A blind trust protects an investor from charges of conflict of interest and other improprieties because its specific assets and trading practices are unknown to the investor. Corporate employees and public officials often use blind trusts to avoid charges of insider trading and corruption, respectively. When used properly, blind trusts are excellent instruments for diversifying concentrated holdings. As corporations increasingly include stock as part of their compensation packages and executives find stock making up an ever increasing percentage of their assets, more people are turning to blind trusts as a way to maximize their portfolio value.
With no managerial discretion over the assets in a blind trust, the beneficiary — or grantor — may liquidate securities without fear of violating Securities and Exchange Commission regulations or sending a “bear” message to the market. It is important to remember that the grantor and the trustee may have no communication about the company or investment strategies or activity. Because the trustee alone controls the timing, amount and price during liquidation, it is advisable to name an experienced, professional money manager as the trustee or executor.
One of the main advantages of using a blind trust is the flexibility of trading it offers. Unlike the restrictions that demand trading only during company “trading windows” — or satisfying the strict trading plan and employer authorization requirements of SEC Rule 10b5-1 — trading through a blind trust leaves those decisions to the executor. Also, contrary to SEC Rule 10b5-1, blind trusts do not prohibit the creation of a trading plan when the insider possesses non-public information that might affect his company's stock price, because the insider has no control over the timing of the transactions.
Estate and Tax Strategy
Blind trusts can also be valuable in estate and tax management, financial planner Gavin Morrissey from Commonwealth Financial Network points out. They can be established as a revocable trust, subject to later discontinuation or amendment, or an irrevocable grantor trust that protects the estate from taxes upon the grantor’s death. Blind trusts may be structured in a way that protects against downturns in the market while reducing an estate’s gross value and its exposure to capital gains taxes.
The potential downsides to blind trusts are their complexity and their strict prohibition of company-related communication between the insider and the trust's executor. Setting up blind trusts requires extensive knowledge about trust and securities regulations. To establish successful strategies using blind trusts and to ensure that provisions in the trust satisfy the insider's needs, he and his financial planner should work with attorneys who are experienced in navigating this complex area of business law.
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