Many people know the basics of how trusts work, but they may have never heard of a blind trust. This type of trust is a great 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 that you need to know about setting up a blind trust including how they work and how much one 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 to the trustee. Neither the grantor nor the beneficiaries have access to the holdings within the trust. The trustee is tasked with the responsibility for completely managing the assets in the trust 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 does not have access to 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. The trust assets may be held in stocks, bonds, real estate, or any other number of investments. The investment decisions lie completely with the trustee through his or her fiduciary duty to the grantor and beneficiaries, and the grantor is not privy to the details of those holdings.
How A Blind Trust Works
You might be wondering, “How does a blind trust work and what is its purpose?” A blind trust works much the same way that other revocable or irrevocable trusts work. A blind trust is always a living trust as it is created during the lifetime of the settlor. 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. In reality, an attorney is usually hired to create the trust document. The trust agreement appoints a trustee to manage the assets within the trust for the benefit of the beneficiaries. Once the trust is created, the trust 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.
Here is where the “blind” portion of a blind trust comes into play. Unlike with a typical trust, a blind trust requires a completely independent trustee. In a blind trust, the trustor executes the trust instrument and then becomes completely hands-off. The trustor has no knowledge of the holdings of the trust and neither does the beneficiary of the trust. Blind trusts may be either revocable or irrevocable. If revocable, the only power that the trustor retains is the ability to revoke the trust. Beyond that, the trustee is still responsible for complete management of the trust.
How To Set Up A Blind Trust & How Much It Costs
Now maybe you are wondering how to create a trust. A blind trust is established basically the same way that any other kind of trust is established. This is often done as part of a person’s estate planning, but that is not always the case. An individual may choose to establish a blind trust not related to estate planning. Most often, an attorney is hired to draft the trust instrument. The grantor must sign and execute the agreement and then the trust must be funded. Once this takes place, then the trust is in effect.
The cost of setting up a trust can vary widely. Since a blind trust is often used by wealthy individuals for extremely complex financial situations, the cost 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 for management of the trust. These costs can also go into the tens of thousands of dollars per year.
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 when this absolutely makes sense. Here are a few of those reasons.
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 for their personal finances to remain completely 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 name of the trust, 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. This is usually done by politicians, government officials, public officials, and corporate executives 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 specific holdings of the trust. This allows the trustee to buy and sell stock and other assets without as much worry to the insider trading rules.
When it comes to politicians, a qualified blind trust often allows them to stay within the guidelines of the Ethics in Government Act. This act is a federal law which requires public disclosure of financial and employment history of public officials and their immediate family. By creating a blind trust, the grantor is able to hold certain assets that might otherwise present a conflict of interest.
The Bottom Line
Blind trusts are a special kind of trust which prevent the grantor or beneficiaries from having access to any knowledge of the holdings of the trust. This avoids potential conflicts of interest, and these trusts are often used by public officials, corporate executives, and lottery winners. Establishing a trust can be quite expensive, and paying a trustee to maintain them is not cheap either. However, in certain situations, they can be extremely useful and beneficial.
Frequently Asked Questions
Who controls a blind trust?
The trustee has total control over the management of the assets in the trust. The grantor retains no control over the assets, and the beneficiaries have no knowledge of the holdings of the trust. The trustee is completely independent, and the grantor cannot appoint himself as trustee. In the case of a revocable blind trust, the only power that the grantor retains is the ability to revoke the trust. He or she has no other control in the management of the assets.
What are the pros and cons of a blind trust?
One of the biggest pros of a blind trust is the ability to avoid conflicts of interest with the trust holdings. In addition, the details of the trust 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 full control of the assets. This means that he or she no longer has any say in the management of the assets. The trustee can buy and sell assets according to the terms of the trust depending on what he thinks is in the best interest of the beneficiaries.
Who is the beneficiary of a blind trust?
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. In some cases, the grantor himself may be the beneficiary of the trust during his lifetime.
What is the difference between a trust and a blind trust?
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 trustee of the trust. However, in a blind trust, the grantor must totally give up control of the assets. He or she must give full management responsibilities to the trustee, and the grantor should have no knowledge of the holdings or assets within the trust.