What is a Blind Trust? Definition, Mechanics, and Real-World Examples

What Is a Blind Trust?

A blind trust is a trust whose assets are unknown to its beneficiaries and whose owner, or trustor, grants control of the trust to an independent trustee. The trustee has full discretion over the management of the trust and its assets. They make financial decisions and conduct transactions without the involvement of the owner or beneficiaries. Blind trusts are often established to prevent conflicts of interest and maintain privacy. They can be revocable or irrevocable.

Understanding the Operations of a Blind Trust

In a usual trust, the trustor appoints a trustee to manage the trust, and handle transactions like distributing funds after the trustor’s death. The trust can contain various investments, including equities, bonds, and real estate. The trustor and trustee are often in contact with each other while the beneficiary of the trust is usually aware of the trust and perhaps, aware of the holdings within the trust.

Conversely, a blind trust is designed so that the trust beneficiaries and the trustor have no knowledge of the investment holdings within the trust. Neither party has any control or say in how the investments are managed, including whether to buy or sell specific securities.

A blind trust can be a revocable trust, meaning the trustor can make any changes to the trust, trustee, and terminate the trust. A blind trust can also be an irrevocable trust, which means nothing can be changed once it has been established. Whether the trustor would set up a revocable or irrevocable trust depends on the particular situation and goal of the trust. An irrevocable trust, for example, can be designed so that assets are no longer the legal property of the trustor and thus preventing creditors or the government, such as Medicaid, from claiming the assets.

Important Factors to Consider with a Blind Trust

Challenges with blind trusts include the trustor’s awareness of the initial investments, which can impact future decisions. The trustors may also set the rules under which the investments are managed and, of course, pick trustees that they are confident will act in a certain way in potential situations. As a result, the efficacy of a blind trust, in truly eliminating conflict of interest, is far from proven. That said, politicians with a large amount of wealth or in high office use blind trusts to show that at least the effort is being taken to establish impartiality. 

Exploring Alternatives to Blind Trusts

Establishing a blind trust can be costly, and there are other ways to avoid conflicts of interest. They can sell out of the specific investments, real estate, or private holdings in favor of index funds and bonds. A person could also sell the assets—converting them to cash—while occupying the position of employment. However, the process of selling investments can trigger tax implications and some investments, such as land or real estate, can be difficult to sell. Although blind trusts are helpful, there is no legal structure that can remove all conflicts of interest, nor can they guarantee ethical behavior from the person holding the position or office.

Real-World Examples of Blind Trusts in Action

While anyone can set up a blind trust, they’re usually used for leaving money to beneficiaries and avoiding conflicts of interest.

Estate Planning

A blind trust might be established during the estate planning process if the trustor doesn’t want the beneficiaries to know how much money is in the trust. A blind trust could also be tailored so that the funds go to the beneficiary when the person reaches a certain age or milestone, such as graduating from college.

Politicians

Blind trusts are also used when a wealthy individual is elected to a political office, where the investment holdings could potentially create a conflict of interest. The Ethics in Government Act of 1978 requires those holding political offices to disclose all of their assets unless those assets are held in a blind trust.

For example, if a politician owns equity in a company that has a pending regulatory issue, it might create a conflict of interest. The blind trust separates the politician from any trades that are initiated by the trustee or the financial institution acting as the trustee.

The Bottom Line

A blind trust gives a trustee full control over the trust’s assets and management, ensuring the trustor and beneficiaries have no knowledge or say in the management. This is intended to prevent conflicts of interest. A blind trust can be revocable or irrevocable. While useful for reducing perceived conflicts, blind trusts are not foolproof solutions because initial investment knowledge and trustee selection can influence outcomes. Alternatives to blind trusts include divesting personal holdings for more passive investments like index funds, though this may have tax implications. Setting up a blind trust can be costly and it is not legally mandated to remove investment conflicts entirely.