A blind trust is one in which the owner (or trustor) grants the trustee complete authority over the trust. The trustee is in charge of managing the assets and any revenue produced in the trust while having complete control over the assets and investments. While the blind trust is in effect, the trustor has no influence over the decisions made within the trust and does not receive any reports from the trustees, with the exception of terminating the trust. When people desire to avoid conflicts of interest between their employment and investments, blind trusts are frequently created.
- A blind trust is one in which the owner (or trustor) grants the trustee complete authority over the trust.
- The trustee is in charge of overseeing the investments while also managing the trust’s assets and any revenue.
- When people desire to prevent conflicts of interest between their employment and investments, blind trusts are frequently created.
How Blind Trusts Operate
In a conventional trust, the trustor or originator names a trustee to serve as the fiduciary, which means the trustee is responsible for upholding the terms of the trust agreement, such as allocating the funds after the trustor’s passing. Equities, bonds, and real estate are just examples of the different investments that the trust may hold. The beneficiary of the trust is typically aware of the trust and may even be aware of the holdings under the trust, and the trustor and trustee frequently communicate with one another.
In contrast, a blind trust is set up so that neither the trustor nor the beneficiaries of the trust are aware of the investments contained within it. Neither party has any control over or input into the management of the investments, including the decision of whether to acquire or sell particular securities.
A blind trust may be revocable, which means that the trustor may replace the trustee or dissolve the trust at any time. A blind trust may also be an irreversible trust, meaning that once it has been established, nothing can be changed. Depending on the specific circumstances and purpose of the trust, the trustor may create an irrevocable or revocable trust. As an illustration, an irrevocable trust can be set up to make assets that were once the trustor’s lawful property no longer be so, prohibiting creditors or the government, such as Medicaid, from claiming the assets.
Since the trustor who created the trust is at least aware of the investment mix at the outset and cannot reasonably ignore that information when assessing future decisions, there are difficulties and problems that may occur. In addition to choosing trustees they are convinced will act in a certain way in hypothetical situations, the trustors may also specify the guidelines under which the investments are administered. Because of this, the effectiveness of a blind trust in really removing conflict of interest is far from established. To demonstrate that at least an effort is being made to ensure neutrality, politicians who are wealthy or hold high office often use blind trusts.
Alternatives to Blind Trust
A blind trust can be expensive to set up, and politicians and business leaders can avoid potential conflicts of interest in other ways. They can liquidate their individual holdings, real estate, or other unique investments in favor of index funds and bonds. While holding the job, a person could potentially sell the assets and turn them into cash. Selling investments, however, can have tax repercussions, and some investments, like real estate or land, might be challenging to sell. Blind trusts can be useful, but no legal framework can completely eliminate conflicts of interest or ensure that the person in a position of authority would act ethically.
Illustrations of Blind Trusts
A blind trust can be created by anyone, although it is frequently done to leave money to beneficiaries and avoid conflicts of interest.
If the trustor doesn’t want the beneficiaries to know how much money is in the trust, a blind trust may be set up as part of the estate planning process. A beneficiary of a blind trust may have the money transferred to them when they reach a specific age or milestone, such as finishing college.
Blind trusts are also employed when a wealthy person is elected to a position in politics and their financial assets can pose a conflict of interest. Politicians must reveal all of their assets under the Ethics in Government Act of 1978, unless they are put into a blind trust.
A politician might have a conflict of interest if they own stock in a business that is now facing a regulatory issue, for instance. Through the blind trust, the politician is kept out of any transactions carried out by the trustee or the financial institution serving as the trustee.