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. 

RELATED TERMS
  1. Beneficiary Of Trust

    A beneficiary of trust is the individual or group of people who ...
  2. Naked Trust

    A straightforward type of trust into which a trustor transfers ...
  3. Authorized Investment

    Authorized investments are those that are permitted within a ...
  4. Bare Trust

    A bare trust is a type of trust that provides beneficiaries with ...
  5. Trust Fund

    A trust fund is comprised of a variety of assets established ...
  6. Alimony Substitution Trust

    A trust agreement in which a divorced person agrees to pay spousal ...
Related Articles
  1. Insights

    What Happens to Trump's Businesses When He Becomes President

    President-elect Trump plans to put his businesses into a blind trust to avoid conflicts of interest in office.
  2. Managing Wealth

    Surprising Uses for Trust Funds

    Here are five common situations where a trust fund makes financial sense.
  3. Investing

    A Look Into Creating a Trust Fund With ETFs (VCIT, SDIV)

    Learn the basics of how a trust works and the two most common types. Discover how to use ETFs to fund a trust and the different strategies.
  4. Personal Finance

    Buying a Home in Trust

    Buying a home in a real estate trust allows for tax advantages, possibly avoiding probate court, and future family conflict. Below we outline the two different types and what to arm yourself ...
  5. Managing Wealth

    When to Trust a Revocable Trust

    Unsure how your assets will be dispersed once you're gone? Here's a revocable trust can help.
  6. Managing Wealth

    How ING Trusts Have Surprising Tax Advantages

    Learn how ING trusts can be used to shield assets from state income taxes and provide additional protection for high-wealth individuals.
  7. Financial Advisor

    5 Common Mistakes When Creating a Trust Fund for Your Child

    Trust funds are often established to protect children in the event that their parents are not able to provide for them. Here are some common errors to avoid.
  8. Financial Advisor

    Are The Wealthy Better Served By Trusts Or Wills?

    Trusts and wills are both means to pass on wealth to heirs. Which of these is likely to serve your needs better if you have considerable wealth?
  9. Retirement

    Designating a trust as retirement beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center