that vary well. I only bring this up because it may be a good idea for other people on HN who decide to sell their company and retire when when they are young.
flooha 17y ago
Why not use the money for music education now and be actively involved (or not) instead of in x number of years (40?) from now?
- eli 17y ago
  Because then you couldn't live off the interest in the mean time.
auston 17y ago
I once heard the word "Charitable Remainder Trust" - it was by a guy who wanted to make sure his money could never be taken from him... http://www.investorwords.com/830/charitable_remainder_trust.html http://www.investorwords.com/830/charitable_remainder_trust.... So no cap gains + a tax deduction for making money? Doesn't seem so charitable to me... (someone, please correct me if I am wrong)
- ryanwaggoner 17y ago
  There's absolutely nothing charitable about paying taxes.
  - auston 17y ago
    Sorry - my point was that the title connotes he's already completed some charitable action, when, in actuality, he's just taken steps to preserve his wealth until he passes - at which point a charitable action will be taken (on his behalf). edit: no one here likes the truth, I guess.
    - gvb 17y ago
      IOW, he's paying Tuesday for a hamburger he is enjoying today. http://en.wikipedia.org/wiki/J._Wellington_Wimpy http://en.wikipedia.org/wiki/J._Wellington_Wimpy (Posted as humor, not a cheap dig. If you down-vote me, do it for the cheap humor.)
    - shaddi 17y ago
      He does say explicitly that he's not being altruistic. My take is that this is a tip for startup owners who are planning to give some of their wealth to charitable causes after their death. He suggests a way to do this (financial hack, if you will) that improves the efficiency of the operation, maximizing both the money that goes to the charitable cause and to the donor. Regarding the payout, see http://news.ycombinator.com/item?id=976759 http://news.ycombinator.com/item?id=976759.
dondemarco 17y ago
Hmmmh...
phony_identity 17y ago
Derek, you did great work in creating that wealth and everyone here is happy to see you enjoying some of it. But please consider re-writing this to something more truthful - fewer words emphasizing your altruism and spartan lifestyle (?) and more words talking about the tax advantages and forced spending discipline that this smart plan gives you. The title, for example, shouldn't be "Why I gave away my company to charity". You didn't do that. (Which is good! That would be crazy.) How about, "Why I willed my estate to charity."
maddalab 17y ago
Altruism aside, it is a very smart move. I grew up in India and am sparse in my living standards and am at times amazed at the kind of affluence that exists in America even amongst those who consider themselves less privileged. As long as the trust grows at greater than 5% of its values you receive the mandated annual disbursement which is this case is a fair chunk of change and add monies to be disbursed at the end. However factoring in the rate of inflation and "money's real value over time", the trust probably needs to be invested wisely to grow at 5% + rate of inflation to retain its original value over the years. Occurs to me that setting up the trust is only half the battle, having it deliver on its original promise is the greater half.
- ido 17y ago
  When you reach that magnitude (many 10s of millions of dollars) getting 5% + inflation (inflation is on average pretty low in industrialized countries) amortized over many years is not hard.
ivankirigin 17y ago
I was thinking of a similar configuration for an investment vehicle. Make a charity whose goal is investing in good startups. Feed the returns back into investing. The goal is clout and influence rather than cashed out returns. I think this would better align incentives of investors and companies. It could also be used for "human capital" investments which are uncommon today except for student loans. It wouldn't need to be relinquished upon death - but the trustees would be transferred over time.
wallflower 17y ago
"At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have enough.'" Original source of 'enough' quote in Sivers' essay http://www.tompeters.com/dispatches/010754.php http://www.tompeters.com/dispatches/010754.php
- ryanwaggoner 17y ago
  That quote kind of loses its punch without the ellipsis: 'Yes, but I have something he will never have...enough.'
  - wallflower 17y ago
    Argh. Reminds me for some reason of the stand-up comedy formula. You are correct. I forgot the punchline. The ellipsis. Example from Robin Williams "Parenting is hard" (Premise) "Once you become a parent, you have responsibilities" (Statement/setup building on premise) "For example, you can't go out drinking, come home drunk, go up to Junior's room at 3am and say 'For a change, Daddy's going to throw up on you now just like you do" (Turn around, the twist)
n8agrin 17y ago
Wow, this really rang true with me: "It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest." I often think about how this mentality equates to business. For example, we generally think about business profit growth as healthy, but what if a business is sustainable, does not grow in profits but can somehow grow "happiness" with customers, investors, employees, etc. In a sense the business is not necessarily being altruistic, it's just recognizing what makes people more dedicated to the business. When thinking about Zappos I generally wonder if this wasn't their strategy for many years.
lefstathiou 17y ago
I hope I'm not being an ass but this article annoyed me a bit. This guy came across very arrogant, self righteous and judgmental. The following statements were just obnoxious: - "Yes, but I have something he'll never have: enough." - "I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime." - "it throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don't use - or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours." A) I've never met nor heard of any billionaire who got where they were because they were chasing dollars. All of them started out by LOVING what they did and doing it extremely well. The market rewarded them for the value they created for society. The greater the value, the greater the reward. B) Why is he implying that because of their success, the rich are incapable of appreciating the simple things in life? Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius C) What business it is of his how other people live their life and how they choose to spend their money. Everybody needs to be like him in order to be as valiant and noble? I dunno... maybe i'm being a bit extreme but I just cant stand it when other people go around self righteously preaching about how other ppl should live their lives.
- dkarl 17y ago
