Should You Set Up a Blind Trust for Your Assets?
When it comes to money management, many people want to be in complete control of their finances.
This includes their stocks, bonds, real estate investments, and other assets.
But depending on your situation, it might make sense to set up a blind trust and have a trustee manage your affairs.
A trustee is a person who manages property or assets for a third-party (grantor). In the case of a blind trust, you give the trustee control over your assets. As the grantor, you have no knowledge of how the trustee manages or invests assets in the trust.
But, why would someone choose a blind trust?
Here’s what you need to know about this legal vehicle, including why it makes sense in certain situations.
How Does a Blind Trust Work?
Trusts are common with estate planning, as they provide an easier way to manage assets.
Grantors set up trusts for various reasons. Some do so to conceal their assets from the public. And others establish a trust to outline how they want inheritances distributed to their heirs.
It’s an excellent tool to help preserve family wealth. It establishes when and how beneficiaries receive money.
A blind trust is a type of living trust, but it’s different from a normal trust. When setting up a normal trust in the above scenarios, the person who owns assets in the trust—also known as the grantor—is involved in the management of these assets.
They’ll communicate with their trustee and they’re privy to how funds are invested. In a normal trust, beneficiaries also receive details about assets in the trust.
In a blind trust, though, the trustee alone handles the assets. The grantor and beneficiaries don’t know anything about investments bought and sold by the trust. In other words, they have no knowledge of how the trustee manages these assets.
This doesn’t mean that the trustee can do whatever they want with the asset. They’re still working in the best interest of the grantor and the beneficiaries. Therefore, trustees should make decisions that result in the best possible outcome.
When setting up a blind trust, you can choose between two options. One option is a revocable blind trust.
With this type, even though you choose a trustee to manage assets in the trust, you have the power to terminate the trust agreement at any time. Setting up a revocable blind trust gives you the flexibility to switch trustees in the future, or even add or remove a beneficiary.
Another type of trust is an irrevocable trust. This type of trust doesn’t offer the same type of flexibility. Once you set up this trust, choose a trustee, and move assets into the trust, you cannot make any changes.
If choosing a blind trust when estate planning, only set up an irrevocable trust if you don’t foresee amending the trust in the future.
Reasons to Establish a Blind Trust
When some people think of trusts, they think of a legal vehicle used by wealthy persons only.
Yet, anyone can set up a trust, if their personal situation warrants one.
Since a blind trust involves giving up control over your assets, why would you choose this type of trust?
Simply put, a blind trust is beneficial in situations when a person needs to separate themselves from their assets, usually to avoid professional conflicts of interest.
Blind trusts are common with elected officials and corporate employees. Even people who win the lottery might set up a blind trust.
Take a publicly elected judge, for example. This individual hears and rules on a variety of cases.
And sometimes, a verdict the judge gives affects the reputation and value of a particular company.
Let’s say the judge hears a case involving a company they knowingly hold stock in. If they rule in this company’s favor, one could argue that the judge made a biased decision. A blind trust, on the other hand, could protect the judge from scrutiny.
Since the judge entrusted the management of assets (including stocks) to a trustee, they have no knowledge of investments in the trust.
So even if the judge owns stock in the company, there’s no conflict of interest.
A blind trust also benefits a corporate employee who owns a large amount of company stock.
If this employee sold off their stock right before their company’s downturn, some might accuse this employee of illegal activity or insider trading.
But with their stock held in a blind trust—and being managed by a trustee—the employee avoids any wrongdoing.
You don’t have to be in corporate America or a public official to have a blind trust. Some people also set up this type of trust after winning the lottery.
After coming into a large sum of money, many people prefer to remain anonymous. So they look for ways to avoid claiming lottery winnings in their name.
In some states, you’re required to disclose your identity after winning the lottery. In other states, you can stay anonymous. This prevents people from trying to benefit from your newfound wealth.
But even if you're allowed to hide your identity, setting up a blind trust is the only way to ensure anonymity.
The trust can claim the lottery winnings, keeping your name off public records.
If you win the lottery, you’ll need to set up a blind trust before claiming your winnings.
Establishing a blind trust after winning the lottery can also preserve your winnings. Rather than receive a lump sum, the trust can distribute funds to you (or your beneficiaries) at scheduled times.
How to Establish a Blind Trust
To set up a blind trust, the first thing you’ll need to do is decide which assets to transfer to the trust. You’ll need to show proof of ownership. This might include proof of stock or bond ownership or a real estate deed.
You cannot put actual cash in a blind trust. What you can do, though, is transfer ownership of a deposit account to the trust. This includes a savings account, money market account, or a certificate of deposit.
Once you decide which assets to include in the trust, the next step is to choose a trustee. This is a third-party that will manage the trust on your behalf. They’ll have complete control over your assets, so it’s important to pick someone trustworthy.
Some people choose a friend or family member to act as trustee. But although an option, others prefer to put some distance between their assets and their personal relationships. In which case, they choose either a lawyer, accountant, or trust company to oversee the blind trust.
One benefit of using a family member or friend is that they’re unlikely to charge a management fee. Setting up a trust with a lawyer, accountant, or trust company can be expensive. Depending on the complexity of your trust agreement, you might pay a professional between $1,000 and $10,000 to set up a trust. You’ll also pay yearly management fees, as much as 3 percent of trust assets.
If using a professional, schedule an initial consultation to ask questions and determine whether you’re comfortable working with this person. You must be compatible with your trustee to have a positive working relationship.
Questions to ask a potential trustee include:
- What is your educational background?
- What is your experience as a professional trustee?
- What types of trust do you serve as trustee?
- How many trusts do you manage?
- How will you decide the right investments for my trust?
- How do you charge for services?
The next step is to create the trust agreement. Whether you’re using a friend, family member, or a trust company, use an attorney to create or review this agreement.
The trust agreement should highlight whether the trust is revocable or irrevocable. It should also outline how the trustee will manage the trust, and include information on who receives disbursements and when. You should also include other details like the name of beneficiaries and when the trust ends, if applicable.
You’ll need to sign and notarize the trust agreement, and then transfer your assets to the blind trust.
A blind trust is a great legal vehicle when you want to separate your financial life from your professional life.
It’s an excellent way to avoid professional conflicts of interest, or keep your assets private from the general public.
Regardless of your reasons for creating a blind trust, the important thing is to choose a trustee that’s trustworthy and has your best interest in mind.
Giving someone control over your assets is risky.
But, with the right person managing your affairs, a blind trust can protect your finances.