Legal trusts can be used to accomplish a number of financial and estate planning objectives as well as provide legal protection for assets placed in them. There are instances where 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 Are Blind Trusts?
A blind trust is a special type of trust that gives complete trading and management authority to a third-party entity. This separate party is held to a fiduciary standard, which means it must act solely in the best interest of the beneficiary regardless of all other circumstances or conflicts of interest. The trading party has virtually unlimited authority and discretion to manage the assets in the trust, similar to the manner in which a parent or guardian would manage a custodial investment account for a small child. The beneficiary is not permitted to have any knowledge of anything that happens inside the trust. The beneficary 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.
The 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 prohibiting the sale of restricted stock or other securities that would represent a conflict of interest. Because the beneficiary of a blind trust has no knowledge of what is done inside the trust or when, the trustee of the trust is freed from the rules pertaining to restricted stock or other trading limitations imposed on the investment decisions of politicians and other elected officials. Therefore, the benficiaries can focus on other tasks
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 do not disclose this information, and, therefore, they are often used by people who come into large sums of money, such as lottery winnings or an inheritance. This can prevent jealousy among friends and relatives and also protect the beneficiary from predators and scammers. These trusts also 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
Like all other types of trusts, blind trusts can either be set up as pass-through entities or 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.
Mark Cussen has more than 17 years of experience in the financial industry. He received his B.S. in English from the University of Kansas and became a Certified Financial Planner in 2001. He has published financial educational articles on such websites as Investopedia and Money Crashers. He also provides financial education and counseling for members of the U.S. military and their families.