  It struck me the same way. He projects a salesman's confidence and glibness, so my knee-jerk reaction is to roll my eyes and wonder what the hell he's selling. Well, it's obvious what. The entire post is plain and simple bragging. He says himself that he didn't do it out of altruism. He did it to maximize his happiness, which includes -- he says this explicitly -- enjoying the fact that he made such a bright decision. And though he doesn't say it, it's obvious that another one of the benefits he gets is the joy of telling everyone about his enlightened, tasteful choice. Nothing he says is new. Choosing a life of utter freedom, security, and modest luxury over the relentless drive for more wealth and power is probably as old as stable urban societies and has probably been admired for the same reasons just as long. So we're not here to learn; we're just here to gawk at one of our celebrities. If HN had channels, this would be E! Admire the man for what he's done, but for God's sake, have the sense to roll your eyes and stop admiring for a second when he tastelessly brags about it. Resume admiring when this little faux pas passes out of consciousness.
vaksel 17y ago
wouldn't it make more sense to invest that money into a few hundred startups instead? At $50K a pop, that's 340 startups that he could invest in. Then 5 years later, when that 17 mil becomes 200 mil, he could setup that music trust. I mean sure, he can still invest with whatever is left over from that 1 mil yearly cash out, but it's not going to be a game changer compared to backing 340 new startups.
- seasoup 17y ago
  Reread the statement about "enough".
  - JanezStupar 17y ago
    Plus if we assume that he does recieve 1.1 mil $ per year (at least for first couple of years). And if he is that ascetic as he claims. Then we can safely assume that from 660k that remain (after taxes) - he can probably live pretty lavishly on 160k per year (for an ascet !) - especially since this amount doesn't need to be spent on making money (transport,...). So now we can see that he can clearly invest into 10 startups per year - and even afford to be actually involved in them. Which would probably far increase possibility of success over just blindly dumping money in 340 startups with total disregard for anything. And in 10 years he would be involved in 100 of possibly pretty good startups of which I believe at least one could repeat his success (due to selection and nurturing). To me its clear how this "non-greedy" strategy is clearly better over long term. I'm really amazed how some people who claim (or act) greedy are really not THAT greedy - solely because they act on short-term ("BIG" bonus this year! or - steal from thy shareholders, etc, etc) over long-term. I don't call them greedy - I just call them stupid :) Because a true greedy person should be focused on an mid or long-term goal (how to maximize my profit in 20 or 40 years).
mattmaroon 17y ago
I have to admit, I hate anyone who says something like: "That means $5 million more going to music education instead of another tank in Iraq or a banker's bailout bonus." Because that is where all tax money goes. I'd say >90% of tax dollars go to something way more important than music education, though I guess if I had cashed out of a music startup I might be selfish enough to convince myself that is untrue.
- Tichy 17y ago
  Music education was important to him. For other people maybe other things are more important. They can donate to other cause, or pay voluntary taxes.
  - mattmaroon 17y ago
    What paid for the roads he took on his way to music classes? What funded the internet he made money off of? What paid for the tanks that kept his country in such a state that people could spend time studying music rather than fighting civil wars and subsistence farming? I'm sure I'm no more a fan of the Iraq War than he is, but I'm glad we have tanks and nukes, if for no other reason than their very existence reduces the likelihood we will need them. If everyone gave their money to helping other people with their hobbies, rather than paying taxes, would you want to live here?
    - alexro 17y ago
      He still pays for that from his personal income, and pays a lot more than most of others do.
    - jon_dahl 17y ago
      This is a strange argument. He isn't dodging taxes - the same tax code that pays for roads and tanks also specifically encourages people to give money to charities, by providing legal deductions. That's all he's doing. The government has a mandate, and the power, to fund itself. The same isn't true of charities.
andrewcooke 17y ago
just wanted to make a point that others seem to have missed. to the extent that this is avoiding taxes so that more money can be given to a particular charity, isn't it "robbing peter to pay paul"? this might not make much sense to the american mindset, which seems to be virulently anti-government, but taxes don't just vanish - they pay for vital services. more than that, reducing how much tax someone with many millions pays implies that others, with less money, either pay more or receive lower quality services. i realise this is a minor detailed compared to giving to charity or keeping it all, and i don't mean to detract from that. i just find the "it's cool to avoid taxes" (and instead give more to charity) assumption a bit odd.
- smanek 17y ago
  The US government spends most of its money (roughly in order) on: -Wall Street Bailout -Military Spending (which, in large part, means pre-emptively attacking sovereign nations we don't like) -Inefficient entitlement programs -Interest on our existing debt If memory serves, only about ~5% of our money goes to what I would consider really worthwhile programs like NASA and education. You can up that to about 20% if you include things like roads, infrastructure maintenance, 'vital services', and so on. I imagine that Derek prefers to have more control over where his hard earned money goes.
- Mz 17y ago
  Recently at work, I wondered if some acronym we were using was incorrect. I wrote my boss an email saying, basically, I think we have this wrong and got the reply "I googled it and it comes up so it's right." Um, yeah, I googled both terms before sending the email and both versions bring up this form. So I got curious and spent about 40 minutes searching for information to verify which acronym is actually correct. Ultimately, I found we were using the correct acronym. Curiously, most of the sites that were using the correct acronym were for-profit business sites and most of those using the incorrect acronym were government sites. My point: Maybe if the American government were more competent, Americans wouldn't be so anti-tax.
djm 17y ago
hey derek - you mentioned that you wrote this article after being prompted to do so and I thought I'd take the opportunity to try and prompt you to write another one! You briefly commented on living the (relatively) simple life - having fairly few possessions etc. I try and live somewhat like this myself and have found it very liberating. If you're interested I'd much like to read an essay with your expanded thoughts on this lifestyle decision. cheers, david
- mbrubeck 17y ago
  Here's one of his past essays that's relevant: http://sivers.org/freedom http://sivers.org/freedom

