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.
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.)
"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
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.
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.
I read it a bit like that but most of what I got out of it was an interesting way to structure a deal that I might consider should I find myself in a similar circumstance. I would like a private jet though.
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.
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.
"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.
$1.1 million/year sounds like a lot, but he is living in an apartment in New York city.
edit: Oh, -4 on the mods. I'll make a note to put flashing lights around it the next time I use irony to comment on a man who thinks a $1.1m/yr income is "living simply".
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."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
[+] [-] edw519|16 years ago|reply
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|16 years ago|reply
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.)
[+] [-] wallflower|16 years ago|reply
Original source of 'enough' quote in Sivers' essay
http://www.tompeters.com/dispatches/010754.php
[+] [-] ryanwaggoner|16 years ago|reply
'Yes, but I have something he will never have...enough.'
[+] [-] lefstathiou|16 years ago|reply
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|16 years ago|reply
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.
[+] [-] jimbokun|16 years ago|reply
Partly because owning a lot of crap tends to distract you and create a kind of gravitational pull that keeps you near the crap you own.
I thought he made it pretty clear that not owning much stuff made sense even for purely selfish reasons.
[+] [-] gcheong|16 years ago|reply
[+] [-] maddalab|16 years ago|reply
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|16 years ago|reply
[+] [-] michael_dorfman|16 years ago|reply
Major props to Derek.
"The best things in life aren't things"
[+] [-] nazgulnarsil|16 years ago|reply
[+] [-] n8agrin|16 years ago|reply
"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.
[+] [-] quickpost|16 years ago|reply
Doesn't exactly sound like "living simply" to me.
[+] [-] ryanwaggoner|16 years ago|reply
http://en.wikipedia.org/wiki/Charitable_remainder_unitrust
[+] [-] jws|16 years ago|reply
edit: Oh, -4 on the mods. I'll make a note to put flashing lights around it the next time I use irony to comment on a man who thinks a $1.1m/yr income is "living simply".
[+] [-] seldo|16 years ago|reply
[+] [-] drp|16 years ago|reply
[+] [-] phony_identity|16 years ago|reply
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."
[+] [-] ivankirigin|16 years ago|reply
It wouldn't need to be relinquished upon death - but the trustees would be transferred over time.
[+] [-] Psyonic|16 years ago|reply
[+] [-] sivers|16 years ago|reply
http://sivers.org/book/SmartestInvestmentBook
http://sivers.org/book/InvestorsManifesto
http://sivers.org/book/FourPillarsOfInvesting
[+] [-] ryanwaggoner|16 years ago|reply
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.
[+] [-] ksvs|16 years ago|reply
[+] [-] gvb|16 years ago|reply
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
where y is the number of years. If he lives for 40 more years... (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.
(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.
[+] [-] mattmaroon|16 years ago|reply
"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|16 years ago|reply
[+] [-] flooha|16 years ago|reply
[+] [-] eli|16 years ago|reply
[+] [-] andrewcooke|16 years ago|reply
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|16 years ago|reply
-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|16 years ago|reply
My point: Maybe if the American government were more competent, Americans wouldn't be so anti-tax.
[+] [-] djm|16 years ago|reply
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|16 years ago|reply
[+] [-] MikeCapone|16 years ago|reply
Not bad.
[+] [-] auston|16 years ago|reply
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|16 years ago|reply
[+] [-] dondemarco|16 years ago|reply
[deleted]
[+] [-] vaksel|16 years ago|reply
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|16 years ago|reply