A blind trust is most helpful to persons who need objectivity in their political or professional roles. And it is also appropriate for people who want to keep their assets very private.
For instance, politicians and government officials usually create a blind trust to prevent any actual or perceived conflicts of interest between their goals and the welfare of their constituents.
In this article, we discuss what a blind trust is, how it works, and the reasons to get one.
What is a Blind Trust?
A blind trust is a trust in which the owner (or trustor) grants another party (the trustee) complete authority over the trust. The trustee has complete control over the investments and assets while being in charge of managing the assets and any revenue generated in the trust.
While the blind trust is in effect, the trustor can abort the trust, but otherwise has no influence over the actions taken within the trust and does not receive any reports from the trustees. Blind trusts are usually established when people want to prevent conflicts of interest between their employment and investments.
Read this: SELL TO OPEN VS SELL TO CLOSE: Detailed Comparison
How does Blind Trust Work?
Blind trust is a certain type of trust established by the grantor to warrant a trustee to manage their investment holdings. Immediately after the trust is established, the trustor does not have control over how the funds are used or handled. The only thing they/their beneficiary can do is to manage income from these assets. Most times, the settlor is also the beneficiary.
In a conventional trust, the trustor or originator names a trustee to serve as the fiduciary. What this means is that the trustee honors the trust agreement, such as allocating the funds after the trustor’s death.
Equities, real estate, and bonds are just some of the different investments that the trust can hold. The beneficiary of the trust is often aware of the trust and possibly aware of the holdings under the trust while the trustor and trustee usually communicate with each other.
In contrast, a blind trust is set up so that neither the trustor nor the beneficiaries of the trust are aware of the investments contained within the trust. Neither party has any authority over the management of the investments, including whether to purchase or sell certain securities.
Types of Blind Trust
There are two major types of blind trust. See them below:
- Revocable blind trust: In the revocable blind trust, the trustor can change the trust, trustee, and end the trust after its establishment.
- Irrevocable blind trust: Here, the trustor cannot change anything or end it after it has been established.
The specific goal and situation of the trust will determine whether the trustor would establish a revocable or irrevocable trust. An irrevocable trust, for instance, can be created so that assets are no longer the trustor’s legal property. Therefore, avoiding creditors or the government (such as Medicaid), from claiming the assets.
Reasons To Get a Blind Trust
The major reason you should get a blind trust is to avoid perceived conflicts of interest between your business and investments and to keep your assets private. However, officially separating yourself from investment holdings may initially seem like a poor choice because it lets you lose control over your wealth.
Conflicts of interest are regular, particularly in influential positions. Politicians may need to establish a living trust if their financial partnerships can affect their responsibilities toward their constituents, even when doing so could cost them to lose power. It may cause CEOs and the board of directors to be charged with crimes like insider trading.
For instance, Joyce is a shareholder and a member of the board of directors of a company called XYZ. One day she sells XYZ’s shares and purchases those of a rival. If XYZ has issues subsequently, say a fraud becoming noticed, it could lead to a fall in its share price. Thus, Joyce could be charged with insider trading since she newly invested in another company.
Here, Joyce would think about putting all of her XYZ shares into a living trust. Therefore, she will not have any information about how her investments are being managed.
Now, the trustee becomes the one who sells XYZ’s stock. And Joyce will no longer be accused of insider trading since the trustee doesn’t have a stake in XYZ.
Another reason to get a living trust is the grantor’s privacy. The assets won’t appear in the trustor’s public records because they won’t be connected to them.
It will make it challenging to determine the owners of these funds. Lottery winners may also use these trusts to hide their identities and their money from the public.
Related: Put Call Parity: How To Calculate Put Call Parity
How to Establish a Blind Trust
Establishing a blind trust essentially entails creating a contract that the grantor signs to give a complete power of attorney over the trust’s assets to an independent, third-party trustee (conversely, with a regular, revocable living trust, the trust settlor can allow him/herself as the trustee and keep controlling the assets). But you need a lawyer’s help; it’s not a Do-It-Yourself project.
There are federal and state laws concerning establishing blind trusts. Therefore, it is important to seek an attorney with expertise in this field. You can provide input during the drafting phase for the trust’s drafting, such as what the trust’s investment goal will be.
For instance, should it be invested for capital preservation, income, or growth? You can provide a range for the asset allocation, and you can specify who the trust’s beneficiaries will be.
After that, you no longer communicate with the trustee and are unaware of any additional transactions involving the trust’s assets. It’s very important to choose the right trustee. You don’t only need someone trustworthy and knowledgeable about investments.
However, to separate yourself from your assets, you also require someone you don’t have a close relationship with (not a relative or friend). In certain cases, it may occasionally deem a longtime financial adviser or lawyer to be too close.
When it comes to lottery winnings, you may engage an attorney to set up your trust, name them as trustee, and tell the trustee to anonymously redeem your winning ticket on your behalf. Establishing a blind trust may enable you to access your winnings without the media or other prying eyes finding out who you are. Moreover, this depends on the lottery you win.
Blind Trust Movie
In the blind trust movie, a woman is found guilty of killing her boyfriend and friend amid a passionate encounter, despite having a top attorney defending her. After the trial, she leaves to find out who framed her.
The blind trust movie was produced in 2007, written by Tom Gates, and directed by Louis Bolduc.
The movie featured the following casts; Jessica Capshaw, Chad Willett, Art Hindle, Robin Wilcock, Carlo Mestroni, Danny Blanco Hall, Tony Calabretta, Sean Tucker, Cindy Sampson, Stephan Dubeau, Maria Inger, etc.
Bottom Line
Blind trusts aim to prevent actual or perceived conflicts of interest and charges of misconduct by adding a layer of separation between the grantor’s assets and political or professional activities.
People who win the lottery can also use them to keep their financial information private. However, if you’re considering setting up a blind trust, you should carefully compare the advantages of independence and the lack of oversight against the disadvantages of information and control loss, especially if it’s an irrevocable blind trust.
FAQs
They can either be established as pass-through entities or be taxed at the trust level, with the proceeds from the trust used to pay the taxes. In any case, the owner or beneficiary is ultimately responsible for paying the taxes on the investment income generated by the trust assets.
Between $1,000 and $10,000. You might pay a professional between $1,000 and $10,000 to set up a trust. However, this depends on the complexity of your trust agreement. You’ll also pay yearly management fees, as much as 3 percent of the trust assets.
Revocable Trusts, also known as living trusts. It is a useful estate-planning instrument that decreases the expenses and inconveniences of probate while protecting privacy and setting up your estate for a smooth transition in the event of death or incapacity.
Irrevocable trust. This kind of trust can lower your estate taxes while assisting in asset protection against lawsuits and creditors. If you default on a debt, assets in an irrevocable trust are not subject to bankruptcy or other legal actions.
An account that’s held within a trust is called a trust checking account. It is used by trustees to carry out transactions as required by the trust agreement. The Federal Deposit Insurance Corporation (FDIC) provides insurance for trust checking accounts.
References
- investopedia.com – Defining a Blind Trust
- wallstreetmojo.com – Blind Trust
- annuity.org – Blind Trust
Recommendations