328 points by sivers 17y ago

Can we assume it actually makes more than 5% interest every year? Otherwise he's slowly draining it of its value, and if he lives long enough may empty it. It probably does, but it's a thought.

ryanwaggoner 17y ago
Yeah, asset managers generally advise withdrawing no more than 4% annually to preserve wealth. However, I'm guessing that this is classified similar to a foundation, which must pay out 5% of its assets each year. EDIT: Just read the wikipedia article he links to, and as the value of the trust is recalculated each year, and his annuity is based on the recalculated value (as opposed to the original value) it's effectively impossible to deplete the value. Also, you can setup a net-income CRUT that pays out the lesser of the annuity income percentage, or the trust's net income for the year, thus ensuring that your annuity doesn't reduce the value of the trust from year to year.
- sivers 17y ago
  Exactly. I'm required to pay out 5% per year to myself, but then I don't have to spend the whole 5%. I can reinvest it or whatever.
  - tsuraan 17y ago
    Can you re-invest it in the non-profit that you created? i.e., accept the 5% and then just give most of it right back?
- ippisl 17y ago
  but it's possible that the value at the end would be just a small fraction of the original sum.
sivers 17y ago
Unwise to passively assume. It's my responsibility to make sure it grows by at least 5% or that defeats the whole purpose! :-) http://sivers.org/book/SmartestInvestmentBook http://sivers.org/book/SmartestInvestmentBook http://sivers.org/book/InvestorsManifesto http://sivers.org/book/InvestorsManifesto http://sivers.org/book/FourPillarsOfInvesting http://sivers.org/book/FourPillarsOfInvesting
- Psyonic 17y ago
  Good links, and I'm not at all surprised that you've put a lot of thought into it. Of all the writers that appear here on a regular basis, you have the highest signal/bullshit ratio I've seen. When you say you're giving back, I believe you.
ksvs 17y ago
That's what I was thinking. 5% is the upper limit of the fraction of his wealth that a rich person could safely spend each year anyway. So his income is no different than if he'd kept the money. The only thing he has lost is the ability to change his mind about where the principal goes when he dies.
- sivers 17y ago
  Intentionally lost my ability to do something stupid with more than 5% the principal while I'm alive. :-)
- drp 17y ago
  That kind of salary still lets him build substantial personal wealth, so if he manages it wisely there will likely still be quite a large sum to pass to his heirs.
gvb 17y ago
He should live so long. :-D As pointed out elsewhere, this is an exponential decay so it will never go to zero. Bashing numbers helps me visualize this... Looking at (nearly) the worst case, if the trust earns zero interest, he will be draining it by 5% per year, so the principle will be 0.95^y * 22e6 where y is the number of years. If he lives for 40 more years... 0.95^40 * 22e6 = 2.8e6 (13% of the original sum is left). A less drastic case would be earning 4% but paying out 5%, i.e. losing 1% per year. 0.99^40 * 22e6 = 15e6 (67% of the original sum is left). OK, the absolute worst case is he invests the whole amount in subprime mortgages and loses it all. We won't bash those numbers, obviously he is a lot smarter than that.

