What Is a Blind Trust?
A blind trust is a financial mechanism where a trustor, the individual who establishes the trust, grants a trustee full control over the trust. Here, the trustee has total discretion over the assets and investments, taking charge of managing both the assets and any resulting income. The trustor can terminate the blind trust but receives no reports regarding the trustee’s actions or the trust’s holdings while it remains in force. Often, blind trusts are created to avoid conflicts of interest between the individual’s employment and other financial interests.
Key Points to Remember
- A blind trust grants the trustee full control over the assets and investments, with no reporting requirements to the trustor.
- They help individuals avoid conflicts of interest between professional duties and their personal investments.
- Blind trusts can be either revocable or irrevocable, depending on the specific needs and goals.
How a Blind Trust Works
In most conventional trusts, the trustor appoints a trustee who acts as a fiduciary, complying with the trust agreement’s terms, such as distributing funds after the trustor’s death. The trust may include various investments like stocks, bonds, and real estate. Typically, both the trustor and the beneficiary are aware of the trust’s holdings.
However, in a blind trust, neither the trustor nor the beneficiaries know the investment holdings. They have no input on how the investments are managed or decide on buying or selling assets within the trust.
A blind trust can be set up as a revocable trust, allowing the trustor to make changes or terminate the trust, or as an irrevocable trust, which cannot be modified once established. The choice depends on the situation and the trustor’s goals. For example, an irrevocable trust can protect assets from creditors or governmental claims.
Important Considerations
Creating a blind trust isn’t without challenges. The trustor initially knows the investment mix, which can influence future decisions despite their best efforts to remain impartial. Trustors also establish the trust’s governing rules and select trustees expected to act in a certain manner. While these trusts strive to eliminate conflicts of interest, their effectiveness isn’t foolproof. Despite this, politicians often use blind trusts to demonstrate efforts toward impartiality.
Alternatives to Blind Trusts
Setting up a blind trust can be costly. There are other ways for politicians and executives to sidestep potential conflicts of interest. They might divest specific investments in favor of index funds and bonds or convert assets to cash during their tenure. However, selling assets can trigger tax implications, and some investments like real estate or land can be challenging to liquidate. Although blind trusts offer a degree of protection, no structure can wholly eliminate conflicts of interest or guarantee ethical behavior.
Real-World Examples of Blind Trusts
While blind trusts can be set up by anyone, they are particularly useful for estate planning and for individuals in public office who wish to avoid conflicts of interest.
Estate Planning
A blind trust can be strategically used in estate planning if the trustor wants to prevent beneficiaries from knowing the trust’s total value. For instance, it can distribute funds to the beneficiary upon reaching a particular age or milestone such as college graduation.
Political Officeholders
Upon election, wealthy individuals often use blind trusts to manage their investments and avoid any potential conflicts of interest. The Ethics in Government Act requires public office holders to disclose all their assets unless they’re in a blind trust. This setup helps ensure that politicians don’t manipulate trade decisions for personal gain and maintain integrity in their roles.
Related Terms: trustor, fiduciary, revocable trust, irrevocable trust, conflict of interest, trust fund.
References
- Congress.gov. “S.555 - Ethics in Government Act”.
