A blind trust is a legal arrangement where assets are managed by a trustee without any input or knowledge from the person who owns them. This type of trust can be helpful for individuals who want to avoid conflicts of interest, such as politicians or executives, by separating themselves from the direct oversight of their investments. In a blind trust, the trustee has full authority to manage the assets, and the beneficiary does not receive updates on transactions or asset details. Setting up a blind trust typically involves appointing a trustee, drafting the trust agreement and transferring assets into the trust, ensuring the owner has no direct involvement in the decision-making process.
Consider working with a financial advisor if you need help creating or updating an estate plan.
What Is a Blind Trust?
A blind trust is designed to create a complete separation between the owner of the assets and their management. Once established, the trustee is responsible for overseeing all aspects of the trust, from making investments to handling income or disbursements. The key aspect of a blind trust is that the beneficiary relinquishes all control and information regarding the trust’s activities, which helps maintain impartiality in situations where conflicts of interest may arise.
Typically, the trustee is a financial professional or institution that has a fiduciary duty to act in the best interests of the trust beneficiary. They decide on the buying, selling, or holding of assets without any input or influence from the owner.
This arrangement is particularly useful for individuals in public roles, such as government officials or corporate executives, who want to avoid any appearance of using their position for personal financial gain. By keeping the owner in the dark about the trust’s activities, blind trusts effectively shield them from decisions that might create ethical or legal complications, ensuring objectivity in financial matters.
How to Set Up a Blind Trust
Once you decide to use a blind trust to store your assets, you’ll need to set it up. States establish the laws governing blind trusts, so the exact steps and requirements will vary depending on which state you live in. Make sure you check local laws before you set up your blind trust. In general though, the steps to set up a blind trust are as follows:
- Gather proper documentation: Compile the paperwork associated with the assets that you want put into the blind trust. This could mean certificates of stock ownership, bonds or real estate deeds. If you want to put an asset in the trust, you’ll need to have documentation proving ownership.
- Appoint a trustee: This is the person who will have total control over the assets you are putting into the trust. Because the trust is blind, you won’t be able to find out what the beneficiary is doing or make any adjustments. This means you want to make sure this person is trustworthy and has a general understanding of personal finance and investing. However, since the purpose of a blind trust is to separate yourself from your investments, you won’t want to pick someone with whom you have too close of a personal relationship.
- Draft a trust agreement: Collaborate with a legal expert to draft a trust agreement that details the conditions of the blind trust. This document should define the trustee’s roles and responsibilities, specify the assets included, and outline the duration of the trust.
- Transfer assets into the trust: After the trust agreement has been drafted, the next step involves moving the assets into the trust. These assets may include financial investments, real estate holdings, or any other property that requires management.
- Relinquish control: The trust beneficiary must officially relinquish all control over the assets. This means they cannot have any say in how the assets are managed, nor can they receive detailed updates from the trustee about the activities within the trust.
- Establish reporting terms: Although the beneficiary does not receive detailed updates, the trust agreement may outline periodic reports with limited information, such as overall performance, to ensure transparency without breaching the separation between the owner and the trust’s management.
- Formalize the trust: Finally, execute the trust agreement by having all parties sign the document. and having it notarized. This makes the blind trust legally binding, and the trustee can then begin managing the assets as stipulated.
The person forming the blind trust generally reserves the right to terminate it whenever he or she wants. When the trust is terminated, the beneficiary will regain control of the assets.
How Much Does It Cost to Set Up a Blind Trust?
Setting up a blind trust can be expensive. It can cost thousands of dollars. Establishing a blind trust often requires the help of a financial professional and you’ll have to pay any associated fees.
In addition to the set-up costs, a blind trust can have significant maintenance costs. This means that you’ll be paying some costs as long as you have the trust, so the total cost of the trust is not just what you pay to set it up. If you’re considering setting up a blind trust, make sure it is worth the time and money.
Reasons to Use a Blind Trust
The most common use for a blind trust is the one described above: to avoid conflicts of interest when a prominent business person ends up running for public office. For instance, let’s say you spent most of your professional life working at an oil and natural gas company. As part of your compensation you probably received incentive stock options or other equity in the company.
Now, let’s say you win a race for the United States Senate. In your new role as a senator, you could be in a position to pass legislation that impacts your former company, including the price of shares you are holding. By putting your assets into a blind trust, you can no longer make financial decisions that are impacted by your decisions as a senator or vice versa. Sure, you still know what was put into the trust in the first place, but you can’t decide to sell the shares based on what you do in the Senate.
People who suddenly come into a lot of money, especially from an unexpected source like a lottery win, can also use blind trusts as a way to maintain their financial privacy. A blind trust lets lottery winners remain anonymous, which can be important for someone who suddenly comes into a large amount of money. If multiple people have a claim to the prize, a blind trust can also make disputes easier to solve.
Bottom Line
A blind trust provides a way for people to avoid financial conflicts of interest when they enter into public office or another high-profile position. The exact rules of setting up a blind trust vary by state. Regardless of which state you’re in, you’ll always need to provide documentation for the assets going into the trust and appoint a trustee to mind the assets for as long as they are in the trust. You retain the ability to terminate the trust and take back control of the assets at any time.
Financial Planning Tips
- Whether you are looking to set up a blind trust or want broader financial advice, it may make sense to find a financial advisor to guide you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Blind trusts are not the only type of trust. During the estate planning process, you may want to consider setting up a living trust. This makes things easier for your family after you die by avoiding the probate process.
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