What Are the Advantages of a Blind Trust?

What Are the Advantages of a Blind Trust?
••• courtneyk/E+/GettyImages

Legal trusts can be used to accomplish a number of financial and estate planning objectives as well as to provide legal protection for the assets placed in them. There are instances when those who hold public office or own stock in a company must be careful how they handle their investments.

Blind trusts can assist those in this category to manage their assets according to governmental regulations while still providing many of the traditional benefits of other types of living trusts.

What Is a Blind Trust?

A blind trust is a special type of trust that gives complete trading and management authority to a third-party entity, according to the National Conference of State Legislatures. This separate party is held to a fiduciary standard, which means it must act solely in the best interest of the beneficiaries regardless of all other circumstances or conflicts of interest.

The trading party (the person who is authorized to make trades of the trust's assets) has virtually unlimited authority and discretion to manage the assets in the trust. This is similar to the manner in which a parent or guardian would manage a custodial investment account for a small child.

The beneficiary (the person or persons who owns or will inherit the assets of the trust) is not permitted to have any knowledge of anything that happens inside the trust. The beneficiary only knows the third party is managing the assets according to the wishes of the beneficiary. The beneficiary is effectively "blind" to what happens inside the trust, hence its name.

Primary Advantage of Blind Trusts

Blind trusts can be used by elected officials and corporate insiders to manage assets and place trades that would otherwise run afoul of Securities and Exchange Commission (SEC) rules and other governmental regulations that prohibit the sale of restricted stock or other securities that would represent a conflict of interest.

The beneficiary of a blind trust has no knowledge of what's done inside the trust or when, so the trustee of the trust is freed from the rules pertaining to restricted stock or other trading limitations that can be imposed on the investment decisions of politicians and other elected officials. The beneficiaries can focus on other tasks, explains Annuity.org.

Other Uses of Blind Trusts

Blind trusts were created because it may be possible for someone to find out what assets are placed inside a traditional trust through a search of public records or other data that contain this information. But blind trusts don't disclose this information. They're therefore often used by people who come into large sums of money, such as lottery winnings or an inheritance.

This can prevent jealousy among family members and friends and it can also protect the beneficiary from predators and scammers. These trusts can provide standard estate planning benefits such as protection from creditors and estate taxes, depending upon how the trust is set up.

Taxation of Blind Trusts

Blind trusts can also benefit beneficiaries based on their tax status. Trusts are often used as part of a comprehensive tax strategy by families and individuals. They can either be set up as pass-through entities or they can be taxed at the trust level, with the money to pay the taxes coming out of the trust. Either way, the owner/beneficiary ultimately foots the tax bill for the investment income generated by the trust assets.