michael_dorfman 17y ago

Wow, talk about a classy move. Major props to Derek. "The best things in life aren't things"

nazgulnarsil 17y ago
status is a thing >_> isn't derek signaling high status by giving away something valuable? <_<
- misuba 17y ago
  sort of. but everything humans do can be argued as a status move, so it's unwise to get super hung up on it. (me, i just marvel at the 1337 tax-evasion skillz. :-)
  - gojomo 17y ago
    Let's do Sivers the favor of precision in our language: he engaged in rational tax avoidance for a good cause. When you say 'tax evasion', it generally means the steps taken were illegal.
    - skorgu 17y ago
      Or at least focused on avoiding taxes for personal profit if not outright illegal.
- aaronblohowiak 17y ago
  Polysemy -- "thing" is an overloaded term.
- araneae 17y ago
  Yup, he is. Now all the ladies will be after him.
- wehriam 17y ago
  I don't think that is what they mean by "things." Derek is signaling generosity by being generous.

MikeCapone 17y ago

5% * 22 million = 1.1 million Not bad.

quickpost 17y ago

He's getting 5% of $22 million each year to cover living expenses ($1.1million)? Doesn't exactly sound like "living simply" to me.

drp 17y ago
Just having money doesn't mean he has to blow it.
- quickpost 17y ago
  Fair point. However, if that's the case, why not leave more of it in the trust - he's automatically "blowing" 35% of that 5% (350k+) in taxes every year. EDIT: Here's the real answer - http://news.ycombinator.com/item?id=976759 http://news.ycombinator.com/item?id=976759
ryanwaggoner 17y ago
He's required to receive at least 5% of the trust's value as his annuity each year. http://en.wikipedia.org/wiki/Charitable_remainder_unitrust http://en.wikipedia.org/wiki/Charitable_remainder_unitrust
- quickpost 17y ago
  Ahhh, that makes a lot more sense. Thanks!
- ajju 17y ago
  Does the benefactor have to pay tax on that 5%? If not, this is an amazing deal for the benefactor!
  - sethg 17y ago
    If I am reading the Wikipedia article correctly (and if the article itself is correct), the benefactor does pay tax on that 5%. However, if the OP had kept his startup in his own name, then at the time he sold it, he would have had to pay capital-gains tax on all of his profit, that year. (And then he would have been able to spend the remainder on whatever he wanted, that year.)

edw519 17y ago

Thank you, Derek. One of my all time favorite hn posts. So many good quotes, I won't cite any of them. Just read the whole thing. We spend so much time pushing our customers to answer the question, "What's most important to you?" that we tend to forget to ask it to ourselves. OP's answer might not be my answer, but it's an awfully good one. Working hard is so much easier when you're working toward such an important outcome. Respect.

