WHAT IS A BLIND TRUST? Pros and Cons

The trustor names a trustee as their fiduciary in a traditional trust. This means that, according to the Trust provisions, the trustee manages the Trust on behalf of the trustor. When the trustor dies, the trustee may be responsible for managing investments or dispersing assets. Typically, a trustor and trustee communicate often for decision-making and updates. Beneficiaries are frequently aware of Trust operations.
But what if you just wanted to “set it and forget it?” What if you got a new job and suddenly found yourself in a financial bind? Learn why a blind Trust might be the solution you’re seeking for and how it might help you handle any conflicts of interest.

A blind trust is a sort of living trust, either revocable or irrevocable, that gives the trustee complete control over assets. A blind trust’s trustee cannot also be the trustor. The trustee must be a third party who is not related to the trustor in any way. This is required for a blind trust to achieve its stated goals of avoiding conflicts of interest and maintaining a high level of anonymity.

Blind trusts are governed by state and federal regulations, so anyone interested in establishing one should seek the advice of an experienced lawyer.
The primary distinction between a blind trust and other forms of living trusts is that after the blind trust is formalized, neither the trustor nor his or her beneficiaries have the authority to control any element of the trust or the assets held in it.
The trustor may specify the terms of the trust as it is being created, including designating the beneficiaries and specifying the objectives for any investments kept in the blind trust. However, once the trust instrument — the legal form that authorizes the trust — is signed and finalized, the trustor and beneficiaries have no further contact with the trustee on asset management.

A blind trust is typically used to avoid conflicts of interest that may occur for trustors in specific jobs or situations.

A retired corporate executive, for example, who has a big part in her company’s stock, could become a member of the local municipal council. All potential conflicts of interest should be avoided because this political position demands she act objectively. A conflict of interest exists if the councilwoman has stock in a corporation that stands to profit from specific city council actions.

The conflict of interest is eliminated if the councilwoman’s shares of company stock are held in a blind trust. This is because she has no knowledge of how the firm’s performance will influence her ownership.
This can be critical for an investor who is deemed an “insider” and may be accused of insider trading – the act of trading stocks based on knowledge not available to the public, which is sometimes punished as a felony.

Illegal insider trading is defined by the Securities and Exchange Commission as “purchasing or selling a security in breach of a fiduciary duty or other relationship of trust and confidence on the basis of significant, nonpublic knowledge about the security.”
The Investment Advisers Act of 1940 governs investment advisors and requires them to register with the Securities and Exchange Commission. Investment advisers must follow the act’s code of ethics, which includes disclosing their “personal securities holdings and transactions” unless they are kept in a blind trust, enabling them “no direct or indirect influence or control.”

A blind Trust can be established by anyone. They are, however, often only beneficial when an individual needs to separate themselves from their possessions. For example, they may establish a blind Trust to eliminate professional conflicts of interest.
This means that blind Trusts are frequently utilized throughout an individual’s lifetime and are not always used for estate planning. Following that, we’ll give some specific instances to help understand who might benefit from a blind Trust.

Although blind trusts are available to anybody, they are most commonly employed to avoid conflicts of interest. They may also employ a blind Trust for confidentiality purposes.

Confidentiality: Once a blind Trust is established, its operations are kept private from both the trustor and the beneficiaries. Only the trustee has the authority to oversee, manage, and make decisions on the Trust’s behalf. Someone may set up a Trust in this manner if they do not want the beneficiary to be aware of the trust or its operations. They may even arrange for the monies to be transferred to the beneficiary whenever they reach a specified milestone.
Potential Conflict of Interest: Politicians are a prime example of why blind Trusts are required at times. If a wealthy person is elected to public service, their investments may constitute a conflict of interest. Unless their assets are placed in a blind Trust, they are compelled by law to declare all of their property and assets. This is in accordance with the 1978 Ethics in Government Act.

A blind trust can be established as part of estate planning or as a separate transaction to fulfill a specific need.
A blind trust can be established in a variety of ways, depending on the circumstances.
Lottery winners often appoint a lawyer as trustee and name themselves as the trustor, grantor, and beneficiary.
Prior to execution, government employees must have their qualified blind trusts certified by the Senate Select Committee on Ethics.

Among the submissions before the Committee is:

Copy of the proposed trust document and a cover letter from the grantor explaining how the trustee was chosen
Schedule A — a list of the assets in the Qualified Blind Trust (QBT) at the moment the Committee approved it.
Schedule B outlines the trustee fees.
Certificate of Trustee Independence
Certificate of Investment Advisor Independence

Remember that blind trusts must be carefully constructed to meet the criteria required for a given purpose. To secure the validity of your trust, you should contact a knowledgeable financial planner and an experienced lawyer.

