Blind TrustExplained with Alternatives
What is a Blind Trust?
A blind trust is a trust in which the trustee is given total control over the trust.
The trustee has full authority over any investments or assets in the trust, as well as any income that is generated.
The trustor or grantor, who is the originator of the trust, is permitted to end the trust or change the trustor or trustee if it is a revocable trust but has no other ability to control what is done with the trust and is not sent any reports by the trustees during the time the trust is in effect.
Blind Trusts are often put in place by individuals who are concerned about potential conflicts of interest between their investments and their job.
Understanding Blind Trusts
Generally, when a blind trust is formed, a trustor, the individual forming the trust, chooses a trustee to manage the trust.
The trustee is expected to follow the trust agreement.
The trust may include a variety of investments, such as real estate, securities, and life insurance policies.
Once the blind trust is established, there should be no communication about the management of the blind trust.
The beneficiary of a blind trust also has no control over the trust and is not to know the contents of the trust.
Blind Trusts can be created as revocable or irrevocable trusts.
With a revocable trust, the grantor is permitted to terminate the trust or change the grantor or trustee.
In contrast, if the trust is irrevocable, the grantor is not allowed to change anything once the trust is formed.
The trustor would choose to establish an irrevocable or revocable trust based on their goals for the trust as well as their specific situation.
One advantage of an irrevocable trust is that it can be set up so that the property will not be the property of the trustor.
This is useful for keeping Medicaid, the government, or creditors from taking the assets.
Important Issues
There are some problems associated with a blind trust.
When a grantor sets up a blind trust, they will be aware of what is in it and are not likely to forget.
This could cause issues if the trust was set up due to potential conflicts of interest associated with the grantor’s employment.
It is impossible to tell if the trustor will consider their investments when making any decisions they make as part of their job.
However, it is still common for politicians who are wealthy or hold high positions to set up blind trusts to try and show they are attempting to be impartial.
Alternatives to a Blind Trust
It can be expensive to set up a blind trust, and individuals who want to eliminate possible conflicts of interest have other options.
If the person owns real estate, has a private holding, or has special investments, they can sell these and instead buy bonds or index funds.
Another option would be to sell the investments for cash and not reinvest the cash while there are any concerns about conflicts of interest.
But, some of these assets may not be easy to sell quickly, and there could be concerns about tax implications.
Therefore, blind trusts can be the best choice in some situations, even though they do not necessarily eliminate all of the grantor’s conflicts of interest, nor do they ensure the grantor will behave in an ethical manner.
Common Uses of Blind Trusts
A blind trust could be established by anyone.
However, some of the most common uses for blind trusts are to avoid conflicts of interest or to leave money to beneficiaries.
Avoid Conflicts of Interest
Politicians or other wealthy individuals who are concerned that their investments may cause a conflict of interest sometimes establish a blind trust.
Individuals who hold a political office are required by the Ethics in Government Act of 1978 to divulge all assets they own that are not part of a blind trust.
As an example, suppose a politician held stock in a company that is facing upcoming legislation regulating its industry.
If the politician directly held the stock, they would face a conflict of interest in any decisions that may affect the company and its industry.
However, by forming a blind trust, the politician would be unaware of any of the contents of the trust or how any legislative decisions may affect its contents.
Estate Planning
Blind trusts are also used in estate planning when a grantor chooses not to allow their beneficiaries to find out what assets are in a trust.
Some grantors set up a blind trust so that the beneficiary will receive the assets or funds when they reach a certain age or after they reach particular life events.
Key Takeaways
- A blind trust is a trust in which the creator of the trust gives a trustee complete control over the trust.
- The trustee manages the trust and has full control over the assets along with all income that is generated.
- Blind trusts are frequently established to avoid possible conflicts of interest that could occur between an individual’s job and their investments.
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Cornell Law School "Blind Trust" Page 1 . April 18, 2022
Cornell Law School "5 CFR § 2634.403 - General description of trusts." Page 1 . April 18, 2022