A blind trust is a type of trust in which you grant full control of your trust or financial assets to your trustee. It is referred to as a living trust where the grantors appoint a third party (referred to as trustee) to oversee the assets entirely on behalf of the grantors.
With a blind trust, a third party can manage the financial matters and other required processes for a trust with full discretion over any investments and assets. Blind trust is considered best for those individuals who want to avoid potential conflicts of interest between their work and investments.
What is Blind Trust?
Definition: Blind trust is defined as a trust in which the trustor (owner) gives full control to the trustee (another party). Investment advisers consider it as one of the most effective and innovative ways to avoid conflicts between employment and investment.
Generally, appointed trustees look after the trust and are recognized as the decision-making entity of the faith. In this type of trust, the settlor or owner and the trust beneficiaries do not have any control over or knowledge of the status of the assets held.
Traditionally, trustees discuss the financial and interests updates with the settlers or trustor or owner now and then. But, in a blind trust, the trustees possess full access to deciding anything regarding the trust, even without a direct conversation with the grantor.
The grantor has the power of terminating or redesigning trust according to the necessities of the faith but certainly doesn’t have the legal rights on the decision-making activities or taking reports from the trustee.
Key Features of Blind Trusts
A trustor giving complete management of the trust to some other individual is termed as blind trust. The trustees hold full control of the trust’s holdings. They have the responsibility of maintaining the trust’s resources and any profits made.
The trustors can cancel the blind trust at any time but can not influence the acts performed inside it. Also, doesn’t get any record from members. The trustor can also appoint a trustee as a custodian responsible for upholding the trust deed, like dispersing the finances after the trustor’s death.
The trustees and the trustor always hold a private alliance, and the trustees contain the massive powers of the management and operations of the trust. A few critical features of Blind Trust are mentioned below:
- The founders of a Trust, trustor hands over the entire management system and decision making authority of that trust to a third party, known as the trustee
- Trustor can terminate or rearrange the trust as per requirement
- The trustee has full possession o the income and other monetary assets of the trust
- It always helps the grantors to form a professional relationship with the trustees and to avoid unnecessary arguments with the shareholders of that trust
How does a qualified Blind Trust work?
Blind trust works as a confidential mediator between the beneficiaries and the trustors. Appointed trustees operate the various functions of trust that include the financial assets, overall management of the trust, and securing the best interests of the shareholders.
First of all, a grantor establishes trust and sets its goals. The responsibilities of the grantors almost end at this point, and the whole trust is delivered to the trustees for further operations. Trustors, as well as the trust beneficiaries, will not have a say over how trust assets and investments are being managed.
The trustee is not compelled to share the daily updates of the trust and its agreements with the beneficiaries to the trustor.
A blind trust is either revocable or irrevocable trust depending on the notion of the trust, and the policies of an irrevocable trust are unchangeable.
A grantor always has access to ending and redeveloping the trust and determining the type of the trust based on the monetary targets and other necessary occurrences around the trust.
In a word, a Blind Trust creates a mysterious atmosphere for both settlors and beneficiaries where both parties are unaware of the whereabouts of the trust, such as the activities of investments and the trading of the assets.
Blind Trusts Vs. Normal Trusts
The primary difference between blind trusts and normal trusts is the mysterious ways for the trust’s operations. In blind trusts, the owner of the trust and the beneficiaries are unaware of the entire activities of the trust, and the whole operation is done by a third party, known as the trustee.
Each trust sets up a fiduciary relationship between the owner of the financial assets and that person who oversees the investments of a financial institution. Let’s discuss three essential parties that are involved in the blind trust:
Trustors are also known as grantors or settlors and the creator of the trust. A trustor is the owner of all the financial assets, sets up a Trust, and defines its type.
2. Trust Beneficiary
The external party gets offers of financial benefits from the trust. A beneficiary works as a privileged entity of a Trust.
3. The Trustee
The trust manager is called a trustee and is appointed by the grantor through the legal documentation.
Generally, in a normal trust, the trustee and the grantors often discuss the financial assets and the steps regarding the trust and its further improvement. Moreover, in a normal trust, each party is aware of the administrative activities of the trust and the basic knowledge about the trust and its whereabouts.
But, blind trust is a confidential Trust where the trustee always takes account of the trust’s operations, and the trustee isn’t bound to discuss the financial or other administrative matters with the grantor or the beneficiary.
In this way, the beneficiary and the trustor maintain a distance from conflicts during the investments and interests. But, the trustor has the power of terminating or modifying the trust.
Types of Blind Trusts
Depending on the goals of the trust, the grantor can always choose the type of trust. The classification of Trusts relies on the allocated terms and their modifications for the trust.
These three types of Blind Trusts provide the services in different ways by considering the circumstances. The short descriptions are mentioned below to have the basic concepts about their dissimilarities from each other.