Retric 17y ago
Do the math. He created a trust that pays 5% of 22 million and avoids ~5 million in taxes. That's 1.1 million a year in income and a 5 million tax break at the cost his capital after he dies. It's less liquid right now, but 1.1 million a year is well past FU money and getting a loan with that sort of income stream is easy. If his annual payout was less than 5% then it would have been a sacrifice, but 5% + inflation means he might be extracting more money in real terms than he is generating. This means over a long enough time scale he basically skims most of his money back, and he leaves the tax break some of it's interest to charity. Granted if he generates significantly more than 5% + inflation he does lose some money but he does get 5% of an ever larger pool so it's not all that much of a loss. PS: Which is not to say it’s a bad thing, rather it’s more of a tax loophole than you might think. Afterall his other option was to live off of ~4.5% of 17 million. (Assuming he did not want to run out of money if he lived to be 90.)
- sivers 17y ago
  Eh. I get taxed fully for everything that gets paid to me. (That annual 5%.) That doesn't avoid taxes at all. Only what will never touch my hands (direct from purchase-event to charity) avoids taxes. So this was just a way of making sure as much of it as possible never touches my hands. (As compared to passing-through me: taking it as income then giving it back out again.)
  - Retric 17y ago
    There are 2 tax advantages. You don't pay taxes on the first sale, and the annuity does not pay taxes when it sell's it's assets. Let's say you are a 30 years old and need to pay taxes on 14 million$ and decide to retire. As you get the money you need to pay taxes for simplicity let's call that 4 million$. You now have 10 million$ if you then buy stocks with a 5% dividend that keep up with inflation your income is 500k /year(which you do pay taxes on). However, if you ever sell those stocks you need to pay tax on how much they appreciated. If on the other hand you setup an annuity it does not pay that 4 million in taxes. If it then buys those same stocks with a 5% dividend that keep up with inflation it's paying you (10m+4m) *.05 = 700k / year (which you do pay taxes on). And if the annuity manager want's to sell the stock and buy something else it does not need to pay taxes on the sale. The final question becomes can you buy a life insurance policy for less than 200k/year that pays out the value of the annuity when you die. Expect your family does not pay death taxes on a life insurance policy so even that has tax advantages. PS: In the real world all those numbers are subject to change, but it was setup by congress as a tax shelter and with proper management it can do that vary well. I only bring this up because it may be a good idea for other people on HN who decide to sell their company and retire when when they are young.

flooha 17y ago

Why not use the money for music education now and be actively involved (or not) instead of in x number of years (40?) from now?

eli 17y ago
Because then you couldn't live off the interest in the mean time.

auston 17y ago

I once heard the word "Charitable Remainder Trust" - it was by a guy who wanted to make sure his money could never be taken from him... http://www.investorwords.com/830/charitable_remainder_trust.html http://www.investorwords.com/830/charitable_remainder_trust.... So no cap gains + a tax deduction for making money? Doesn't seem so charitable to me... (someone, please correct me if I am wrong)

ryanwaggoner 17y ago
There's absolutely nothing charitable about paying taxes.
- auston 17y ago
  Sorry - my point was that the title connotes he's already completed some charitable action, when, in actuality, he's just taken steps to preserve his wealth until he passes - at which point a charitable action will be taken (on his behalf). edit: no one here likes the truth, I guess.
  - gvb 17y ago
    IOW, he's paying Tuesday for a hamburger he is enjoying today. http://en.wikipedia.org/wiki/J._Wellington_Wimpy http://en.wikipedia.org/wiki/J._Wellington_Wimpy (Posted as humor, not a cheap dig. If you down-vote me, do it for the cheap humor.)
  - shaddi 17y ago
    He does say explicitly that he's not being altruistic. My take is that this is a tip for startup owners who are planning to give some of their wealth to charitable causes after their death. He suggests a way to do this (financial hack, if you will) that improves the efficiency of the operation, maximizing both the money that goes to the charitable cause and to the donor. Regarding the payout, see http://news.ycombinator.com/item?id=976759 http://news.ycombinator.com/item?id=976759.

dondemarco 17y ago

Hmmmh...

phony_identity 17y ago

Derek, you did great work in creating that wealth and everyone here is happy to see you enjoying some of it. But please consider re-writing this to something more truthful - fewer words emphasizing your altruism and spartan lifestyle (?) and more words talking about the tax advantages and forced spending discipline that this smart plan gives you. The title, for example, shouldn't be "Why I gave away my company to charity". You didn't do that. (Which is good! That would be crazy.) How about, "Why I willed my estate to charity."

