Many people know the basics about trusts, but they may have never heard of a blind trust. This type of trust is an excellent tool for estate planning and, particularly, for avoiding conflicts of interest.
So, what is a blind trust, and how does it work?
This article will explain everything you need to know about setting up a blind trust, including how it works and how much it might cost. In addition, you will learn all about reasons for establishing a blind trust and when you might want to create one. Let’s get started!
What Is A Blind Trust?
A blind trust is established when the grantor creates a trust and relinquishes total control over it to the trustee.
Neither the grantor nor the beneficiaries have access to the trust’s holdings. The trustee is responsible for completely managing the trust’s assets and any income generated from those assets according to the terms of the trust agreement. Neither the grantor nor any beneficiaries receive a report from the trustee while the blind trust remains in effect.
A blind trust may be established as a revocable trust. In that case, the settlor has the authority to cancel or revoke the trust but still cannot access the details of the holdings and investments.
*Remember, the main difference between a revocable and irrevocable trust is whether or not the grantor has the authority to revoke or cancel the trust.
Trust assets may be held in stocks, bonds, real estate, or any other investment. The trustee’s investment decisions lie completely with him or her through his or her fiduciary duty to the grantor and beneficiaries, and the grantor is not privy to the details of those holdings.
KEY TAKEAWAYS
- In a blind trust, the trustor and beneficiaries have no access or knowledge of the trust holdings.
- An independent trustee is responsible for managing all the trust assets and distributing income according to the terms of the trust.
- Generally, blind trusts are used to keep the trust assets private and to help avoid potential conflicts of interest.
How A Blind Trust Works
You might wonder, “How does a blind trust work, and what is its purpose?”
- A blind trust works the same way that other revocable or irrevocable trusts work.
- A blind trust is always a living trust as it is created during the settlor’s lifetime.
- It may also be a grantor trust because the grantor might retain ownership of the assets for tax purposes; however, he must relinquish control of the assets.
- The grantor establishes the trust by creating a trust document. An attorney is usually hired to prepare this document.
- The trust agreement appoints a trustee to manage the assets within the trust to benefit the beneficiaries.
- Once the trust is created, it must be funded. This means that the settlor transfers ownership of assets to the trust. The grantor no longer personally owns those assets; rather, they are owned by the trust entity.
- Most financial institutions allow you to create and maintain trust accounts with the proper paperwork.
What’s unique about a blind trust?
Here is where the “blind” portion of a blind trust comes into play.
- Unlike a typical trust, a blind trust requires the trustee to be independent.
- In a blind trust, the trustor executes the trust instrument, and afterward, they become completely hands-off.
- The trustor and the beneficiary of a blind trust have no knowledge of its holdings.
- Blind trusts may be either revocable or irrevocable.
- If the trust is revocable, the only power that the trustor retains is the ability to revoke the trust. Beyond that, the trustee is still responsible for its complete management.
Must read articles related to Trusts
- Overview of “What is a trust?“.
- Deep dive into understanding irrevocable trusts.
- What are the differences between a revocable and irrevocable trust?
- How does a charitable remainder trust work?
- Learn about the differences between a living trust and a will.
How To Set Up A Blind Trust And How Much It Costs
You may wonder how to create a blind trust. It is established basically the same way as any other kind of trust.
This is often done as part of a person’s estate planning, but that is not always true. An individual may choose to establish a blind trust unrelated to estate planning.
How to set up a blind trust?
What does it cost to set up a blind trust?
The cost of setting up a trust can vary widely. Since a blind trust is often used by wealthy individuals for highly complex financial situations, the price can be quite high.
It could even cost over $10,000 to have an attorney draft the paperwork for the trust. In addition to the drafting of the agreement, there will be ongoing maintenance costs associated with a blind trust.
Since a completely independent trustee must be appointed, there will be costs associated with paying that trustee to manage the trust. These costs can also be in the tens of thousands of dollars per year.
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The trustee has complete control over the management of the trust’s assets. In the case of blind trusts, the grantor cannot appoint themselves as the trustee.
Why Choose To Establish A Blind Trust
So, why would a person choose to establish a blind trust? It might seem crazy to turn complete control of your assets over to a third party and completely lose insight into the details of those assets.
However, there are a few reasons why this makes sense. Here are a few of those reasons.
Estate Planning
This is a common reason for establishing a blind trust. Perhaps the grantor does not want the beneficiaries or family members to know how much money is in the trust. Some people wish their finances to remain entirely private, even from family members.
The settlor might even work with a financial advisor to manage the trust assets, and establishing a trust as part of estate planning can help reduce estate taxes.
Financial Privacy For Lottery Winnings
When someone wins a large sum of money from the lottery, friends and family tend to come out in full force.
Many lottery winners wish to remain anonymous after winning the lottery, and they can usually do that by using a blind trust.
Winners often hire an attorney to create the trust and act as the trustee. The attorney then claims the winnings in the trust’s name, and both the grantor and beneficiaries can remain private.
Avoid Conflicts Of Interest
This is one of the biggest reasons for establishing a blind trust. Politicians, government officials, public officials, and corporate executives usually do this to avoid potential conflicts of interest.
For instance, a corporate executive might hold company stock or have other financial interests that may be subject to insider trading laws and other ethics rules. By setting up a blind trust, the grantor no longer has knowledge of the trust’s specific holdings. This allows the trustee to buy and sell stock and other assets without as much worry about insider trading rules.
When it comes to politicians, a qualified blind trust often allows them to stay within the Ethics in Government Act guidelines.
This federal law requires public disclosure of the financial and employment history of public officials and their immediate families.
By creating a blind trust, the grantor can hold certain assets that might otherwise present a conflict of interest.
The Bottom Line
Blind trusts are a special kind of trust that prevents the grantor or beneficiaries from having access to any knowledge of the trust holdings.
This avoids potential conflicts of interest, and public officials, corporate executives, and lottery winners often use these trusts.
Establishing a trust can be expensive, and paying a trustee to maintain it is not cheap either. However, in certain situations, they can be beneficial.
Frequently Asked Questions
The trustee has total control over the management of the trust’s assets.
The grantor retains no control over the assets, and the beneficiaries are unaware of the trust’s holdings.
The trustee is entirely independent, and the grantor cannot appoint himself as trustee.
In the case of a revocable blind trust, the grantor retains only the ability to revoke the trust. He or she has no other control over the management of the assets.
One of the biggest pros of a blind trust is avoiding conflicts of interest with the trust holdings.
In addition, the trust details can remain completely anonymous from the beneficiaries as the trustee is not required to provide any reporting to them.
On the downside, the grantor must relinquish complete control of the assets. This means that he or she no longer has any say in their management.
The trustee can buy and sell assets according to the terms of the trust, depending on what they think is in the best interest of the beneficiaries.
The beneficiary of a blind trust can be anyone that the grantor chooses. The grantor names the beneficiary in the trust document.
There may even be more than one beneficiary. The trustee must manage the assets in the trust for the beneficiary’s benefit, although there is no duty to report any details of the holdings to the beneficiary.
Sometimes, the grantor may be the trust beneficiary during his lifetime.
In a regular trust, the grantor may still retain some control over the assets in the trust.
In some cases, the grantor might even name himself as the trustee of the trust.
However, in a blind trust, the grantor must totally surrender control of the assets.
He or she must give the trustee full management responsibilities, and the grantor should have no knowledge of the holdings or assets within the trust.
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