Blind Trust Defined
A blind trust is a fiduciary arrangement in which the assets are held by a professional trustee, who manages the assets without the knowledge of the grantor.
Blind trusts are often used by public figures, such as elected officials, to avoid conflicts of interest. The grantor transfers ownership of the assets to the trustee with instructions not to disclose any information about the holdings or transactions to the grantor.
How a Blind Trust Works
A blind trust is one in which the beneficiaries and the trustee do not know the trust's financial assets. Neither party has any influence or control over how the investments are managed, including whether specific assets are bought or sold.
Blind trust can be revocable, which means the trustor can replace the trustee or dissolve the trust at any time. Blind trust can also be irreversible, meaning it cannot be modified once it is formed.
The trustor's decision to create a revocable or irrevocable trust is based on the circumstances and goals of the trust. For example, an irrevocable trust can be set up such that assets are no longer considered legal property.
Reasons to Establish a Blind Trust
There are several reasons why someone might choose to establish a blind trust.
The main reason is to avoid conflicts of interest. By placing the assets in a blind trust, the grantor can no longer be accused of using their position for personal gain.
Another reason to establish a blind trust is to prevent family members from being unduly influenced by the grantor's wealth. If the grantor has children, they may be pressured to use their influence to help them succeed.
By putting the assets in a blind trust, the grantor can ensure that the trustee makes all decisions about managing the assets without input from the grantor or their family.
Lastly, blind trusts can protect the grantor's assets from creditors. If the grantor owes money to creditors, the trustee can use the assets in the trust to pay off the debts without the grantor having to liquidate their assets.
Setting Up a Blind Trust
Establishing a blind trust includes preparing a document the grantor signs and giving an independent third-party trustee full power of attorney over the trust assets. However, it is not a do-it-yourself project; it requires legal assistance.
A few things need to be considered when setting up a blind trust.
The first is who will serve as the trustee. The trustee should be impartial and trustworthy. It is also essential to ensure the trustee has experience managing investments.
The second thing to consider is what type of assets will be placed in the trust. The trustee will need to have authority over all of the asset types to manage them properly.
The third thing to think about is what the trust terms will be. The trustee should have complete discretion over how the assets are managed. However, the grantor can limit how the assets can be used.
For example, the grantor may want to specify that the assets can only be used for certain purposes, such as education or retirement.
Lastly, the grantor must decide whether the trust will be revocable or irrevocable. If the trust is irrevocable, the grantor will not be able to change the terms or dissolve the trust.
Blind Trust Benefits
There are several benefits of blind trust.
First, they can help avoid conflicts of interest. By placing the assets in a blind trust, the grantor can no longer be accused of using their position for personal gain.
Second, blind trusts can prevent family members from being unduly influenced by the grantor's wealth. If the grantor has children, they may be pressured to use their influence to help them succeed.
By putting the assets in a blind trust, the grantor can ensure that the trustee makes all decisions about managing the assets without input from the grantor or their family.
Lastly, blind trusts can protect the grantor's assets from creditors. If the grantor owes money to creditors, the trustee can use the assets in the trust to pay off debts without the grantor having to liquidate their assets.
Alternatives
There are several alternatives to blind trusts.
One alternative is to give the trustee discretion over how the assets are managed but not complete control. This allows the grantor to have some input into how the assets are used while avoiding conflicts of interest.
Another alternative is to place the assets in a trust but not give the trustee discretion over how they are managed. The grantor can set guidelines for how the assets are to be used.
This allows the grantor to control how the assets are used but may only partially avoid conflicts of interest.
Lastly, the grantor can choose not to establish trust and manage the assets themselves. This gives the grantor complete control over how the assets are used but may not protect the assets from creditors.
Advantages and Disadvantages of Blind Trust
There are both advantages and disadvantages of blind trust.
One advantage is that they can help avoid conflicts of interest. By placing the assets in a blind trust, the grantor can no longer be accused of using their position for personal gain.
Another advantage is that blind trust can prevent family members from being unduly influenced by the grantor's wealth. If the grantor has children, they may be pressured to use their influence to help them succeed.
By putting the assets in a blind trust, the grantor can ensure that the trustee makes all decisions about managing the assets without input from the grantor or their family.
Lastly, blind trusts can protect the grantor's assets from creditors. If the grantor owes money to creditors, the trustee can use the assets in the trust to pay off debts without the grantor having to liquidate their assets.
One disadvantage of blind trusts is that they can be challenging to set up. The grantor must have complete confidence in the trustee and be willing to give up control over the assets.
Another disadvantage is that the grantor may not be able to change the terms of the trust once it has been established.
Lastly, the trustee may make decisions that the grantor disagrees with.
Final Thoughts
A blind trust is a type of trust that can be used to help avoid conflicts of interest. Blind trusts can be difficult to set up, and the grantor may not be able to change the terms once the trust has been established.
Alternatives to blind trusts include trusts with discretionary management or trusts where the grantor sets guidelines for how the assets are to be used.
Blind trusts have both advantages and disadvantages. Some benefits include that they can help avoid conflicts of interest and prevent family members from being unduly influenced by the grantor's wealth.
Some disadvantages include that the grantor may not be able to change the terms of the trust, and the trustee may make decisions that the grantor disagrees with.
When deciding to establish a blind trust, the grantor should weigh the advantages and disadvantages to determine if a blind trust is right for them.
FAQs
1. What is blind trust?
A blind trust is a trust in which the grantor gives the trustee complete discretion over managing assets. The grantor needs to have input into how the assets are used and know what the trustee is doing with the assets.
2. How does blind trust work?
A blind trust works by placing the assets in the trust under the control of a trustee. The trustee has complete discretion over how the assets are managed and can make all decisions about how the assets are used without input from the grantor.
3. Why would someone establish a blind trust?
There are several reasons why someone might establish a blind trust. Blind trusts can help avoid conflicts of interest, prevent family members from being unduly influenced by the grantor's wealth, and protect the grantor's assets from creditors.
4. How do you set up a blind trust?
Setting up a blind trust can be difficult. The grantor must have complete confidence in the trustee and be willing to give up control over the assets. The grantor may also be unable to change the terms of the trust once it has been established.
5. What are the advantages and disadvantages of blind trust?
Some advantages include that they can help avoid conflicts of interest and prevent family members from being unduly influenced by the grantor's wealth. Some disadvantages include that the grantor may need more control over the assets, and the trustee may make decisions that the grantor disagrees with.
