What is a blind trust?
In everyday language, “blind trust" means failing to weigh whether someone deserves your complete confidence. In law, it refers to a tool to protect against self-dealing. This article unpacks the second meaning.
Public Officials and Conflicts of Interest
Though used in the private and public sectors, blind trusts often receive more attention in the public sector. High-level public officials are often selected based on private sector success. But this may place those in public office in situations where there might be a conflict of interest.
Their experience in the private sector can mean they developed specialized expertise in their industry. This may make them strong candidates to serve on committees, boards, and other regulatory bodies. Their experience may also mean the candidate may have developed significant financial interests within that industry. Those interests may incentivize them to abuse power to benefit themselves, family members, or other close associates.
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?
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). The trustee holds the property for the benefit of a third party (the beneficiary). More simply, the trustee manages property the grantor supplies to benefit the beneficiary. The property is held in trust for the beneficiary.
There are many types of trusts. Depending on your goals, you might set up a “revocable" or an “irrevocable" trust. A grantor can revoke or change a revocable trust. But 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.
The trustee has control of the trust and has full discretion to make distributions that align with the trust's purposes. Technically, the trustee owns the trust assets. The trustee holds legal title and has full control over the trust assets.
The "fiduciary" relationship between the trustee and the trust's beneficiary characterizes all trusts. The fiduciary relationship means the trustee must put the beneficiary's interests first. A trustee must preserve good faith and trust.
What is a blind trust?
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" to trust management.
How does a blind trust work? 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. Theoretically, they should also have minimal access to information about the trust's affairs. But, some critics point out that maintaining communication barriers between trustees, grantors, and beneficiaries is unrealistic.
When are blind trusts used?
Again, blind trusts are typically formed to avoid potential conflicts of interest. For example, a corporate executive compensated with company stock shares might set up a blind trust to manage these shares. This eases concerns over insider trading. It also allows the person to avoid certain restrictions when trading securities. Similarly, an elected official with business interests in other countries might use his office to ease trade barriers. A blind trust can ease this concern by keeping the official in the dark about the assets held in trust on their behalf.
Blind trusts are also valuable for lottery winners seeking to preserve their privacy and ensure they do not squander their winnings. Most winners have little experience managing large sums of money. Winners can maintain anonymity by allowing third-party trustees to manage their finances. These people can entrust their lottery winnings to a trust company that manages investment portfolios. This management structure can help the lottery winner responsibly access their winnings. 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. Your situation may also implicate federal law. If you find yourself in need of a blind trust, seek legal advice. An estate planning attorney and professional financial advisors can help you determine the applicable trust laws. But, when setting up a blind trust, you will generally follow some variation of the following steps:
- Decide what assets to transfer to the newly formed trust;
- Gather all relevant documents associated with those assets;
- Select a trustee you can rely on to be financially responsible and faithful to the trust;
- Draft a trust agreement naming all of the relevant parties, describing the assets in the trust, and describing the distribution of assets when the trust expires;
- Sign the agreement and have it notarized (some states require you to report the new trust to relevant authorities); and
- Transfer the assets to the trust for management.
Blind Trusts in the Public Sector
Congress passed the Ethics in Government Act of 1978 to fight corruption after the infamous Watergate scandal. Many states have similar laws for their own appointed or elected officials. Federal law requires government officials to disclose their financial holdings. An exception exists if a "qualified blind trust" holds the assets.
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[.]" The blind trust must meet the following requirements:
- Independent Trustee — The trustee cannot be influenced by, affiliated with, or related to the official.
- Transferable Assets — The trust assets cannot be restricted. The assets may be sold or transferred by the trustee without interference.
- Communication Barriers — The official must not advise or communicate with the trustee about the trust.
- 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
Most people will never need a blind trust. High-profile corporate executives and government officials mainly use this legal tool. These people typically have an ongoing relationship with a trusted legal advisor. That said, if you need to set up a blind trust, a trust attorney can help.
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