What is a 'Blind Trust'

In a blind trust, the trustees have full discretion over the assets, and the trust beneficiaries theoretically have no knowledge of the holdings of the trust. The trustor initiates the trust and maintains the ability to terminate the trust, but otherwise exercises no control over the actions taken within the trust and receives no reports from the trustees while the blind trust is in force.

BREAKING DOWN 'Blind Trust'

Blind trusts are often used when a wealthy individual is elected to a political office, where his investment holdings could potentially put him in a conflict of interest with a regulatory issue or other sensitive exercise of political power. In this context, there are some obvious issues with blind trusts in that the beneficiary setting up the blind trust is at least aware of the investment mix going in and cannot realistically forget that information when weighing future decisions. The trustors may also set the rules under which the investments are managed and, of course, pick trustees that they are confident will act in a certain way in potential situations. So again, the efficacy of the blind trust in truly eliminating conflict of interest is far from proven. That said, politicians with a large amount of wealth or in high office use blind trusts to show that at least the effort is being taken to establish impartiality.  

Options Outside the Blind Trust

A blind trust can be expensive to set up and operate, so politicians have found other ways to remove conflict without a blind trust. Some have simplified their investments by selling out of specific company investments in favor of broad index funds and bonds. This also goes for private holdings of property and businesses. By simplifying or converting all holdings to cash, a politician hopes to remove any suggestion of favor towards a business, industry or sector. However, the process of selling investments can trigger tax implications and the more sophisticated the portfolio is to begin with, the harder it is to fully unwind, as not all assets have the same liquidity. In these cases, a blind trust may well be the only option. More importantly, there is really no legal structure that can remove the potential conflicts of financial interests that can crop up as a result of a person holding public office. By far, the best deterrent is the media and the public outrage that occurs when unethical acts are exposed. In other words, a blind trust is a nice gesture, but it doesn't guarantee ethical behavior. 

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