maddalab 17y ago

Altruism aside, it is a very smart move. I grew up in India and am sparse in my living standards and am at times amazed at the kind of affluence that exists in America even amongst those who consider themselves less privileged. As long as the trust grows at greater than 5% of its values you receive the mandated annual disbursement which is this case is a fair chunk of change and add monies to be disbursed at the end. However factoring in the rate of inflation and "money's real value over time", the trust probably needs to be invested wisely to grow at 5% + rate of inflation to retain its original value over the years. Occurs to me that setting up the trust is only half the battle, having it deliver on its original promise is the greater half.

ido 17y ago
When you reach that magnitude (many 10s of millions of dollars) getting 5% + inflation (inflation is on average pretty low in industrialized countries) amortized over many years is not hard.

ivankirigin 17y ago

I was thinking of a similar configuration for an investment vehicle. Make a charity whose goal is investing in good startups. Feed the returns back into investing. The goal is clout and influence rather than cashed out returns. I think this would better align incentives of investors and companies. It could also be used for "human capital" investments which are uncommon today except for student loans. It wouldn't need to be relinquished upon death - but the trustees would be transferred over time.

wallflower 17y ago

"At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have enough.'" Original source of 'enough' quote in Sivers' essay http://www.tompeters.com/dispatches/010754.php http://www.tompeters.com/dispatches/010754.php

ryanwaggoner 17y ago
That quote kind of loses its punch without the ellipsis: 'Yes, but I have something he will never have...enough.'
- wallflower 17y ago
  Argh. Reminds me for some reason of the stand-up comedy formula. You are correct. I forgot the punchline. The ellipsis. Example from Robin Williams "Parenting is hard" (Premise) "Once you become a parent, you have responsibilities" (Statement/setup building on premise) "For example, you can't go out drinking, come home drunk, go up to Junior's room at 3am and say 'For a change, Daddy's going to throw up on you now just like you do" (Turn around, the twist)

n8agrin 17y ago

Wow, this really rang true with me: "It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest." I often think about how this mentality equates to business. For example, we generally think about business profit growth as healthy, but what if a business is sustainable, does not grow in profits but can somehow grow "happiness" with customers, investors, employees, etc. In a sense the business is not necessarily being altruistic, it's just recognizing what makes people more dedicated to the business. When thinking about Zappos I generally wonder if this wasn't their strategy for many years.

lefstathiou 17y ago

I hope I'm not being an ass but this article annoyed me a bit. This guy came across very arrogant, self righteous and judgmental. The following statements were just obnoxious: - "Yes, but I have something he'll never have: enough." - "I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime." - "it throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don't use - or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours." A) I've never met nor heard of any billionaire who got where they were because they were chasing dollars. All of them started out by LOVING what they did and doing it extremely well. The market rewarded them for the value they created for society. The greater the value, the greater the reward. B) Why is he implying that because of their success, the rich are incapable of appreciating the simple things in life? Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius C) What business it is of his how other people live their life and how they choose to spend their money. Everybody needs to be like him in order to be as valiant and noble? I dunno... maybe i'm being a bit extreme but I just cant stand it when other people go around self righteously preaching about how other ppl should live their lives.

dkarl 17y ago
It struck me the same way. He projects a salesman's confidence and glibness, so my knee-jerk reaction is to roll my eyes and wonder what the hell he's selling. Well, it's obvious what. The entire post is plain and simple bragging. He says himself that he didn't do it out of altruism. He did it to maximize his happiness, which includes -- he says this explicitly -- enjoying the fact that he made such a bright decision. And though he doesn't say it, it's obvious that another one of the benefits he gets is the joy of telling everyone about his enlightened, tasteful choice. Nothing he says is new. Choosing a life of utter freedom, security, and modest luxury over the relentless drive for more wealth and power is probably as old as stable urban societies and has probably been admired for the same reasons just as long. So we're not here to learn; we're just here to gawk at one of our celebrities. If HN had channels, this would be E! Admire the man for what he's done, but for God's sake, have the sense to roll your eyes and stop admiring for a second when he tastelessly brags about it. Resume admiring when this little faux pas passes out of consciousness.

vaksel 17y ago

wouldn't it make more sense to invest that money into a few hundred startups instead? At $50K a pop, that's 340 startups that he could invest in. Then 5 years later, when that 17 mil becomes 200 mil, he could setup that music trust. I mean sure, he can still invest with whatever is left over from that 1 mil yearly cash out, but it's not going to be a game changer compared to backing 340 new startups.