Following the historic Watergate affair, the Ethics in Government Act of 1978 was enacted to combat corruption. Many states have legislation in place to protect their appointed or elected officials. Government officials are required by law to reveal their financial holdings. There is an exception if the interests are placed in a “qualified blind trust.”
“Any trust in which a reporting individual, his spouse, or any minor or dependent child has a beneficial interest in the principal or income” is defined as a “qualified blind trust.” “and meets the following criteria:

Independent Trustee: The trustee cannot be influenced, linked with, or related to the official.
Transferable Assets – The trust assets are not restricted, therefore the trustee may sell or transfer them without restriction.
Communication Roadblocks: The official is not permitted to counsel or speak with the trustee concerning the trust.
Approval of Trust and Trustee: The trust and the trustee must be approved by the official’s supervising office.

Politicians have a tremendous motivation to create blind trust as well. “Potential conflicts of interest may develop when a Member, officer, or employee’s financial interests or affiliations are regarded as affecting the performance of official duties,” according to the Select Committee on Ethics. Certain financial interests, such as ownership of specific stocks, may, for example, cause a conflict of interest with certain components of Senate employment, such as votes, meetings, and actions.”

According to the committee, putting these assets in a qualified blind trust “allows grantors to avoid potential conflicts of interest or the perception of such conflicts during Senate employment.”

Lottery winners who desire to remain anonymous may establish blind trust.
A lottery winner’s blind trust differs from a regular blind trust in that the trustor has access to and control over the funds. The term “blind” in this context refers to the public’s knowledge, not the trustor’s.
This allows lottery winners in states where identity disclosure is mandatory to stay anonymous.

When studying this sort of trust, you usually have a clear idea of what you want to achieve. Whatever the reason, there are pros and cons to this form of trust.

Pros

A blind trust guarantees you a sense of anonymity that other trusts may not. Many people, particularly those in the public sector, could benefit from this. Other pros of this form of trust include:

Maintain your anonymity in asset allocation decisions. You can assign specific assets to specific recipients, include or exclude potential beneficiaries, set age limitations, and so forth.
Avoid potential conflicts of interest, especially if you are in the public eye (government, politician, etc.)
The creditor and estate tax protection (depending upon how it is set up)

Cons

This form of trust may be beneficial for privacy, but it may come at a higher cost due to several complexities. Some cons of this form of trust include:

Creating a Blind Trust might be costly.
After the trust is built, it is impossible to see what is going on within it.

There are various types of trusts to choose from in the estate planning toolbox. Each form of Trust has distinct functions that are intended to meet specific requirements and circumstances. The definitions of three common types of trusts, as well as how they differ from a blind trust, are provided below.

#1. Irrevocable Trust:

An irrevocable Trust is one that cannot be canceled or modified. This means that once a trustor establishes an irreversible trust, the only method to modify it is through the legal system. Even so, any suggested adjustments must be approved by all beneficiaries. A blind trust can be established as an irreversible trust.

#2. Revocable or Living Trust:

A blind Trust can also be established as a revocable Trust, which is a Trust that can be amended, modified, or canceled during the trustor’s lifetime. Revocable trusts are also known as living trusts. Revocable trusts provide less tax shelter, but they are a smart choice if you anticipate changes. For example, you could be younger and have no idea what the future holds. Your asset structure may change, and your family has a lot of room to grow. In this instance, you may want to use a revocable trust so that you can make changes as your life changes.

#3. Testamentary Trusts:

A testamentary Trust differs from other types of Trusts in that it is part of a Will. A Trust is typically established separately and works in combination with a Will. A testamentary trust is included in a will and takes effect only upon the death of the trustor. As a result, because it is not active throughout the trustor’s lifetime, a testamentary Trust cannot be termed a living Trust. Blind Trusts are normally established during the lifetime of the trustor, hence they would not be established as a testamentary Trust.

The grantor receives no tax benefits from a revocable trust: the IRS will assess estate taxes on the assets, as well as taxes on interest income and capital gains. A blind trust is revocable, which means that the grantor can cancel the trust at any moment and delegate authority to another trustee.

The trust beneficiaries must disclose trust income on their individual tax filings. For qualifying blind trust beneficiaries, the independent trustee delivers a modified K-1 summarizing trust income in relevant categories so that beneficiaries can file individual tax returns.

If you are the trustee, you may take funds from your own trust. You could withdraw money as you see fit or as needed because you have an interest in the trust and its assets. You can also transfer assets into and out of the trust.

Establishing a blind trust can be costly; politicians and executives can avoid potential conflicts of interest without establishing a blind trust. They can sell individual investments, real estate, or private holdings in favor of index funds and bonds. A person could potentially sell the assets and convert them to cash while still working. However, selling investments might result in tax consequences, and some investments, such as land or real estate, can be difficult to sell. Although blind trusts are beneficial, no legal structure can eliminate all conflicts of interest, nor can it ensure ethical behavior from the individual holding the position or office.

Conclusion

Blind trust is a strong instrument for creating a barrier between you and your possessions. This can be useful if you wish to create secrecy or avoid any potential conflicts of interest. Whether you’re a high-profile politician or a lottery winner, a blind Trust could be the estate planning instrument you’ve been waiting for.

References

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WHAT IS A BLIND TRUST? Pros and Cons

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