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Start Up a Trust for Tax Savings
Dear Jeff:
I have some money in an estate account, which is earning hardly any interest. I was wondering if there was a way to have that money earn a higher interest rate and still keep it in an estate account?
Jeff Says:
An estate can own virtually any type of account or investment. I will make the assumption that when you refer to an estate account, you are referring to a checking account. As we all know, checking accounts should be used for paying our bills and other expenses. Checking accounts should not be used as an investment vehicle or a place to keep monies when determining what type of investment actually should be made. The reason is simple: checking accounts earn very little interest.
So, the dilemma is finding a place to hold money for the short-term, yet earn interest rates higher than can be received on a checking account. My recommendation is for you to consider a money-market account.
Money-market accounts are offered by financial institutions and even mutual fund companies. There is no liquidity problem with money-market accounts because they have checkwriting privileges. Most are offered without sales charges, but you should read the prospectus to verify this because money market accounts are not all the same. Finally, the interest rates credited to money-market accounts are traditionally higher than on checking accounts. At the time of the writing of this article, the annual percentage rate of many money-market accounts is over 5 percent, compared to between 1 and 2 percent for checking accounts.
You might be asking yourself if mutual funds would be an alternative in light of the potentially higher returns. Mutual funds are probably not appropriate for short-term investments, however, due to sales charges, contingent deferred sales charges, or market fluctuations that could dramatically affect the value of the account. In other words, the value of your account could be at the low point when you actually need the money. For this reason, financial professionals recommend using mutual funds only if you intend to hold those investments for at least three to five years.
Oh, you could earn a lot invested in mutual funds over a one- or two-year period depending on market conditions, but it is probably not worth the risk. I emphasize the word "risk," because you indicate that this is an estate account for which you as the fiduciary are held to a high standard of care. I would not hesitate in your circumstances to limit my short-term investments to a money-market account.
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