1. Revocable Trust
It’s the most advanced notion of blind trust, where the trustor can redesign, add, or nullify the trust throughout the lifetime. This type of blind trust setting is the best way to deal with the advancement and current market updates and set the adequate phenomena in the trust. If you are a young person and desire to improve the trust’s policies gradually by following the live events to cope with the modern era, then Revocable Trust is the best option for the trustors.
2. Irrevocable Trus
On the contrary, the irrevocable blind trust depends upon permanence, as a trust agreement cannot be changed or modified throughout the lifetime. This type of trust is set by the grantors initially and redesigning it is quite troublesome for the trustors.
The modification facilities are strictly conserved in court systems, and sometimes, the agreements from the beneficiaries are required. There are no other instant ways to change the irrevocable trust; a trustor must be pretty much definite about the goals before creating an irrevocable Trust.
3. Testamentary Trust
The most exclusive type of Blind Trust is Testamentary Trust, and it introduces a parameter called Will. This form of trust is established individually but works with the Will of the grantor’s document.
This is a time dependable trust and only able to function after the death of the grantor. Testamentary Trust is not useful until the death of the trustor. If a trustor wishes to create a Trust during their lifetime, this notion of Blind Trust is not preferable for setting up.
Steps for setting up Blind Trusts
Before going through the steps for creating blind trust, you need to take the support of a qualified attorney. In this way, a trustee receives the full power of attorney from the grantor. Determining the trust’s goals and choosing an ace-level of the third party for appointing in the trust.
The legal documentation is the primary criteria of the Blind Trust, and for further advice, you can seek help from some professional financial advisors.
The establishment of the Blind Trust is simple and takes a few steps, and those are as follows:
- Deciding the relevant assets for the trust
- Choosing certificates
- Appointing a highly qualified professional or a financial administration as the third party of the trust, referred to as the trustee
- Determining the type of trust if it is revocable or not
- Finally, drafting the legal documents and sharing assets into the trust
These are a few simple steps for the foundation of trust, and setting the goals of the trust before appointing a trustee is an essential activity for the trustor.
Who needs a Blind Trust?
A blind trust works as the shield for the grantor by preventing the disagreement between the trustor and the shareholders. Powerful people often appoint Blind Trust to prevent conflicts and sometimes keep them anonymously with the investors.
Politicians are quite inclined towards the Blind Trust to maintain the secrecy of the trust and its grantor. Because their performance mostly affects the fund of the trust, keeping the identity of the trustor can help eliminate such tantrums.
The same goes for Government ethics as the Ethics of Government Act of 1978 has clarified that the politician and government officials must publish the assets directly unless the trust is a blind trust.
So, to designate a Blind Trust always keeps the relationship between the trustor and investor pretty secretive and maintains the higher performance of the trust without some effects from personal matters.
Do you need a blind trust after winning a lottery?
Yes, it would be useful for you to create a blind trust after winning a lottery, as this will let you claim your income generated from lottery winnings in the trust’s name instead of your own.
This will help you remain anonymous. You can hire a law firm or attorney to do this if you are living in a state that doesn’t ask lottery winners to disclose who they are. It will also help you in preserving your lottery winnings.
Alternatives of Blind Trusts
A blind trust is a costly approach, and therefore high-profile individuals such as politicians or other executives have other ways to avoid the potential conflict issues instead of blind trust.
They can introduce the index fund and bond by selling real estate or private properties. A person also can transform the assets into cash during employment. But, these activities often arouse basic tax problems, and avoiding such issues is itself an issue. Sometimes, the trading of assets, real estate, and personal properties becomes very hard to achieve.
Blind trust is the most befitting and legal approach to avoid all such issues, however, there is not any legal method that might remove all the conflicts of interest issues.
Examples of Blind Trusts
Blind trust is the best way for grantors to hide their investors’ identities and live a tantrum-free life from the arguments related to the trust and its investors. A few simple examples of Blind Trust are mentioned below:
1. Maintenance of Privacy
Privacy is the most important element for grantors who are from high-profile areas. The establishment of Blind Trust ensures the confidential relationship between the trustors and its beneficiaries with the help of a mediator called the trustee.
If you are interested in maintaining a secretive approach to your trust by keeping the operations and its assets unknown to the beneficiaries, then Blind Trust is the perfect one for you. Trustees manage the financial and other operations of the trust on behalf of the trust to help the trust to grow more and attract more investors.
2. Estate Planning
In an estate planning process, some of the times trustors do not want the beneficiaries to be aware of how much money is there in the trust.
Blind trusts also come into play to let the funds go to the beneficiary at the time when the individual reaches a particular milestone.
3. Conflicts of Interests
Usually, the politicians use the Blind Trust for hiding their job profiles. Their investments towards a Trust often create disagreements of interests with the beneficiaries, and they might stop being a part of that trust.
So, to avoid such conflicts, the politicians create Blind trust, and if the Blind Trust is irrevocable by nature, the trustors also require lawful help from the court to change or terminate the trust.