seasoup 17y ago
Reread the statement about "enough".
- JanezStupar 17y ago
  Plus if we assume that he does recieve 1.1 mil $ per year (at least for first couple of years). And if he is that ascetic as he claims. Then we can safely assume that from 660k that remain (after taxes) - he can probably live pretty lavishly on 160k per year (for an ascet !) - especially since this amount doesn't need to be spent on making money (transport,...). So now we can see that he can clearly invest into 10 startups per year - and even afford to be actually involved in them. Which would probably far increase possibility of success over just blindly dumping money in 340 startups with total disregard for anything. And in 10 years he would be involved in 100 of possibly pretty good startups of which I believe at least one could repeat his success (due to selection and nurturing). To me its clear how this "non-greedy" strategy is clearly better over long term. I'm really amazed how some people who claim (or act) greedy are really not THAT greedy - solely because they act on short-term ("BIG" bonus this year! or - steal from thy shareholders, etc, etc) over long-term. I don't call them greedy - I just call them stupid :) Because a true greedy person should be focused on an mid or long-term goal (how to maximize my profit in 20 or 40 years).

mattmaroon 17y ago

I have to admit, I hate anyone who says something like: "That means $5 million more going to music education instead of another tank in Iraq or a banker's bailout bonus." Because that is where all tax money goes. I'd say >90% of tax dollars go to something way more important than music education, though I guess if I had cashed out of a music startup I might be selfish enough to convince myself that is untrue.

Tichy 17y ago
Music education was important to him. For other people maybe other things are more important. They can donate to other cause, or pay voluntary taxes.
- mattmaroon 17y ago
  What paid for the roads he took on his way to music classes? What funded the internet he made money off of? What paid for the tanks that kept his country in such a state that people could spend time studying music rather than fighting civil wars and subsistence farming? I'm sure I'm no more a fan of the Iraq War than he is, but I'm glad we have tanks and nukes, if for no other reason than their very existence reduces the likelihood we will need them. If everyone gave their money to helping other people with their hobbies, rather than paying taxes, would you want to live here?
  - alexro 17y ago
    He still pays for that from his personal income, and pays a lot more than most of others do.
  - jon_dahl 17y ago
    This is a strange argument. He isn't dodging taxes - the same tax code that pays for roads and tanks also specifically encourages people to give money to charities, by providing legal deductions. That's all he's doing. The government has a mandate, and the power, to fund itself. The same isn't true of charities.

andrewcooke 17y ago

just wanted to make a point that others seem to have missed. to the extent that this is avoiding taxes so that more money can be given to a particular charity, isn't it "robbing peter to pay paul"? this might not make much sense to the american mindset, which seems to be virulently anti-government, but taxes don't just vanish - they pay for vital services. more than that, reducing how much tax someone with many millions pays implies that others, with less money, either pay more or receive lower quality services. i realise this is a minor detailed compared to giving to charity or keeping it all, and i don't mean to detract from that. i just find the "it's cool to avoid taxes" (and instead give more to charity) assumption a bit odd.

smanek 17y ago
The US government spends most of its money (roughly in order) on: -Wall Street Bailout -Military Spending (which, in large part, means pre-emptively attacking sovereign nations we don't like) -Inefficient entitlement programs -Interest on our existing debt If memory serves, only about ~5% of our money goes to what I would consider really worthwhile programs like NASA and education. You can up that to about 20% if you include things like roads, infrastructure maintenance, 'vital services', and so on. I imagine that Derek prefers to have more control over where his hard earned money goes.
Mz 17y ago
Recently at work, I wondered if some acronym we were using was incorrect. I wrote my boss an email saying, basically, I think we have this wrong and got the reply "I googled it and it comes up so it's right." Um, yeah, I googled both terms before sending the email and both versions bring up this form. So I got curious and spent about 40 minutes searching for information to verify which acronym is actually correct. Ultimately, I found we were using the correct acronym. Curiously, most of the sites that were using the correct acronym were for-profit business sites and most of those using the incorrect acronym were government sites. My point: Maybe if the American government were more competent, Americans wouldn't be so anti-tax.

djm 17y ago

hey derek - you mentioned that you wrote this article after being prompted to do so and I thought I'd take the opportunity to try and prompt you to write another one! You briefly commented on living the (relatively) simple life - having fairly few possessions etc. I try and live somewhat like this myself and have found it very liberating. If you're interested I'd much like to read an essay with your expanded thoughts on this lifestyle decision. cheers, david

mbrubeck 17y ago
Here's one of his past essays that's relevant: http://sivers.org/freedom http://sivers.org/freedom