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What is a Blind Trust?
A blind trust is a type of trust in which the grantor and beneficiary have no control over or knowledge of the assets in the trust or how they’re being managed. A third-party trustee, who can be an individual or an institution, has full control of the trust assets and does not communicate with the grantor or beneficiary about what is being bought and sold within the trust. A blind trust can be revocable, meaning the grantor can change it later, or irrevocable, meaning it can’t be modified or terminated.
At first, the idea of putting assets into a trust and then relinquishing all knowledge and control of those assets might sound crazy. But in a few situations, this arrangement makes perfect sense.
Why Do It?
Basically, a blind trust is supposed to eliminate any real or perceived conflicts of interest.
One situation where a blind trust is useful is when a corporate executive wants to avoid illegal insider trading. The executive can place all the company shares he or she owns into the blind trust, thus giving complete control and knowledge over when and how much of the shares is sold to a trustee. This strategy removes the restrictions on when the shares can be sold, since it’s no longer held by an insider, which can result in better investment outcomes. The trustee can manage the assets to improve the executive’s asset diversification and risk profile and does not have to worry about window periods or blackout periods that affect insiders.
Also, retiring or retired business owners and executives who retain large amounts of company shares may be interested in politics, charitable work or board membership that requires them to act objectively.
High wealth individuals set up blind trusts if they suddenly come into large, unexpected sums of money and want to keep the matter private. For example, large inheritances, lottery or gambling winnings.
To avoid potential conflicts of interest, a public servant might set up a blind trust to manage private assets that he or she and his/her spouse and dependent children own. Since a perceived or real conflict of interest could arise if that official is involved in legislation that affects his or her investments, placing those assets in a blind trust, especially an irrevocable one, is supposed to allow the official to act impartially and in the best interests of constituents.
Religious persons also use blind trusts to conceal assets they receive from their parishioners.
Blind trusts are also prevalent amongst politicians.
How to Do It
Establishing a blind trust basically involves drawing up a document that the grantor signs to give full power of attorney over the trust assets to an independent, third-party trustee.
After that, you cease communication with the trustee and have no further knowledge of how the trust’s assets are being handled.
Choosing the right trustee is imperative. Not only do you need someone who is honest and investment savvy, but if you’re trying to separate yourself from your investments, you also need someone with whom you don’t have a close relationship – not a friend or relative.
In the case of lottery winnings, you can retain a lawyer to set up your trust, appoint him or her as trustee and ask the trustee to redeem your winning ticket anonymously on your behalf. Depending on the requirements of the lottery you win, establishing a blind trust might allow you to access your winnings without the media or other third parties learning who you are.
Blind trusts create a layer of separation between the grantor’s assets and professional or political activities that helps to eliminate real or perceived conflicts of interest and accusations of wrongdoing. Individuals who receive a windfall can also use them to maintain financial privacy.
If you would like more information on trust structures and want to learn more about the most appropriate type of trust or trusts for your situation, please submit the online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.
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The Quinn Group operates Quinn Consultants, Quinn Lawyers, Quinn Financial Planning and Quinn Financial Solutions. The Quinn Group provides related information in regard to legal, accounting and financial planning issues. Liability limited by a scheme approved under Professional Standards Legislation* *other than for the acts or omissions of financial services licensees.