Defining a Blind Trust
What Is a Blind Trust and How Does It Work?
A blind trust is one in which the owner (or trustor) gives complete management of the trust to another person (the trustee). The trustee has complete control over the trust's assets and investments, as well as the responsibility of managing the trust's assets and any income earned. While the blind trust is in effect, the trustee can cancel it, but he or she has no influence over the acts conducted inside it and gets no reports from the trustees. Blind trusts are frequently created when people desire to avoid conflicts of interest between their work and their assets.
TAKEAWAYS IMPORTANT
A blind trust is one in which the owner (or trustor) gives complete management of the trust to another person (the trustee).
The trustee is in charge of the trust's assets and investments, as well as any income earned by the trust.
When people seek to prevent conflicts of interest between their work and their investments, they commonly create blind trusts.
What is a Blind Trust and How Does It Work?
In a conventional trust, the trustor or originator names a trustee to serve as the fiduciary, which means the trustee is responsible for upholding the trust agreement, such as dispersing the monies after the trustor's death. The trust can hold a variety of assets, such as stocks, bonds, and real estate. The trustee and trustee are often in communication with one another, and the trust beneficiary is typically aware of the trust and, in certain cases, aware of the trust's assets.
A blind trust, on the other hand, is set up such that neither the trust beneficiaries nor the trustee are aware of the trust's financial assets. Neither party has any influence or control over how the investments are managed, including whether individual assets are bought or sold.
A blind trust can be revocable, which means the trustor can replace the trustee or cancel the trust at any time. An irrevocable trust can also be a blind trust. trust, trustee, and trust termination A blind trust can also be an irreversible trust, meaning that 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. An irrevocable trust, for example, can be set up such that the trustor's assets are no longer his or her legal property, preventing creditors or the government, such as Medicaid, from seizing them.
Particular Points to Consider
A blind trust might provide obstacles and issues since the trustor who creates the trust is at least aware of the investment mix at the outset and cannot reasonably disregard that knowledge when making future decisions. The trustors can also determine the rules for how the investments are managed and, of course, choose trustees they believe will act in a specific way in certain circumstances. As a result, the effectiveness of a blind trust in really removing conflict of interest has yet to be demonstrated. However, politicians with a lot of money or in high positions utilize blind trusts to indicate that they are making an attempt to maintain neutrality.
Alternatives to Blind Trust
Establishing a blind trust can be costly, but politicians and CEOs have other options for avoiding possible conflicts of interest. They can sell individual investments, real estate, and private holdings and replace them with index funds and bonds. A person might potentially sell the assets, turning them to cash, while still working. However, selling investments can result in tax consequences, and some investments, such as land or real estate, are difficult to sell. Although blind trusts are beneficial, no legal framework exists that can eliminate all conflicts of interest or ensure ethical behaviour from those in positions of power.
Blind Trusts: Examples
Although a blind trust can be established by anybody, it is commonly used to leave money to beneficiaries and avoid conflicts of interest.
Preparing a Will
If the trustor does not want the beneficiaries to know how much money is in the trust, a blind trust can be formed during the estate planning process. A blind trust might also be set up such that the money is distributed to the beneficiary when the individual achieves a specified age or milestone, such as college graduation.
Politicians
When a rich individual is elected to a political position, blind trusts are utilized to avoid a potential conflict of interest due to their investment interests. Those who occupy political office are required under the Ethics in Government Act of 1978 to reveal all of their assets unless they are placed in a blind trust. 1
A politician's ownership of shares in a corporation with a pending regulatory issue, for example, might cause a conflict of interest. The blind trust keeps the politician out of any trades that the trustee or the financial institution serving as trustee initiates.
