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.)
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.
He wrote several paragraphs of wisdom, and you're here to correct his spelling. Nice. Could you reallt nopt derive his meaning despite his poor spelling?
What's your point? You make it sound as if he's hypocritically passing off his action as an altruistic gesture.
Bottom line is: it was a smart tax move. He created a company worth a lot of money. He wanted to "donate to charity" as efficiently as possible.
What he did ended up benefiting his charity a lot more than if he had made a donation after selling the company first. The fact that he is sitting pretty doesn't change that fact.
I think several people on HN could end up benefiting from doing the same thing. Either because the numbers work out to their advantage, or because they are willing to make a small hit to stiff the tax man, or they just really want to help out some cause such as their school etc.
My issue is in title, sure it will be read more stated that way, but the post still follows that line of pure benevolence.
"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.
Having too much money can be harmful. It throws off perspective. "
A better title would have been. "1.1 Million a year until I die THEN the remainder of my money goes to charity," would have been more clear to the situation. Instead the current title just brings a bunch of Kudos and warm fuzzies.
But, beyond the way it was communicated, Derek I give you Kudos. You are definitely disciplined to not cash out with the money upfront and go on a spending spree. That is more than what a lot of people would have done. You had a lot of decisions to make, figuring out what you really wanted, what was best for your 85 employees, what to do with the money? I hope they all turned out well for you. I hope you keep starting and building things and not lose the bug.
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.