A Blind Trust is a type of living trust that is completely controlled by the designated trustee. The originator of the trust cannot also be the trustee of a blind trust. Trustees have full control over the handling and managing of assets in addition to any income that is generated.
By design, the trustor or grantor as well as the beneficiaries have no knowledge or control of assets within a blind trust. The trustor can terminate the trust (if it is a revocable trust). But otherwise, they will not have any insights to transactions within the trust. Typically, blind trusts are used by individuals who either value privacy deeply, or want to prevent conflicting interest between their investments and their employment.
How Does a Blind Trust Work?
Now that we understand what a blind trust is at the surface level, we need to understand who is involved, how it is created and the main reasons why you would use this type of a trust.
Who Is Involved?
With a typical trust arrangement, the trustor allows the trustee to manage assets in a fiduciary manner. The trustor is in contact with both the trustee and beneficiaries, and usually all parties know what is going on within the trust. This is how other types of trusts typically act.
Blind trusts work opposite to this however. They are designed so that the trustor and beneficiaries know nothing about the holdings within the trust. Neither parties can make decisions on buying/selling of securities, or view any statements regarding the trust, etc.
How Is It Created?
It is important to get advice from a financial advisor when determining how to set up a blind trust — especially if you have a set purpose for your assets. blind trusts can be set up as either revocable or irrevocable depending upon the goal of the trust.
With a revocable blind trust you can terminate the trust as you see fit, as mentioned above. With an irrevocable blind trust, you cannot do so. In the case of an irrevocable trust, you are no longer the legal owner of the assets. Setting it up this way can shield your assets from potential creditors or the government if applicable.
Reasons to Create a Blind Trust
Why would someone need to create one of these types of trusts? Someone who values privacy or wants to work in public service ideally. This would avoid the optics of a potential conflict of interest.
There are a couple main reasons why you would want to create a blind trust. One would be if you value privacy in your financial situation. A common example would be a lottery winner who wants to keep their winnings out of the scope of the public. In this instance, lottery winners would assign themselves to be the beneficiary — as well as the trustor. An estate planning attorney will be hired as the trustee to manage the trust.
Avoid Conflicts of Interest
The other reason would be to avoid conflicts of interest in your life or employment. This can be beneficial for those who hold privacy in high regard on a personal level, but also, may be mandatory for certain employment positions. An example of someone who this would apply to is a politician or other type of government employee.
Insider trading could be a concern if for example, a politician personally holds securities for a company and works on policies or regulations (or has information not released to the public) related to that company could potentially benefit them. This would be known as insider trading. A way to eliminate any concerns related to insider trading, the government official should set up a blind trust. This allows for no direct or indirect influence or control over those holdings.
Pros and Cons of Blind Trusts
Typically if you are exploring a this type of trust, you have a set idea of what you are trying to accomplish. Regardless of what the reason is, there are pros and cons to this type of trust.
Pros of a Blind Trust
With a blind trust you are guaranteed a sense of privacy that other trusts may not provide. This could be valuable to many people, especially those in the public arena. Some of the other pros for this type of trust include:
- Retain anonymity in your asset allocation decisions. You can set certain assets to particular beneficiaries, include or exclude potential beneficiaries, set age restrictions, etc.
- Avoid conflicts of interest — especially if you are in the public domain (government, politician, etc.)
- Protection from creditors and estate taxes (depending upon how it is set up)
Cons of a Blind Trust
This type of trust may be great for privacy, but may come at a steeper price due to some intricacies. Some of the cons for this type of trust include:
- Can be expensive to create a Blind Trust
- Cannot see what is happening within the trust after it is established
Final Thoughts: Start Planning Your Estate
There could be issues if an official has holdings in an area related to their position that could be perceived as a conflict of interest. Some government officials need to have their trusts approved by the Senate Select Committee on Ethics before executing the blind trust. This way there is no way that their agenda and their constituents’ wishes will be under question.
An extreme alternative that could be used if someone’s worried about conflicts of interest is to sell your assets and convert to cash. This could be difficult and costly with taxes however. To decide if this is a viable option, or if you should proceed with the blind trust — you should definitely consult with a financial advisor to find the answers for your questions.