Trusts exist to hold money and assets in trust for a beneficiary on behalf of a grantor or trustor. These are legal entities defined and limited by a trust document and called into existence to separate the contents of the trust from its original owner for the beneficiary.
Trusts exist in many shapes and forms, and can be revocable or irrevocable, living or testamentary, and can serve as specialized purposes. Trusts need to exist for estate planning purposes and see much use in business and investments to limit liability and provide certain tax advantages. Blind trusts are an example of a specialized trust.
How Blind Trusts Work
Blind trusts are a type of trust rarely used for estate plans or avoiding probate. These trusts usually exist to separate the management and contents of a trust from its owner to eliminate any potential conflict of interest between the two unequivocally.
A simple example of when a blind trust may be used includes running for public office, wherein a politician could agree to divert assets into a blind trust and let it be managed wholly without their knowing. They would still receive income on the trust, and that income would be taxed according to their tax bracket, but they would have neither knowledge nor control over the contents or management of the trust.
In the case of a federal employee’s investments, there are regulatory bodies at work to approve the officer’s choice of trustee and ensure that they truly do not know their trust’s inner workings and the nature of their income, thereby eliminating the potential for a conflict of interest that might otherwise arise when a public official is asked to vote on a matter that might affect their personal financial investments.
Politicians are not required by law to set up a blind trust. In fact, few use them because they can be costly to maintain. But they are required to obey the rules and regulations surrounding blind trusts for members of the government. Another crucial example is to avoid charges of insider trading.
Company executives count as insiders and must follow certain restrictions when it comes to the trading of their own company stock. For example, a company executive must respect their company’s blackout period before selling or buying shares due to their exclusive knowledge of that quarter’s unannounced earnings.
But by transferring their interest in the company into a blind trust, the executive no longer must worry about being suspected of insider trading. This would allow an unaffiliated trustee (who has not been illegally given insider information) to act within the blackout window and reduce the executive’s risk without breaking the law.
Reasons to Consider a Blind Trust
The long and short of it is that regardless of whether high-powered executives or humble public servants use them, blind trusts are meant to eliminate any conflict of interest confidently. People outside of politics can have fiduciary or moral responsibilities that require them to act objectively and in the interest of a common good, outside of their own financial gain.
A retired CEO-turned-non-profit-executive would not be making good headlines by seemingly steering a charity towards political decisions made for the good of their own portfolio. By establishing a blind trust, they can act independently from their own financial interests and shield themselves from manipulation and wrongdoing accusations.
A last common example is in the case of sudden and immediate wealth, such as an unexpected inheritance or lottery win. By taking yourself out of the equation, you can eliminate your own accountability towards that wealth and avoid being taken advantage of or duped out of your own money.
Blind Trusts vs. Other Trusts
Blind trusts exist to provide some much-needed distance between yourself and your investment assets. Rather than manage those assets yourself, you only benefit from the investment through regular distributions earned as income, and a trustee manages the assets for you completely without your knowledge.
You can also set up a blind trust for a loved one, making them the beneficiary while funding the trust yourself as trustor. Such might be the case with a spendthrift trust or a special needs trust. Other trusts serve a different purpose, such as estate planning tools to avoid probate or as a form of asset protection against creditors and insolvency.
In probate, a trust is a simple way to ensure a certain property is not entangled in the probate process after you die. However, only the irrevocable trust contents are far enough removed from an individual to no longer count as part of their estate for estate tax purposes.
How to Establish a Blind Trust
The defining characteristics of blind trust are an independent third-party trustee and a power of attorney document making that trustee your agent. In effect, these documents combined serve to bind you to the trustee, insofar that they are your fiduciary, but wholly control the management and investment of the assets in your trust without your knowing.
Blind trusts are not easily created and certainly cannot be created without professional help. They can cost thousands of dollars to set up properly and manage. In the cases where a blind trust is necessary to avoid a conflict of interest, that money is well-spent and critical for creating a blind trust that respects all moral and regulatory considerations befitting the situation.
Always Seek Professional Legal Advice
There are both state and federal laws regarding the management of these trusts, so finding a local expert is important. At that point, you should consider discussing your goals and interests in the creation of a blind trust.
- Who is the ideal trustee?
- What is the vague general purpose of the trust?
- To hold and manage a property?
- To sell and reinvest to maximize growth?
- Or to preserve capital for a while?
Setting the right trajectory is crucial because once the trust is created, the trustor has no control over what happens next and cannot amend their words (unless they choose to dissolve the trust).