<p>My sons will be the beneficiaries of a trust. The funds may be used for educational purposes, but in all probability will not be necessary for their college expenses and so the funds can be disbursed at age 25 … 4 and 8 years out respectively.</p>
<p>The trust has not yet been funded – and there are are some options on how to fund it. My question is … asking for your crystal ball here …what’s the best option in terms of returns over the 4 or 8 years. </p>
<li><p>A rental house (4 BR 3.5 bath circa 1964) in a residential area of NYC metro area. No tenant in place, but this would be an income property. Figure a 30 minute commute to Manhattan via the LIRR.</p></li>
<li><p>Building lots on the west coast of Florida, currently undeveloped on the outskirts of a growing city. Vacant land that has been increasing in value since its purchase 30 years ago. One lot is waterfront on canal with lagoon views and with gulf access (relatively valuable and the bulk of this option), one is waterview, the other is inland.</p></li>
<li><p>Treasury bills.</p></li>
<li><p>Cash.</p></li>
</ol>
<p>The assumption should be that these all have equal current value. I do not think that either son will want to live in the rental house, even if they eventually land jobs in the area. I also do not think that either son will be interested in building/living on the Florida land.</p>
<p>My experience with Trusts has been as Trustee. I’m in year thirteen, because the Trust was funded with illiquid assets including a rental house that could neither be rented nor sold (long story), and some raw land that took forever to develop (another long story). </p>
<p>It’s JMHO, but I’d give a lot of thought to how the Trust is to be managed. Who will take care of rental house house issues? What if one son needs money from the Trust and the other doesn’t? Where does upkeep money come from? Does the lawyer who represents the Trust work well with the CPA who does the tax returns? Is the Trustee located anywhere near the Court with jurisdiction over the Trust? Is the Trustee easy to work with? Etc.</p>
<p>I am not a pro at this, but one thing to consider is that if you have appreciated property, it is beneficial for estate tax purposes to gift it, since the donee will take the donor’s basis, and appreciation will be for the kids. I am not sure on the valuation of the gift for the estate tax unified credit, and of course your tax lawyer/trust attorney should be able to help here.</p>
<p>Also, here a check with tax advisor/lawyer needed, but a gift of a minority interest in real estate will get a lower valuation than its proportionate share of the market price, due to the restrictions on the minority interest. This will also defer some gains to the eventual sale of the property (if there are gains), and lower the amount of the unified credit used.</p>
<p>Right now, I think real estate in NYC area may go still lower. My H differs. He says no one announces the bottom. I think in 6 months from now, prices may be lower still. One good thing about real estate is that even if it suffers a loss, it won’t generally go to zero, as some stocks and bonds can. In the short term, 4-8 years, it is anyone’s guess as to appreciation. I had a real estate broker tell me that these are good buying times, but isn’t it in his interest to do that? Just my two cents.</p>
<p>T bills are about the only sure thing these days. I used to like tax free munis for trusts, due to the high tax rate of ordinary income, but the ratings and insurance for these bonds are IMHO highly suspect these days.</p>
<p>Returns vs. risk is a big question today. Also consider the yield curve on treasurys. In october the short term yield was nearly flat due to the risk and uncertaintly.</p>
<p>Ok, one more caveat. I have no crystal ball…</p>
<p>“I used to like tax free munis for trusts, due to the high tax rate of ordinary income …”</p>
<p>OP - In case you weren’t aware, Trust tax rates are approx. 40% on ordinary income exceeding $8650 per year! For the liquid assets I chose a mix of tax-free mutual funds and zero-dividend growth stocks to minimize ordinary income.</p>
<p>Thanks for the quick replies. You are raising some questions that I had not thought of, along with others that I had. Good and thoughtful information. I appreciate it!</p>