Of all the forms of trusts, blind trusts are perhaps one of the less widely used, and accordingly, one of the less well known. This rests in the fact that blind trusts are not an estate planning tool used by individuals under normal circumstances.
This type of trust is commonly used by lottery winners who wish to avoid problems with family members who may stand to benefit from the lottery winnings in the future or who may squander the money they receive from lottery funds held in a regular living trust.
For example, a lottery blind trust agreement can designate that certain beneficiaries receive a specified amount of money in the beneficiary’s bank account every month for the rest of the winner's life. Numerous beneficiaries can be designated such as family members or friends. The overriding benefit here is that the beneficiaries will have no control over how much money they receive nor will they know how much is in the trust.
Blind trusts also serve to insulate beneficiaries from conflicts of interest particularly under government ethics or other fiduciary arrangements that require someone to be insulated from the management of certain types of investment accounts.
Often those in political office or in public employment may elect to have investments set up under a blind trust so as to not violate ethics rules concerning public officials or employees investing in companies that have close ties to the government. In this situation, the blind trust creates a barrier between trust management and beneficiary, closing off any chance of improper dealing.
In a regulatory climate that now requires strict restrictions on any conduct that can be viewed as a conflict of interest or self-dealing a blind trust is a necessity.
Regardless of its use a blind trust, generally follow the same procedures as any other trust. However, the differences rest on how the trust is managed and the trustee’s duties to beneficiaries.
Functionally, a blind trust is a type of irrevocable living trust in which the trustee has full authority to invest trust assets, and the trust beneficiary has no right to know what property is owned by the trust. Under certain circumstances, trust must be established whereby the beneficiary must be shielded from knowing what assets are being held in trust.
The reasons for this secrecy can be for any number of reasons, however blind trusts are most commonly known as “lottery trusts” on account of their use by lottery winners who wish to keep their winnings, and how they are disposing of their winnings, secret from prying eyes.
How to Set Up a Blind Trust
Setting up a blind trust follows the same general rules that apply to any other trust. In this case, the person creating the trust (the grantor) funds the trust with assets for the benefit of the grantor or other beneficiaries such as friends or family during their lifetime. Like other trusts, the grantor may name themselves as the trustee, whereby the grantor will also handle managing the trust's assets.
Applying this strategy is effective, particularly if the value of the assets can be increased through investment or the grantor becomes incapacitated or unwilling to continue as trustee. Under these circumstances, a successor trustee can be designated to manage the trust's assets.
Grantors establishing a blind trust, who wish to be the beneficiary as well, should also elect to choose an attorney or a financial institution to act as trustee rather than serve in the dual role of grantor and trustee, particularly when granting discretionary authority over trust assets to a trustee.
Further, in the case of lottery winners or those who wish to insulate themselves due to conflict of interest considerations, the trust document should appoint a trustee and name the grantor as the beneficiary. It is important to note that since a blind trust is an irrevocable trust, you may not control assets held in trust.
Therefore, if you specify in the trust agreement that trust assets are to be distributed in periodic payments, this cannot be changed without revoking or amending the trust. The final step in this process involves funding the trust or transferring the title to assets to reflect administration by the trust.
Hiring a Blind Trust Lawyer
A blind trust attorney can provide an evaluation as to whether this structure is an appropriate asset management vehicle. Blind trusts are not commonly used. Therefore, it is important to understand that a simple boilerplate solution will not be sufficient. Blind trust law can be complex. Further, improperly setting up a blind trust can lead to its beneficiaries being frustrated or cause excess tax liability for the beneficiary.
Therefore, counsel experienced in blind trust law can provide advice whether this an appropriate financial planning tool. Discussing your options with counsel experienced in blind trusts is an important first step in this decision-making process.