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Should you consider a blind trust as part of your estate plan?

child covering parents' eyes to show blind trust

We often hear that certain politicians or lottery winners have a blind trust.  But what is a blind trust, how do they work, and who typically needs one?

In a typical trust, the trust maker (the grantor or settlor) establishes a trust and names a trustee (or fiduciary).  The trustee manages the trust by making investments and distributing the trust's assets.   In most cases, the trust's beneficiaries are also aware of the existence of the trust.

Do You Need a Blind Trust?  In cases where conflicts of interest or privacy, or secrecy are required, a blind trust can make sense.  Who needs a blind trust? Typically, a blind trust is created when an individual creates a trust for the benefit of their loved ones, a charitable organization, or a third party. Lottery winners use a blind trust to remain anonymous.  The trust money and property are often distributed to the beneficiaries upon the trust maker's death. But there are situations in which a person may want to set up a trust to be used during their lifetime for their benefit to maintain privacy or avoid a potential conflict of interest. In such cases, a blind trust might be appropriate.

How Blind Trusts Work

The "blind" part of a blind trust refers to the concept that the trust maker remains in the dark about managing the trust's money and property. Although they may lay out general parameters for the trust, such as investment goals, before creating it, once the trust is established, the trustee (the person designated to control the trust assets) has full discretion to handle the trust's holdings and has no communication with the trust maker.

The beneficiary of a blind trust also does not know what goes on with the trust. However, in most cases, the trust maker is also the beneficiary. That is, the trust contains their money and property, and the trustee manages that money and property for the benefit of the trust maker-beneficiary—the trust maker-beneficiary has no knowledge of or control over the trust's activities.

Blind Trust versus Nonblind Trust

A blind trust differs from a normal trust in several ways. The biggest difference is that the trust maker has discretion over trust money and property in a nonblind trust. Usually, the trust maker and trustee consult each other and, in some cases, are the same person. Often, they give explicit instructions to the trustee about how to run the trust, such as when and how to make distributions to a beneficiary. And, while the beneficiary may be at the trustee's mercy regarding receiving trust distributions from a blind trust, with a nonblind trust, the beneficiary may be in contact with the trustee and be aware of trust activities.

Revocable versus Irrevocable Blind Trust

Blind trusts can be irrevocable or revocable. A trust maker can modify or terminate a revocable trust and regain control of the accounts and property upon termination. An irrevocable trust cannot be modified or terminated by the trust maker. In other words, once the trust maker places money and property in an irrevocable blind trust, the trust maker permanently gives up control over that money and property.

Blind Trusts and Public Figures

Viewers of the television show Billions may be familiar with blind trusts, thanks to the character Chuck Rhoades. For anyone who has not seen the show, Chuck is a New York prosecutor known for his flawless record of winning insider trading cases. Chuck put his investments in a blind trust managed by his father to show the public that his financial holdings would not influence his actions as a public figure.

While no state requires public figures to use a blind trust while in office, most states and the federal government have laws that require government employees to recuse themselves and disclose when their public duties may affect their financial interests. These laws are intended to maintain trust in public institutions, helping to defend against legislative self-dealing or the perception of it.

Blind trusts are a workaround to real or perceived conflicts of interest. A public figure can place the money and property that might create a conflict of interest into a blind trust and turn the money and property over to an independent trustee. The official can then claim that they do not know how their actions in office will affect their private financial interests because they have no control over those interests.  Indeed politicians often use a blind trust when running for office. Just How Blind Are Blind Trusts, Anyway?

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.

A dozen states have laws that regulate blind trusts and require strict compliance. Federal ethics laws also have rules about what qualifies as a blind trust and how it should function to comply with the law.[2]

Blind Trusts and Company Executives

Blind trusts are not just for government officials. Conflicts of interest can similarly impact officers, directors, and others who own shares in a company and have information not available to the public. Ownership of these shares can call into question whether a corporate insider is acting in the company's and its shareholders' best interests—as federal financial law requires them to—or in their own interests.

The Securities Act restricts the sale of shares owned by corporate insiders for as long as they remain with the company. Publicly traded companies usually only allow insiders to trade company stock during "window periods."[3] A blind trust set up during a window period can be a mechanism for avoiding these trading limitations. The trustee of the insider's blind trust works under strict guidelines for selling company stock. The trustee can execute this plan without running afoul of insider trading laws.

Blind Trusts and Lottery Winners

While politicians and company insiders may use a blind trust to avoid conflicts of interest, a lottery winner or person who receives a financial windfall may use this trust for a different reason: financial privacy.

Let us say that you are the lucky winner of the $1 billion Powerball lottery. As excited as you are to spread the news and raise the big cardboard check on television, you remain anonymous. There are plenty of reasons to keep a low profile—reporters, scammers, harassment, and requests for money from friends and family, to name just a few. But not all states allow lottery winners to remain anonymous.

If you do not live in one of those states and want anonymity, you can use a blind trust to protect your identity. However, "blind" trust is a bit of a misnomer in this situation. It is just a regular trust that uses a name other than your legal name. You retain control of the trust and its money and property but are "blind" to the public because the trust is not easily linkable to you.

Blind Trusts for Celebrities

Celebrities may use blind trusts as a means to keep their financial holdings and real estate purchases confidential. A blind trust is a type of trust where the beneficiary, in this case, the celebrity, has no control or knowledge over the trust's investments or actions. Instead, a trustee manages the assets, and the beneficiary has no access to the information about the trust's holdings.

By using a blind trust, celebrities can avoid public scrutiny of their investments and avoid conflicts of interest that may arise if they are involved in businesses or industries that could be perceived as controversial or unethical.

Don't Go Blind into a Blind Trust—Talk to us 

 Blind trust can be a useful and powerful tool in estate planning for individuals who want to maintain a level of privacy and anonymity when it comes to managing thier assets.

One of the main benefits of a blind trust is that it provides a layer of seperation between the asset owner and the trustee or manager, allowing more objective decision making.  This is particularly helpful in situations when conflict of interests may arise.  Its important to note however, that blind trusts do come with some potential drawbacks, such as limited control over the assets and the potential for trustee abuse.   Finally for any trust to be effective the blind trust has to be funded. 

As with any estate planning technique its important to carefully consider all factors and seek profesional guidance.   If you feel a blind trust may be right for you or your family or have any questions call or write us; we would be happy to help you explore if a blind trust is beneficial in your estate plan.

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