Before delving into the specifics of a blind trust, it helps to understand what a trust is and how they operate. A trust is a legal agreement where an individual (known as the trustor or settlor) transfers ownership of certain assets to an account managed by a trustee (also known as a fiduciary). The trustee then operates the trust on behalf of the designated beneficiaries. The trustor will clearly outline how the trust is to be managed in the trust agreement. Sometimes the trustee will oversee the assets for a short period of time until the account is gifted to the beneficiaries. Other times, the trust is intended to run indefinitely, providing investment income for generations to come. Either way, the trustee is responsible for prudently managing the assets and investments while they are held in trust.
A trust can be revocable or irrevocable. With a revocable trust, the trustor can modify the terms of the trust agreement, dissolve the trust, and reclaim assets transferred to the trust, as long as they are alive. Upon the trustor’s death, the trust would become irrevocable. An irrevocable trust cannot be modified or dissolved. Assets transferred to an irrevocable trust are permanently gifted to the trust, and cannot be reclaimed by the trustor. In some situations, an irrevocable trust can be modified by the beneficiary, but that hinges on the language and provisions in the trust agreement.
What is a Blind Trust?
A blind trust is a trust agreement where neither the trustor or the beneficiaries have any control or influence over the assets in the trust. Once assets are transferred to a blind trust, the trustee is able to freely buy and sell assets according to the mandates of the trust agreement. The trustor and beneficiaries cannot know what assets are being held, what is bought or sold, what the annual returns are, etc. They cannot contact the trustee for updates on holdings, principal, or returns, and they cannot give the trustee any input or directions regarding management of the assets.
When are Blind Trusts Necessary?
Blind trusts are typically used when the trustor is facing potential conflicts of interest between their profession and their personal assets. If there is a possibility that professional decisions can directly impact someone’s personal wealth or business interests, a blind trust provides an ethical solution to preclude moral dilemmas. Blind trusts aren’t intended to last forever, so they can be revocable or irrevocable. In both cases, the trustor and the beneficiary are usually one in the same, so when the potential conflicts of interest that warrant the blind trust are gone, they can reclaim their assets.
Blind Trusts for Elected Officials
One of the most common situations that warrants a blind trust is when an individual is elected to public office. Politicians with international holdings may be tempted to use their position of influence to lower taxes or tariffs, ease trade barriers, or otherwise influence regulation that would benefit their foreign interests. They could be tempted to grant lucrative government contracts to businesses in which they are personally invested, or push legislation that would benefit businesses, industries, or sectors which represent a substantial portion of their investments.
The Federal Ethics in Government Act of 1978 requires government officials disclose their financial holdings unless the assets are transferred to a “qualified” blind trust. While elected officials are not required to sell assets or utilize a blind trust, many politicians do, as it eliminates the need to disclose personal assets and avoids the scrutiny that can accompany public disclosures. While a blind trust doesn’t eliminate these potential conflicts of interest, it is a good tool to at least minimize the risks.
There are five requirements for a trust to pass as a “qualified” blind trust:
- The official, their spouse, or any dependent or minor children are beneficiaries to the trust’s principal or income
- The trustee operates independently, and cannot be influenced by or affiliated with the government official
- The transferred assets cannot contain any restrictions, and the trustee is free to buy, sell, or transfer the assets without interference
- The trust agreement needs to contain provisions that explicitly prevent the trustor from advising the trustee on how to manage the assets
- The government official’s supervising ethics office must approve of the trust and the trustee
Blind Trusts for Corporate Executives
Another common use for blind trusts is by corporate executives or members of the company’s board of directors. Individuals with substantial corporate stock holdings and access to inside information are subject to restrictions on trading securities that can make it difficult to prudently manage their portfolio. These regulations can be avoided if the executive’s holdings are transferred into a blind trust where the executive can’t dictate when to buy or sell corporate stock.
How are Blind Trusts Established?
There are a myriad of state and federal regulations regarding blind trusts, but generally speaking there are six steps to establish a blind trust:
- Consult with a qualified attorney to understand which state and federal laws your blind trust will be subject to (for example, many states don’t allow politicians to name family members as trustees of a blind trust)
- Gather the necessary documents for the assets in question (e.g. property titles, business contracts, financial account documentation, etc.)
- Select an individual or firm to serve as the trustee
- Draft a trust agreement with an attorney to outline the parameters of the trust, including if the trust is revocable or irrevocable, and how the assets shall be distributed when the blind trust expires
- Sign and notarize the agreement, and if necessary report the trust to the state
- Transfer assets to the trust
While a blind trust ensures that the trustor and beneficiary doesn’t know what assets are held in the trust, they do know what assets were held when they transferred to the trust. If the trustor held a substantial business stake in a certain company or industry, they may still be inclined to influence legislation and regulations favorable to that company or industry. Also, because the trustor can choose the trustee, they can choose someone who would manage the trust predictably, and influence regulations that would benefit the anticipated portfolio. For example, if a trustor taps his longtime financial advisor as the trustee, he may have grown accustomed to the financial advisor’s investing preferences over the years to the extent he can predict (at least generally) what sectors and industries the trustee will invest in. The trustor can then influence political or business decisions that will favor those industries, sectors, and companies.
An alternate way to preclude conflicts of interest
Instead of a blind trust, the government official or corporate executive could liquidate their financial holdings and invest all their funds in broad index-based mutual funds or ETFs. Theoretically, this would eliminate any bias towards specific companies or industries, however it can be difficult to do if the individual has complex holdings and business interests that are illiquid.
Call Arizona Estate Attorney Dave Weed at (480)467-4325 to discuss your case today.