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Blind Trust: What is a Blind Trust & How it Works

Wondering what a Blind Trust is and if it’s right for you? Keep reading to find out.

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Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

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In a traditional Trust, the trustor names a trustee as their fiduciary. This means that the trustee manages the Trust on behalf of the trustor, per the Trust agreements. Activities could include managing investments or distributing assets when the trustor passes away. Typically, a trustor and trustee are in frequent contact with each other for decision-making and updates. Beneficiaries are also often aware of activities within the Trust. 

However, what if you wanted to “set it and forget it?” Or, what if you gained new employment and suddenly had a financial conflict to deal with? Find out why a blind Trust might be the solution you’re looking for, and how it can help resolve any conflicts of interest you might have.

What is a Blind Trust? 

A blind Trust is a type of Trust in which the trustee is given complete control. This means that they have full discretion over any assets and investments that were placed under ownership of the Trust. They can also make decisions about what to do with any income generated, without consulting the trustor. 

Although the trustor can set up and terminate a blind Trust, they have no control over any actions taken while the Trust is in effect. Blind trusts are often established when the trustor wants to avoid any conflicts of interest.

How Does a Blind Trust Work?

A blind Trust makes it so that both the Trustor and beneficiaries have no idea what’s going on within the trust. The trustor will first set up the Trust and transfer assets into it, but after the initial phase of set-up, all activities will be handed over to the trustee. The trustor and the beneficiaries won’t have any say over how investments are handled, nor can they have any opinion on what assets should be purchased or sold.

A blind Trust can be either revocable or irrevocable. A revocable trust can be changed, while an irrecoverable cannot. Whether the trustor chooses between a revocable or irrevocable blind trust depends on their financial goals and other unique circumstances. Next, we’ll describe a few common types of trusts to help highlight how a blind trust differs from them.

What is the Difference Between a Blind Trust and Other Trusts?

In the estate planning toolbox, you’ll find several different types of trusts to choose from. Each type of Trust has different functions that are designed to serve different needs and circumstances. Below you’ll find the definition of three types of Trusts that are often encountered, and how they might differ from a blind Trust. 

  • Irrevocable Trust: An irrevocable Trust is a type of Trust that can be neither revoked nor modified. This means that once a trustor sets up an irrevocable trust, the only way they might be able to change it is through the court system. Even then, all the beneficiaries must be in agreement to any proposed changes. A blind Trust can be set up as an irrevocable trust.

  • Revocable or Living Trust: A blind Trust can also be set up as a revocable Trust, which is a Trust that can be changed, modified, or revoked during the trustor’s lifetime. Revocable Trusts are commonly referred to as living Trusts. Revocable Trusts offer less tax shelter, but are a good idea if you anticipate changes to occur. For example, you may be younger in age, and have no grasp of what the future holds. Your asset structure could change, and your family has a lot of potential to expand. In this case, you might choose a revocable Trust so that you can make modifications with each life event.

  • Testamentary Trusts: A testamentary Trust is unique from other types of Trusts in that it is part of a Will. Typically, a Trust is set up separately and works in tandem with a Will. A testamentary Trust is written as part of the Will, and only goes into effect upon the trustor’s death. Therefore, a testamentary Trust cannot be considered a living Trust since it’s not active during the trustor’s lifetime. Blind Trusts are typically set up during a trustor’s lifetime, so they typically wouldn’t be set up as a testamentary Trust.

Who Can Set Up a Blind Trust?

Anyone can set up a blind Trust. However, they’re typically only useful in situations where an individual needs to separate themselves from their assets. For example, they might set up a blind Trust to avoid conflicts of interest for professional reasons. 

This means that blind Trusts are often used during an individual’s lifetime, and aren’t necessarily used for estate planning purposes. We’ll provide some concrete examples next to help explain who might benefit from a blind Trust.

Example of Blind Trusts 

Although blind Trusts are available to anyone, they’re typically used when someone is trying to prevent conflicts of interest. They might also use a blind Trust for confidential reasons.

  • Confidentiality: Once a blind Trust has been established, its activities become confidential from both the trustor and their beneficiaries. Only the trustee has access to oversee, manage, and make decisions on behalf of the Trust. Someone might set up a Trust this way if they don’t want the beneficiary knowing about the trust, or being aware of any Trust activities. They might even set it up so that the funds are distributed to the beneficiary once they reach a certain milestone.

  • Conflict of Interest: Politicians are the perfect example for why blind Trusts are sometimes needed. If a wealthy individual is elected to office, their investments could create a conflict of interest. They are required by law to disclose all of their property and assets, unless they have those assets held in a blind Trust. This is according to the Ethics in Government Act of 1978. 

How to Set Up a Blind Trust 

Setting a blind Trust involves drawing up a legal document that assigns full power of attorney to a trustee. In the case of a blind Trust, this trustee must be a third party who is independent from the trustor. This differs from a traditional Trust, in which the trustor has the option of appointing themself as the trustee.

Once the Trust has been set up, all communication between the trustor and trustee ceases. The trustor then has no knowledge of how assets within the Trust are being managed. As you can see, choosing the right trustee is critical. Most trustors choose a third party entity that they don’t have a close or longtime relationship with, such as a certified financial advisor or planner. 

Conclusion

A blind Trust is a powerful tool used to establish a degree of separation between you and your assets. This can come in handy if you’re looking to create confidentiality, or want to eliminate any perceived conflicts of interest. Whether you’re a high-profile politician or someone who just won the lottery, a blind Trust could be just the estate planning tool you were looking for. 

At Trust & Will, we make sure that Trusts are created within the parameters dictated by state and federal regulations. Are you ready to get started? We invite you to find out how you can create your Trust online in under 15 minutes through our user-friendly platform.

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