What are blind trusts, and are they hurtful or helpful?

Within the otherwise straightforward world of trusts, there exists an entity with a little more uncertainty, and risk, involved. A blind trust requires you to give another party - the trustee - full control of your assets. While this may seem daunting or even irrational, there are instances where this trust can come in handy. Blind trusts can create a layer of separation between your employment and investment, helping you avoid conflict of interest between your assets and your professional or political activities. Read on to see if this trust is right for you.

Who should create a blind trust?

• Politicians: Blind trusts are most prevalent among politicians because their investment holdings may create a conflict of interest. Say you are a company owner elected to a political office, and the company has a pending regulatory issue. Your ability to make a fair decision on the issue is likely to be questioned because you are going to be directly affected by the decision. To avoid this, you can use a blind trust to separate yourself from your assets.

  Using a blind trust can be especially important for politicians because the Ethics in Government Act of 1978 makes it mandatory for politicians to disclose all of their assets - unless, of course, those assets are held in a blind trust.

• Corporate Executive: If you are a corporate executive wanting to avoid illegal insider trading, you can place any company shares you own into a blind trust. If you were to hold and manage the stocks, you would face various restrictions on when and how much of the stock is sold. You would need to comply with these restrictions to prevent illegal insider trading unless you utilize a blind trust to give full control of the stock to the trustee. Doing so may significantly improve Investment outcomes (especially under a financially savvy trustee) since several restrictions are eliminated. For example, you no longer have to worry about window periods, which are when executives and employees are allowed to trade in stock of their own company. 

• Individuals who receive a windfall: If you happen to win a lottery, suddenly inherit a large sum of money, or just gain a large, unexpected sum of money, you may want to set up a blind trust if you want to keep the matter private. Some wise lottery winners have successfully used Blind trusts to prevent greedy relatives or others trying to cash in on the winners’ sudden wealth. Especially in the case of winning a lottery, you could hire an attorney to set up your blind trust, appoint the attorney as your trustee, and ask the attorney to redeem the lottery ticket anonymously on your behalf. This allows you to gain your winnings without the media or others from learning your identity. 

• A trustor: If you are seeking to establish a trust but do not want the beneficiaries to know how much money is in the trust, you could establish a blind trust. In the trust, you could specify that the beneficiaries are to receive some of the funds in the trust when they reach a certain age or milestone.

Establishing a blind trust

With a lawyer, you can establish a blind trust by setting up a document that gives full power of attorney over the trust to a third party. You must go through this process with an experienced attorney because there are state and federal laws related to the creation of blind trusts. While you are drafting the trust document, you have the ability to decide whether it will be revocable or irrevocable, provide input on financial objectives, denote asset allocation, and choose the beneficiaries.

You will also have to choose the trustee, which is arguably the most important part of the process. The trustee should be honest and financially savvy, and should not be a friend or close relative since you are trying to separate yourself from your assets. After completing and signing the trust document, you need to stop communicating with the trustee and refrain from gaining knowledge on how the trust is being managed. 

Alternatives to a blind trust

Blind trusts are costly to establish and maintain, with an additional drawback of low transparency. This is why some turn to alternative options when trying to remove potential conflicts of interest; they sell the specific investments, private holdings, real estate, or other assets for bonds or cash. However, this may not be the best option for some because it can incur significant amounts of tax, and certain investments can be difficult to sell.

Though It is clear that blind trusts can be created in multiple circumstances to eliminate conflicts of interest, you should always weigh the benefits and drawbacks or consider alternatives before creating this trust: after all, you could end up losing control of your assets if you are not careful. If you require any assistance or have any further questions, feel free to make use of the concierge service here at peacefully. We assist with referrals to trusted professionals, offer case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung