Trusts can be used to hold assets for a beneficiary, and you may hear about them when carrying out estate planning or evaluating strategies to pass investments to heirs.
One type of trust, called a blind trust, offers a layer of separation between the person who created it and how the investments are managed. Those who will receive the assets also do not have access to information regarding the vehicle. Individuals typically open blind trusts for reasons such as avoiding potential conflicts of interest.
When considering a blind trust, it can be useful to know:
— What is a blind trust.
— How a blind trust works.
— Who uses a blind trust.
— The advantages of a blind trust.
— The drawbacks of a blind trust.
What Is a Blind Trust?
There are different types of trusts
available, and a blind trust acts as its name implies.
“A blind trust is one where the settlor gives an independent trustee the unbridled discretion over the assets of the trust to manage, invest and maintain them as the trustee determines in its sole discretion,” Joseph Stead, managing partner at Stead & Associates PLLC in Mesa, Arizona, says. The assets might include stocks, bonds and real estate.
Those involved in a blind trust are usually referred to as:
— Settlor: the creator of the trust (also called the owner or trustor).
— Trustee: the party who manages the trust.
— Beneficiaries: the receivers of the assets in a trust.
This arrangement is different from other trusts, which allow the owner to know about the investments and how they are managed. In typical trusts, beneficiaries often have insight into the holdings and understand they will eventually be passed to them.
In the case of a blind trust, both the beneficiaries and the creator do not know how the funds have been used or what assets are held.
[READ: States With Estate and Inheritance Taxes.]
How a Blind Trust Works
A blind trust can be revocable or irrevocable. If the trust is revocable (also known as a living trust), the settlor has flexibility and can dissolve the vehicle at any time.
“If the trust is irrevocable, it remains in place until the beneficiaries inherit the totality of the assets, with few legal exceptions,” Mark Murphy, chief executive office of Northeast Sequoia Private Client Group in in Roseland, New Jersey, says.
Sometimes irrevocable trusts are used to move assets out of an estate. Creators lose control over the holdings and cannot terminate the trust or change the terms.
Who Uses a Blind Trust?
Those who hold positions of authority or influence might open a blind trust.
“It is generally a tool used by public officials and other government employees in order to avoid the impropriety of conflict of interest laws,” Stead says. The Federal Ethics Act of 1978 mandates that government officials must disclose their financial holdings unless they’re transferred to a qualified blind trust.
Corporate executives who sit on a board of directors may have significant holdings in their company.
“Their access to inside information legally restricts them from trading their securities,” Murphy says. “By placing their stock holdings in a blind trust, they can no longer dictate when shares are traded.” An independent trustee manages the stock and isn’t bound by insider trade regulations.
Families with confidentiality wishes may find benefits in these vehicles.
“Blind trusts may be useful for estate planning purposes if the settlor wants to limit the beneficiaries’ knowledge of the trust assets and their ability to interfere with the management of the trust,” Joseph Fresard, attorney at Simasko Law in Mount Clements, Michigan, says.
Those who unexpectedly receive a lump sum via the lottery might open a blind trust because some states allow lottery winners to preserve their anonymity through this tool.
“Before you claim your jackpot, you draft and sign a trust deed and appoint a trustee,” Murphy says. “Then, you fund your trust by ‘donating’ your lucky ticket to the trust prior to claiming your prize.'”
[READ: How Advisors Can Help Clients Invest an Inheritance]
Blind Trust Advantages
For lottery winners, the vehicle could help protect their assets from others.
“Keeping your good fortune anonymous shields you from unscrupulous characters who prey upon windfall recipients, such as cousins you never knew you had and salesmen eager to sell you myriad ways to line their pockets while emptying yours,” Murphy says.
In addition, some individuals might feel more comfortable setting parameters for their heirs, including not exposing them to the assets they will receive.
“This may be useful if the settlor wishes for their beneficiaries to not inherit until a certain age, and for the beneficiaries not to structure their lives in a way in which they will rely on the large inheritance they will receive,” Fresard says.
[Read: Estate Planning Tips to Keep Your Money in the Family.]
Blind Trust Drawbacks
One drawback to a blind trust is that there can be certain risks that stem from a lack of knowledge about investments.
“Beneficiaries may benefit from a clearer idea of what their future finances will look like,” Fresard says. “The blind trust also poses the issue of less trustee accountability, as the beneficiaries are not able to inspect whether the assets are being managed responsibly.”
You can also expect extra fees with this arrangement.
“A blind trust is much more expensive to set up and maintain as opposed to other types of trusts,” Stead says. “Independent trustees will charge a fee for their services provided to the settlor on top of the legal fees involved in hiring an experienced attorney to draft such a trust.”
Some states have legislation pertaining to how blind trust are handled, which could further complicate the setup and reduce the benefits.
As you evaluate your options, you may wonder if you have a specific need for a blind trust. For those with no conflict of interest or privacy concerns, it may make sense to create a different type of trust.
If you want to separate yourself from investment decisions or prefer that beneficiaries do not know about the holdings, however, you might opt for a blind trust.
Before opening one, do your research and talk to those involved to make sure it’s the right move for you.
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What Is a Blind Trust? originally appeared on usnews.com
