Blind trusts are most beneficial to people who require objectivity in their business or political roles, but they are also suitable for people who want to maintain a high level of privacy regarding their assets.
For example, government officials and politicians often establish blind trusts to avoid any perceived or real conflicts of interest between their own agendas and the good of their constituents.
In 2022, for example, Congress is considering the proposed TRUST in Congress Act. If passed and approved into law, the TRUST in Congress Act will require members of Congress (and their spouses and dependent children) to place specific assets into blind trusts.
Lottery winners may similarly opt to create a blind trust to keep their winnings out of the public eye.
What Is a Blind Trust?
A blind trust is a type of living trust, either revocable or irrevocable, that grants full control of assets to the trustee. The trustee for a blind trust cannot be the trustor. The trustee must be a third party who doesn’t have a close, personal relationship to the trustor. This is necessary for a blind trust to serve its intended purposes: avoid conflicts of interest and achieve a high level of privacy.
How Does a Blind Trust Work?
State and federal laws govern blind trusts, so people who wish to establish one must enlist the help of an experienced lawyer.
The key difference between a blind trust and other types of living trusts is that neither the trustor nor his or her beneficiaries have the authority to manage any aspect of the trust or the assets held in it after the blind trust has been finalized.
The trustor may dictate the parameters of the trust as it’s being drafted, including naming the beneficiaries and stipulating the goals for any investments held in the blind trust. But after the trust instrument — the written document that authorizes the trust — has been signed and completed, the trustor and beneficiaries have no more communication with the trustee regarding the handling of assets.
Reasons to Establish a Blind Trust
The purpose of a blind trust is most often to avoid conflicts of interest that may arise for trustors in specific positions or situations.
For example, a retired business executive who owns a large stake in her company’s stock might become a member of the local city council. Because this political position requires her to act objectively, all possible conflicts of interest should be eliminated. If the councilwoman holds stock in a company that could stand to profit from certain city council decisions, this represents a conflict of interest.
If the councilwoman’s shares of company stock are held in a blind trust, the conflict of interest is eliminated because she has no knowledge of how the company’s performance will affect her holdings.
This can be crucial for an investor who is considered an “insider” and could be accused of insider trading — the act of trading securities based on information that is not available to the public, and it is often prosecuted as a felony.
The U.S. Securities and Exchange Commission defines illegal insider trading as “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”
The Investment Advisers Act of 1940 regulates investment advisors and requires them to register with the SEC. Investment advisers are expected to adhere to the act’s code of ethics, which includes reporting their “personal securities holdings and transactions” unless these assets are held in a blind trust, thus allowing them “no direct or indirect influence or control.”
Politicians, Government Officials & Blind Trusts
Politicians also have a strong incentive to establish blind trusts. According to the Select Committee on Ethics, “Potential conflicts of interest may arise when a Member, officer, or employee’s financial interests or affiliations could be seen as affecting the performance of official duties. For example, certain financial holdings, like owning particular stocks, might create a conflict of interest with certain aspects of Senate employment including votes, meetings, and actions.”
Placing these assets in a qualified blind trust, the committee contends, “allows grantors to avoid potential conflicts of interest or the appearance of such conflicts during Senate employment.”
Blind Trust and the Lottery
Lottery winners who wish to keep their identity secret may opt to set up a blind trust.
A blind trust for a lottery winner is structured differently than a typical blind trust in that the trustor has access to and control of the funds. In this type of trust, the term “blind” refers to the public’s knowledge, not the trustor’s.
This allows lottery winners in states where they are required to disclose their identities to remain anonymous.
Let’s Talk About Your Financial Goals.
How to Set Up a Blind Trust
Setting up a blind trust may be part of estate planning or a separate transaction to address a specific need.
Depending on a person’s situation, a blind trust may be established in a number of ways.
Lottery winners typically hire a lawyer to serve as the trustee and they name themselves the trustor, or grantor, and beneficiary.
Government officials must have their qualified blind trusts approved by the Senate Select Committee on Ethics prior to execution.
Submissions to the Committee include:
- Cover letter from the grantor addressing how the trustee was selected
- Copy of the proposed trust instrument
- Schedule A — list of assets contained in the Qualified Blind Trust (QBT) at the time of the Committee’s approval
- Schedule B — trustee fee schedule
- Certificate of Independence of Trustee
- Certificate of Independence of Investment Advisor
Bear in mind that blind trusts must be structured carefully to meet the criteria required for a specific purpose. You must consult a qualified financial planner and an experienced lawyer to ensure the validity of your trust.