Blind Trust

Updated on April 9, 2024
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Blind Trust?

Blind trust is a trust set up by the grantor to transfer complete control of their assets and investments to an independent third-party trustee. Once established, the trustor and the beneficiary hold little to no knowledge over or interfere in the trust fund management or any income generated.

The trustee or fiduciary controlling the grantor assets can be an individual or institution. It enables the latter, such as politicians and businesspeople, to maintain confidentiality or avoid conflicts of interest arising from their professions, investments, or assets. These trusts can either be revocable or irrevocable, based on whether the trustor can change or terminate them.

Blind Trust

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Key Takeaways

  • A blind trust is a legal arrangement allowing the grantor to give an impartial, third-party trustee, i.e., a person or institution, complete control over their assets and investments.
  • Establishing this trust can include avoiding conflicts of interest between the profession and investments and maintaining confidentiality.
  • The trustee should not be someone the grantor knows well but someone they can trust. As a result, selecting a trustee with a proven track record is critical.
  • Influential people like politicians, businesspeople, religious leaders, government officials, etc., seek to create a living trust to separate themselves from their financial holdings to maintain their professional and public image.

How Does Blind Trust Work?

The Blind trust describes a specific type of trust created by the grantor to authorize a trustee to handle their investment holdings. The trustor has no control over how the funds are managed or used once the trust is set up. All they or their beneficiary can do is receive the income from these assets. In most cases, the settler is also the beneficiary.

This legal arrangement protects the individual against actual or perceived conflicts of interest, privacy concerns, and misconduct allegations. It remains active only during the grantor’s lifetime and is called a ‘living trust.’

The term “blind” implies what the general public knows, not what the trustor knows.

Besides managing assets, the fiduciary undertakes investment activities on behalf of the grantor. And the trustee acts in the best interest of the trustor and the beneficiary. The grantor can determine the terms of the trust according to which it can function.

It is worth noting that the trustee and the trustor cannot have a relationship. One cannot choose a family member or an old acquaintance as a trustee and expect the others to believe the trust is truly “blind.” Doing so will defeat the whole purpose of creating this trust.

Blind Trust Types

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A living trust can be of two types, depending on its nature. In the revocable trust, the grantor can change or terminate it and get their assets back whenever they want. However, an irrevocable trust does not allow this freedom.

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Blind Trust Examples

Let us look at some blind trust examples explaining why someone would willingly relinquish ownership of their possessions:

Example #1

Many influential people use living trusts. Politicians from affluent backgrounds, for example, frequently do so because their constituents expect them to act in their best interests, not their financial interests. They keep themselves from any potential conflict of interest deriving from their investments in a firm or assets by appointing a trustee.

People from all levels of the government, including mayors, governors, senators, and administrative personnel, can opt for it. While they are not legally obliged to do it, several high-profile former United States officials have done so. Bill Clinton, George W. Bush, and Ronald Reagan were among the presidents who established such trusts.

Example #2

Another blind trust example is the board member of a public company. Since they have a fiduciary responsibility, they cannot afford a conflict of interest while serving on the board. As a result, they create a living trust to avoid disqualification to take a position on the board.

Example #3

Renowned journalists, religious leaders, and corporate professionals, such as CEOs, are expected to act in the public interest, allowing people to trust them. Hence, setting up a blind trust helps them avoid conflicts of interest arising from using public funds for personal gains and puts them in a positive light.

Reasons To Establish Blind Trust

The main reason why an individual must establish a living trust is to minimize potential conflicts of interest between their profession and investments and to protect their financial privacy. However, officially distancing oneself from investment holdings may appear a terrible choice at first glance as it allows one to lose control over their wealth.

Reasons To Establish Blind Trust

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Conflict of interest is a common occurrence, especially in influential positions. While it may result in politicians losing power, they may need to form a trust when their financial affiliations can affect their obligations toward their constituents. It can also lead to CEOs and board of directors being accused of crimes like insider trading.

For example, Jane is a member of the board of directors and a shareholder of the company ABC. One day, she sells ABC’s shares and buys those of a competitor for some reason. If ABC faces any trouble in the next couple of days, such as a scam coming to notice, it could lead to a sharp fall in its share price. Jane could be accused of insider trading as she had recently invested in another company.

Jane can consider transferring all her ABC shares into a living trust here. The trustee will be the one who sells ABC’s stock. Thus, she will have no information regarding the handling of her investments. And Jane will not be charged with insider trading because the trustee has no stake in ABC.

Another reason behind creating a living trust is its anonymity to the grantor. Because the assets will not be linked to the trustor, they will not show in their public records. It will make it difficult to determine who owns these funds. Lottery winners may also use these trusts to conceal their identities and keep their money hidden from public view.

How To Set A Blind Trust?

The first step to establishing a living trust is ensuring one needs it. Then, the person needs to clearly define all the assets and investments to be transferred to the trust. These are expensive investments and often have high maintenance fees because the trustee will need to make investment decisions all by themselves.

How To Set A Blind Trust

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Next, the grantor connects with an attorney to permit a third-party trustee to hold and manage their funds. It requires the trustor to sign a contract giving complete discretion to the trustee to use assets per their investment goals. The grantor can also decide on the investment limits and name beneficiaries.

After filling out the trust document, the trustor can start managing the fund. There will be no further communication between the trustee and the grantor about the management of blind trust funds.

While the trustee should not be someone the grantor knows closely, they should be someone the grantor can trust. It is, therefore, crucial to pick a trustee with a well-known background.

Another necessity is to follow all local regulations, especially if the grantor is in a government position. The U.S. government, for example, has specific laws that define whether a trust is qualified or not. Thus, hiring an experienced financial consultant or a lawyer is essential to structure a trust without errors.

It is also critical to determine whether the trust should be revocable or not, based on one’s financial goals. In the first case, despite not having any control over the funds within the trust, the grantor can modify provisions or decide to shut it off at any time. If it is an irrevocable trust, the grantor cannot make any changes but can continue receiving its income. When this happens, the blind trust funds extinguish.

Challenges Of A Blind Trust

It is impossible to say with certainty that the living trust will eliminate all conflicts of interest or charges of wrongdoing. It is so because the trustor does have some control over its assets and investments.

Finding someone trustworthy and not connected to the grantor is also an issue. Furthermore, there is no guarantee that the person or institution chosen to be the trustee will adhere to the code of ethics.

Frequently Asked Questions (FAQs)

What are blind trusts?

In a blind or living trust, the grantor (or trustor) gives a third-party trustee complete control of their assets. The independent trustee manages the funds and has absolute discretion over how to spend them. In this process, the settlor remains unaware of the management of assets and investments and cannot intervene in the trustee’s actions at any time.

What are the problems with blind trust?

Blind trusts are complex to draft and require extensive knowledge about various regulations. The lack of knowledge and loss of control over assets can lead to financial risks for the trustor. It is also complicated to identify the right person or institution to fill the role of trustee, as there is no guarantee that they will follow the code of ethics.

How effective are blind trusts?

Blind trusts are effective for people who wish to maintain a high level of privacy regarding their financial assets. These also help avoid conflicts of interest in professions to a certain extent. However, whether these trusts fully serve their purpose is debatable because there is always an element of tentativeness associated with them.

This has been a guide to What blind trust is and its Meaning. Here we explain how blind trust works along with its reasons, challenges, examples and how to set it up? You may learn more about financing from the following articles –