What is a blind trust?
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A blind trust is a special type of trust that helps individuals with significant assets keep their assets separate from their decisions. When someone sets up a blind trust, they give their assets to someone else to manage called a trustee. The trustee makes all the decisions about how to invest and use the assets, and the person who set up the trust (the trustor) doesn’t have any say in those decisions. Blind trusts can be set up so that the trustor can change their mind later (revocable trust), or permanent (irrevocable trust). People who use blind trusts are often in public positions, like politicians or business leaders.
Here are some important terms to know about blind trusts, as well as reasons why someone might choose to have a blind trust, with a couple of examples.
Understanding trust terms, definitions and meanings
Trust terminology can be confusing, so here’s a cheat sheet with definitions to help.
Grantor or Trustor: The person or entity who sets up the trust.
Grantee or Beneficiary: The person or entity who receives the trust’s assets or distributions.
Trustee: The individual or organization responsible for managing the trust’s assets.
Trust: A legal arrangement in which a third party holds and manages assets for a grantee. Trusts are commonly used in estate planning, and can take many forms beyond blind trusts, such as marital trusts, irrevocable life insurance trusts, charitable trusts and more.
Trusts can be categorized as either revocable and irrevocable trusts. A revocable trust, also known as a living trust, is treated as an asset while the grantor is alive and can be dissolved. It is taxed accordingly. An irrevocable trust, however, cannot be altered once the grantor has established the trust. This type of trust is not taxed as an asset and can reduce tax liability for income generated by the trust’s assets, making it an effective tool for estate tax reduction.
What is the benefit of having a blind trust?
The primary benefit of a blind trust is to eliminate conflicts of interest, particularly for public officials or individuals in influential positions who may be perceived as biased due to their financial interests. By creating a blind trust, the trustor can avoid accusations of favoritism in their decision-making. Also, blind trusts offer a level of privacy as the beneficiary may not know details of the trust’s assets and investments. It’s also worth noting that public officials are mandated to disclose financial history and the placement of certain investments in blind trusts by the Ethics in Government Act of 1978.
Examples of blind trusts
Blind trusts can serve a variety of purposes. For instance, if you were elected as a mayor of a city, you may choose to establish a blind trust to ensure your decisions are made in the best interest of your constituents and not be influenced by any personal equity you may have in certain companies or projects. Similarly, a private person who wants to set up a trust for a family member may choose a blind trust to keep the trust’s monetary value secret, which may help prevent the beneficiary’s decision-making from being influenced or to maintain impartiality to certain investments due to differing political values.
What’s the difference between a trust and a blind trust?
The main difference between a trust and a blind trust is the level of information and control the trustor and beneficiary have over the trust’s assets. In a regular trust, the trustor typically has control over the assets and can make decisions about how they are invested and distributed to the beneficiary. The beneficiary is also usually aware of the assets in the trust.
On the other hand, in a blind trust, the trustor and beneficiary do not have access to or knowledge of the trust’s investment holdings. The trustee has full control over how the investments are managed, and the trustor and beneficiary have no say in the matter. This lack of transparency is designed to prevent conflicts of interest and maintain the privacy of the trust’s assets.
When to set up a trust
While blind trusts are less common and are typically used for specific purposes, regular trusts can be useful in many instances. If you’re estate planning for yourself or others, a trust can help manage and distribute assets according to the trustor’s wishes. If you are considering estate planning for yourself or others, consulting with a financial advisor or lawyer can help determine if setting up a trust is a suitable option for your situation.