Typically, a trustmaker establishes a trust to benefit their loved ones, a charitable organization, or some other third party. The money and property in the trust are distributed upon the trustmaker’s death according to the trust instructions.
In some cases, a trustmaker, especially a public figure who values privacy, will want to establish a trust to be used during their lifetime and for their own benefit. A blind trust can serve this purpose.
How a Blind Trust Works
A blind trust allows a beneficiary to manage their financial interest without the appearance of impropriety or conflicts of interest.
The trustee operates independently of the trustmaker/beneficiary, which helps to maintain impartiality.
Trustees make investment decisions independently. Since the beneficiary has no information about the assets held in a blind trust, these trusts are an effective tool for complying with laws prohibiting insider activity.
- Transfer of Assets: The trustmaker transfers their money and property to the trustee, who will manage them. The trustee is typically a bank, investment advisor, or attorney.
- An Independent Trustee: The trustee is independent and operates the trust with no input from the trustmaker/beneficiary. The beneficiary does not know of any changes made to the investment portfolio.
- Investment decisions: To avoid any impropriety or claims of conflict of interests, the trustee makes all investment decisions without the influence or involvement of the beneficiary.
- Trustmaker knowledge: The trustmaker is not permitted access to any information about the assets in the trust, and the trustee cannot disclose this information until the trust is terminated.
- Trust Termination: The trust is usually terminated once it has met its goals or at the beneficiary’s request. Once the trust is terminated, the beneficiary can access the assets and information about portfolio investments.
Differences Between a Blind and a Nonblind Trust
The biggest difference between a blind and a nonblind trust is that the trustmaker of a nonblind trust has full discretion over how the money and property in the trust are used and invested.
- Purpose: A nonblind trust is typically established to provide for a beneficiary or to transfer wealth to the next generation. A blind trust is established to avoid conflicts of interest or the appearance of impropriety.
- Access to information: In a blind trust, the trustmaker/beneficiary has no access to information about the assets held in the trust and how they are invested. In a nonblind trust, the beneficiary typically has access to this information.
- Role of trustmaker: In a nonblind trust, the trustee typically seeks input from the trustmaker when making investment decisions, and they are responsible for following the trust instructions. In a blind trust, the trustee acts independently.
- Decision-maker: The trustee is the sole decision-maker in a blind trust. In a non-blind trust, the beneficiary may provide input into investment decisions.
Revocable and Irrevocable Blind Trusts
A blind trust can be revocable or irrevocable.
A revocable blind trust is when the beneficiary retains the right to modify or terminate the trust at any time.
Once the trust is terminated, the trustmaker resumes control of all assets and property in the trust.
An irrevocable trust cannot be modified or terminated by the trustmaker. When the trustmaker moves property and accounts into the irrevocable trust, they give up control over it.
Examples of Blind Trust Uses
Anyone can use a blind trust, but public figures, company executives, and lottery winners most commonly use them
A public figure can place their money and property that might create a conflict of interest into a blind trust and turn over the management of these assets to an independent trustee.
The public figure can then claim that they have no knowledge about how any decisions they make in office will impact their personal investments because they have no control over them.
No states require a public figure to use a blind trust while in office, but most states and federal governments have laws that require government employees to recuse themselves and disclose how their public duties may affect their personal investments.
These laws are intended to defend against legislative self-dealing or the perception of it and maintain public trust in government institutions.
Some states have laws that regulate blind trusts. Federal ethics laws also have rules about what qualifies as a blind trust and describe how it must function in order to comply with the law.
Like public figures, company executives can use blind trusts to prevent conflicts of interest, especially if they own shares in the company and have information that is not public knowledge.
Owning shares puts a company executive at risk of being accused of acting in their own best interests instead of the best interests of the company and its shareholders, which is required by federal financial law.
As long as corporate insiders are affiliated with a company, the Securities Act restricts the sales of their shares.
For example, publicly traded companies only allow insiders to trade company shares during “window periods.”
A corporate insider could set up a blind trust during these window periods and give guidelines to the trustee for selling company stock.
The blind trust would enable the company insider to avoid trading limitations and avoid running afoul of insider trading laws.
A lottery winner may want to establish a blind trust to maintain financial privacy.
Many lottery winners want to keep a low profile to avoid scammers, reporters, and requests for money, but not all states allow lottery winners to remain anonymous.
In this case, you retain control of the money and assets in the trust. The part of the trust that is blind is the name, so blind trust is a bit of a misnomer in this situation.
You establish the trust in a name other than your legal name, so the trust cannot be easily traced to you. The trust is “blind” to the public because it is not easily traceable.
Talk to Your Attorney
When establishing a blind trust, you must comply with federal and state laws, including rules related to conflicts and disclosures, reporting requirements, trustee eligibility requirements, and trustmaker/trustee communication.
Blind trusts are established for specific purposes and can be complex, so they must be set up carefully. Work with your estate attorney to ensure the accuracy and validity of your blind trust.
If you have questions about blind trusts, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.