What Is a Blind Trust?

Public Officials and Conflicts of Interest

Though used in both the private and public sectors, blind trusts often receive more attention in the latter. In many cases, high-level public officials are elected or appointed based on earlier successes in the private sector. This can create a conflict of interest.

On one hand, their experience in the private sector likely means they developed specialized expertise in their industry. This may make them a strong candidate to serve on committees, boards, and other regulatory bodies governing that industry. On the other hand, their experience also means the candidate may have developed significant financial interests within that industry. Those interests may incentivize them to abuse their new power to benefit themselves, their family members, or other close associates.

So, how can the public benefit from a candidate's experience without the risk that the candidate will use their power to further their private interests? Blind trusts provide a potential solution.

What Is a Trust?

First, some vocabulary. In law, a “trust" is a property interest held by one person (the trustee) at the request of another person (the grantor, also known as the trustor or settlor) for the benefit of a third party (the beneficiary). More simply, the trustee manages property supplied by the grantor for the benefit of the beneficiary. The property is said to be held in trust for the beneficiary.

There are many types of trusts. However, they are all characterized by the “fiduciary" relationship between the trustee and the trust's beneficiary. Technically, the trustee owns the trust assets because they hold legal title. However, the fiduciary relationship means that the trustee must put the beneficiary's interests first. As the name implies, a trustee must preserve good faith and trust.

Depending on your goals, you might set up a “revocable" or an “irrevocable" trust. A revocable trust can be unmade or altered by the grantor. An irrevocable trust cannot. A key benefit of a revocable trust is its relative flexibility. By contrast, a key benefit of an irrevocable trust is its permanence.

What Is a “Blind" Trust?

So, with this vocabulary in place, how does a blind trust work? The purpose of a blind trust is to ensure that the people with an interest in the trust assets are cut out of the loop. As the name implies, they are “blind" as to how the trust is managed.

To make it work, the trustee must be a third party with complete control over the trust. The grantor and beneficiary have no control over management while the trust exists. In theory, they should also have very limited access to information regarding the affairs of the trust. However, some critics point out that maintaining communication barriers between trustees, grantors, and beneficiaries is an unrealistic and often disrespected ideal.

When Are Blind Trusts Used?

Again, blind trusts are typically formed to avoid potential conflicts of interest. For example, a corporate executive who is compensated with shares of the company's stock might set up a blind trust to manage these shares. This not only eases concerns over insider trading, but also allows them to avoid certain restrictions when trading securities. Similarly, an elected official with business interests in other countries may be tempted to use his office to ease trade barriers. A blind trust can alleviate this concern by keeping the official in the dark about the assets held in trust on their behalf.

Blind trusts are also useful to lottery winners seeking to preserve their privacy and to make sure their winnings are not squandered. First, by allowing a trustee to manage their personal finances, winners can step out of the spotlight and preserve their anonymity. Second, most winners have little experience managing the large sums of money you might win in a lottery. These individuals can entrust their lottery winnings to a trust company specialized in managing investment portfolios. Many financial institutions, such as banks, provide similar services.

How Blind Trusts Are Set Up

State laws vary on how to set up a blind trust. Depending on your situation, you might also encounter an additional overlay of federal law. An estate planning attorney and professional financial advisors can help you sort out the relevant trust laws in your location. However, when setting up a blind trust, you will generally follow some variation of the following steps:

1. Decide what assets will be transferred to the newly formed trust;
2. Gather all relevant documents associated with those assets;
3. Select a trustee you can rely on to be financially responsible and faithful to the trust;
4. Draft a trust agreement naming all of the relevant parties, describing the assets in the trust, and describing how the assets should be dispersed when the trust expires;
5. Sign the agreement and have it notarized (some states require you to report the new trust to relevant authorities); and
6. Of course, transfer the assets to the trust for management.

Blind Trusts in the Public Sector

The Ethics in Government Act of 1978 was passed to fight corruption after the infamous Watergate scandal. Many states have similar laws in place for their own appointed or elected officials. Federal law requires government officials to disclose their financial holdings. An exception exists if the holdings are placed in a “qualified blind trust."

A “qualified blind trust" is defined as "any trust in which a reporting individual, his spouse, or any minor or dependent child has a beneficial interest in the principal or income" and meets these requirements:

1. Independent Trustee — The trustee cannot be influenced by, affiliated with, or related to the official.
2. Transferable Assets — The trust assets cannot be restricted, meaning that they may be sold or transferred by the trustee without interference.
3. Communication Barriers — The official must not advise or communicate with the trustee about the trust.
4. Approval of Trust and Trustee — The official's supervising office must approve of the trust and the trustee.

Contact an Attorney for More Information About Blind Trusts

Ultimately, most people will never need a blind trust. This legal tool is mainly used by high-profile corporate executives and government officials. That said, if you do need to set up a blind trust, a trust attorney can help.