What Is a Blind Trust?
It is hardly unusual for someone to be elected to political office after achieving success in the private sector. But red flags are raised when a newly elected official's current investments or business interests stand to benefit from policy decisions made through that office (whether directly or through appointed officials). This is what's called a conflict of interest, which creates a perception of impropriety regardless of actual intentions. One way to minimize such concerns is to establish a "blind trust," in which the elected official transfers control of his or her assets to a trustee.
The following information will help you understand what blind trusts are and how they're set up, their use in both the public and private sector, how federal law addresses potential conflicts of interest with elected officials, and more.
What Is a Blind Trust and When Are They Used?
As its name implies, the purpose of the blind trust is to ensure that the beneficiary of the assets in question -- whether it's a C-level executive or the President of the United States -- is "blind" to how these assets are being managed. They typically are formed when someone's position of authority provides an opportunity for "self-dealing" through policy decisions or inside information. Additionally, lottery winners often set up blind trusts in order to protect their privacy.
For example, a corporate executive who is compensated with shares of the company's stock might set up a blind trust to manage these shares. This not only eases concerns over insider trading, but also allows her to avoid certain restrictions on trading securities. Similarly, an elected official with business interests in other countries may be tempted to use his office to ease trade barriers or otherwise enrich himself through policy decisions. A blind trust, at least in theory, would alleviate some of these concerns.
How Blind Trusts Are Set Up
Additional state and federal regulations often apply to elected officials with potential conflicts of interest, but blind trusts are generally set up as follows:
- Review the trust laws in your state (for example, the Fair Political Practices Commission of California prohibits elected officials from naming family members as trustees of a blind trust).
- Gather all relevant documentation pertaining to the assets that will be transferred to the trust upon its formation.
- Find a trusted and financially responsible individual to serve as trustee (check state and federal laws for limitations on who may be a trustee).
- With the help of an attorney, draft a trust agreement, including the way in which assets should be dispersed and when the blind trust expires.
- Agreement must be signed and notarized (depending on state law, you may have to report the trust to the state), followed by the transfer of assets to the trust.
Business interests and other non-liquid assets generally must be liquidated prior to being transferred to a blind trust. So an elected official who runs a business, for instance, would have to sell that business before the proceeds are transferred. Stocks, bonds, and other financial assets may be transferred directly to the trust.
Blind Trusts in the Public Sector
The federal Ethics in Government Act of 1978 requires government officials to disclose their financial holdings unless they are placed in a qualified blind trust. They are not required to sell off their assets or transfer them to a blind trust, but many do in order to avoid scrutiny or the appearance of conflicts of interest.
A qualified blind trust is defined as "any trust in which a reporting individual, his spouse, or any minor or dependent child has a beneficial interest in the principal or income" and meets these requirements:
- Independent Trustee - Not subject to influence by, affiliated with, nor related to the government official.
- Transferable Assets - Assets transferred to the blind trust must not be restricted, meaning they may be sold or transferred by the trustee without interference.
- Required Provisions - The trust must contain certain provisions intended to prevent the government official from advising on the assets or communicating with the trustee.
- Approval of Trust and Trustee - The government official's supervising ethics office must approve of both the trust and the trustee
Most states have similar laws for state government officials, which closely align with federal regulations under the Ethics in Government Act.
Contact a Trusts Attorney for More Information About Blind Trusts
Most people will never encounter a blind trust, as they're primarily used by high profile corporate executives and elected officials with substantial financial assets. Regardless, it's advised that you seek the counsel of a trusts attorney if you need to set up a blind trust.