Blind Trust: How it Works and Examples
What is a Blind Trust?
A blind trust is an arrangement where a fiduciary manages assets on behalf of a beneficiary without the beneficiary’s knowledge. It is a common practice among politicians and wealthy individuals to prevent any conflict of interest that could arise from their financial holdings. Blind trusts allow individuals to separate themselves from any decision-making process regarding their assets. In this blog post, we will dive deeper into what is a blind trust and how it works.
How Does a Blind Trust Work?
In a blind trust, the beneficiary hands over control of their assets to a third-party fiduciary who manages the assets with the beneficiary’s interests in mind. The beneficiary has no control over the assets’ management and cannot change the investment’s decision. Additionally, the beneficiary does not have knowledge of the trust’s underlying assets. The trustee is responsible for managing and distributing the trust’s assets to the beneficiary at a predetermined time or on behalf of a specified event such as retirement, death, or a change in the beneficiary’s financial situation.
Why Use a Blind Trust?
Blind trusts are used to prevent conflicts of interest that could arise from a wealthy individual’s assets holdings. For instance, a politician who owns shares in a company that may benefit from the introduction of favorable laws could use a blind trust to reduce the chances of decision-making based on personal financial gain. Blind trusts can come in handy for those who hold a sensitive position or are involved in a high-profile business where transparency is crucial. Additionally, a blind trust can offer privacy to the beneficiary’s financial holdings, which could prevent media attention or unfounded scrutiny.
Blind Trust Examples
Donald Trump has often used a blind trust throughout his real estate career. The blind trusts that controlled his assets were created to distance himself from particular deals his company was involved in. He also wanted to remove any possibility of a conflict of interest that could arise from his presidency. When Trump became the President, he put his assets under a blind trust run by his children. Ethically, this move is questionable since his children are not true fiduciaries since they have a stake in the assets.
Another significant example of a blind trust is the one made by the former Massachusetts governor and Republican presidential candidate, Mitt Romney. The Romney family’s assets were held in a blind trust giving Romney deniability of any conflicts of interest arising from its business dealings during his gubernatorial and presidential campaigns.
What Are the Pros and Cons of a Blind Trust?
In terms of Pros, blind trusts can isolate the beneficiary from making any investment decisions that could result in conflict of interests. Additionally, blind trusts can preserve privacy, which protects the beneficiary from the public eye. On the flip side, the cons of blind trusts include a lack of control over one’s assets. The beneficiary has no say in the trust’s investment decisions, making the trust’s success or failure reliant entirely on the fiduciary’s judgment. Additionally, blind trusts create very little flexibility should an emergency arise that requires accessing the assets.
In conclusion, blind trusts are a valuable asset management tool, mainly used by politicians in power, high net worth individuals, and those in sensitive positions. They offer privacy to those who require discretion in their financial holdings and protect them from conflicts of interest that could arise from their assets. While there are cons around relinquishing control, their benefits around privacy and removing conflicts of interests make them a vital tool to keep in consideration for those in a fixed position.