A blind trust is a type of living trust in which the grantor and beneficiary have no control over or knowledge of the assets in the trust or how they’re being managed. A third-party trustee, who can be an individual or an institution, has full control of the trust assets and does not communicate with the grantor or beneficiary about what is being bought and sold within the trust. A blind trust can be revocable, meaning the grantor can change it later, or irrevocable, meaning it can’t be modified or terminated.
At first, the idea of putting assets into a trust and then relinquishing all knowledge and control of those assets might sound crazy. But in a few situations, this arrangement makes perfect sense. In this article, we’ll discuss why someone might want to establish a blind trust and how to do it.
Why Do It?
Basically, a blind trust is supposed to eliminate any real or perceived conflicts of interest.
Blind trusts “are most prevalent within the political community, but can be quite valuable in other situations as well,” says Eric Schaefer, a financial planner and investment advisor with Evermay Wealth Management, an independent financial advisory firm serving high net worth families in the Washington, D.C., area. “Other uses might be to avoid any conflicts of interest. This is a very obvious reason for politicians, but retiring or retired business owners and executives who retain large amounts of company stock may be interested in politics, charitable work or board membership that requires them to act objectively,” he says. “The trust may also come in handy when influential individuals have access to insider information and want to shield themselves from any question of wrongdoing for investment account transactions.”
Another circumstance that inspires people to set up blind trusts: suddenly coming into a large, unexpected sum of money and wanting to keep the matter private. For example, savvy lottery winners in the United States have used blind trusts to prevent investment hucksters and money-grubbing relatives from trying to snag a piece of their sudden wealth.
How to Do It
Establishing a blind trust basically involves drawing up a document that the grantor signs to give full power of attorney over the trust assets to an independent, third-party trustee (In contrast, with a regular, revocable living trust, the trust settlor can designate himself or herself as the trustee and continue to control the assets.) But it’s not a DIY project; it requires a lawyer’s assistance.
“There are state and federal laws regarding the creation of blind trusts, so it’s important to visit an attorney who has expertise in this area,” says Richard Gotterer, CFP, managing director and senior financial advisor with Wescott Financial Advisory Group, an independent wealth management firm with offices in Philadelphia, Boca Raton, Miami and San Francisco. “During the drafting phase of the trust, you have the ability to provide input such as what the investment objective of the trust will be. For example, should it be invested for growth, income or capital preservation? You have the ability to provide a range for the asset allocation and you have the ability to name the beneficiaries of the trust,” he says.
After that, you cease communication with the trustee and have no further knowledge of how the trust’s assets are being handled.
Choosing the right trustee is imperative. Not only do you need someone who is honest and investment savvy, but if you’re trying to separate yourself from your investments, you also need someone with whom you don’t have a close relationship – not a friend or relative, in other words. In some cases, even a longtime financial adviser or attorney might be considered too close. (Learn more in Ensuring That Your Trust Is Trustworthy.)
In the case of lottery winnings, you could hire an attorney to set up your trust, appoint him or her as trustee and ask the trustee to redeem your winning ticket anonymously on your behalf. Depending on the requirements of the lottery you win, establishing a blind trust might allow you to access your winnings without the media or other busybodies learning who you are. (For related reading, see Winning The Jackpot: Dream Or Financial Nightmare?)
How It Works
To avoid potential conflicts of interest, a federal official might set up a blind trust to manage private assets that he or she and his/her spouse and dependent children own. Since a perceived or real conflict of interest could arise if that official is involved in legislation that affects his or her investments, placing those assets in a blind trust, especially an irrevocable one, is supposed to allow the official to act impartially and in the best interests of constituents. The official’s supervisory ethics entity must approve the blind trust and the choice of trustee. Federal law doesn’t require federal officials to use blind trusts, but it does regulate how they establish and maintain them.
Another situation where a blind trust is useful: when a corporate executive wants to avoid illegal insider trading. The executive can place all the company shares he or she owns into the blind trust, thus giving complete control and knowledge over when and how much of the stock is sold to a trustee. This strategy removes the restrictions on when the stock can be sold, since it’s no longer held by an insider, which can result in better investment outcomes. The trustee can manage the assets to improve the executive’s asset diversification and risk profile and does not have to worry about the window periods or blackout periods that affect insiders.
However, while you might read a lot about blind trusts during political campaigns, “not many politicians or wealthy individuals and families use them,” Schaefer says. “Not only do you give up the control and transparency of assets placed in trust, these vehicles can cost tens of thousands of dollars to set up,” he says. They also have high maintenance expenses.
The Bottom Line
Blind trusts create a layer of separation between the grantor’s assets and professional or political activities that helps to eliminate real or perceived conflicts of interest and accusations of wrongdoing. Individuals who receive a windfall can also use them to maintain financial privacy. But if you’re thinking about establishing a blind trust, you need to carefully consider whether the benefits of independence and removal of oversight outweigh the drawbacks of loss of control and information, especially if the blind trust will be irrevocable.