What is a Blind Trust and How Do You Set One Up?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Written By

Updated on Wednesday, March 11, 2020

A blind trust allows you to grant control of your financial assets to another party, called a trustee, who manages them for you. There are a variety of trusts that serve different purposes; blind trusts are for people who need to avoid potential conflicts of interest that could arise between their work and their investments.

What’s the difference between a blind trust and a normal trust?

The main difference between a blind trust and other trusts is that neither the grantor nor the beneficiary know where funds in the trust are invested, or have any real say in how they are being invested.

Every trust establishes a fiduciary relationship between someone who owns financial assets and someone who manages those assets. In most cases, when setting up a trust there are three parties involved:

  • The grantor: The person who owns the assets and creates the trust.
  • The trustee: A party chosen by the grantor to manage the trust.
  • The beneficiary: The party who is entitled to receive financial benefits from the trust.

In many trust arrangements, the trustee and grantor communicate regularly regarding the administration of a trust. The beneficiary is typically aware of what’s in the trust or at least what trust assets they’re entitled to.

In a blind trust, the trustee alone knows where funds in the trust are being invested. A blind trust is a way to limit the beneficiary’s knowledge about what’s held in trust and how those assets are managed, says Patrick Hicks, head of legal at online estate planning company Trust & Will.

How does a blind trust work?

An independent trustee manages blind trust assets on the grantor’s behalf. The named beneficiary or beneficiaries have no knowledge of what’s in the trust or what decisions the trustee makes with those assets. Meanwhile, the trustee isn’t required to report to the grantor regarding trust activity. In addition, the grantor of a blind trust may choose to remain anonymous.

This doesn’t mean the trustee can do whatever they like with trust assets, however. As with all trusts, the trustees are fiduciaries, which means they’re required to act in the best interests of the trust beneficiaries.

Revocable vs. irrevocable blind trust: What’s the difference?

A blind trust can be revocable or irrevocable. The difference between the two hinges on whether you can change the terms of the trust once it’s established.

  • Revocable blind trust: You have the power to change, revoke or terminate the trust at any time. For example, you may want to add assets to the trust while moving others out. Or name a different trustee or add beneficiaries to the trust.
  • Irrevocable blind trust: This version is permanent. Once you’ve established the blind trust, named the trustee and transferred assets to his or her control, you have no further ability to make changes to the trust terms.

Whether it makes sense to establish a revocable or irrevocable blind trust depends on your reasons for creating the trust. If you don’t anticipate making further changes, then an irrevocable trust could meet your needs. On the other hand, a revocable blind trust gives you flexibility if you think the trust terms might need to be amended down the line.

Who needs a blind trust?

Technically, anyone could set up a blind trust. But typically they’re only used in situations where people need to separate themselves from their assets. A common scenario where that might be necessary is to avoid professional conflicts of interest.

Publicly elected officials may choose to set up a blind trust. The Ethics in Government Act of 1978 requires government officials to disclose assets unless they’re held in a qualified blind trust. Transferring assets to a blind trust can help lawmakers and other government officials minimize the potential for conflicts of interest by keeping their political and financial lives separate to a degree.

Hicks offers an example using a publicly-elected judge. If the judge is overseeing a case that could impact the value of the company in which he or she is invested, that could present a conflict of interest if their decision could affect the value of said investment. A blind trust would offer a legal safety net against that conflict.

Corporate executives and individuals who serve on a board of directors may also consider a blind trust to hold assets to avoid a similar scenario. Doing so could help them sidestep any financial dealings that could possibly create a conflict of interest.

Corporate insiders are subject to federal regulations that prevent insider trading and other illegal activity. With a blind trust, the trustee would have authority to buy or sell shares of company stock held in the trust allowing the executive to avoid violating any federal trading guidelines.

I just won the lottery, do I need a blind trust?

A blind trust is something you might be interested in creating if you win the lottery. When you have a blind trust, lottery winnings can be claimed in the trust’s name instead of your own. That means you can stay anonymous, which is something you might prefer if you don’t want a lot of people knowing about your windfall.

This might only be possible to do if you live in a state that doesn’t require lottery winners to disclose their identity. As of 2021, these states have laws or lottery board policies that allow winners to stay anonymous:

  • Arizona (for prizes of $100,000 or more)
  • Delaware
  • Georgia (for prizes of $250,000 or more)
  • Kansas
  • Maryland
  • Mississippi
  • New Jersey
  • North Dakota
  • Ohio
  • South Carolina
  • Texas (for prizes of $1 million or more)
  • Virginia (for prizes of $10 million or more)
  • West Virginia (for prizes of $1 million or more)

Aside from anonymity, a blind trust could also be helpful if you’re concerned about preserving your lottery winnings. By transferring the money into a trust, you can dictate when you and your beneficiaries should receive payouts.

How to set up a blind trust

The first step in setting up a blind trust is meeting with a qualified attorney, who can help you determine whether a blind trust is something you need and which laws in your state have to be observed for establishing one. You can also involve a financial advisor in this process.

From there, you can go through the mechanics of creating and funding the trust, which includes:

  • Determining which assets will be placed in the trust.
  • Collecting relevant documents related to those assets, such as deeds to real estate or stock certificates.
  • Choosing an individual or financial institution, such as a wealth management firm, to act as trustee.
  • Deciding whether to create a revocable or irrevocable trust.
  • Drafting the trust document and funding the trust by transferring assets to it.

Depending on where you live, the trust document may need to be notarized and recorded with your register of deeds or another state agency for it to be completely legal.

Do you need a blind trust?

A blind trust can help shield you from conflicts of interest related to your finances. That may be important if you have a high-profile job in the public sector or a private sector role that’s heavily regulated. A blind trust can also be helpful in managing lottery winnings if you’d rather you keep your newfound wealth under wraps or put safeguards in place to protect those assets.

The main challenges of blind trusts are the cost as well as the lack of transparency and control. First, setting up the trust usually means paying the blind trust attorney’s fees, which could be substantial since this type of trust tends to be more complex than other trust options. Beyond that, there are ongoing costs associated with maintaining a trust, including the administrative fee paid to the trustee for their services. Hicks says the initial setup costs can run in the tens of thousands, while annual management fees can run as high as 3% of trust assets.

On the transparency and control side, your beneficiaries won’t know what the trustee is doing but then again, neither will you. That could make a blind trust less than ideal if you’re more of a hands-on type when it comes to managing your assets.

Bottom line, blind trusts can serve a specific purpose in estate planning. Talking to an estate planning attorney can help you decide whether establishing one is the right move.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.