What Is a Blind Trust?

By Markets Fool.com

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A blind trust is a type of trust fund that's designed to mask the assets therein from the person or persons designated to receive the proceeds. Most often associated with politicians, blind trusts theoretically sever any link between a person and control over his or her assets in order to avoid potential conflicts of interest.

Let's say, for example, that Mitt has accumulated a sizable estate of $250 million. He's done so by founding and running a successful private equity company. After two decades of doing so, he wants to give back to society by serving in the government. He accordingly decides to run for President of the United States.

But there's one problem: because of the size of his estate, it holds a vast array of assets, some of which are situated in China. Thus, to avoid allegations that he may go soft on China as a result of these holdings, Mitt transfers his estate into a blind trust, designating his tax lawyer as the trustee to make any and all decisions about how the assets are invested from that point forward. By doing so, Mitt can now claim that he has no incentive to mold his potential policies as president around his personal holdings, as the latter are now under the control of a third party.

Generally speaking, a blind trust is no different than any other type of trust. It requires a settlor to fund the trust -- in the example above, Mitt, a trustee who takes legal possession of the assets and agrees to administer them on behalf of a third party, and the identification of a beneficiary who will receive any income and benefits from the trust. These are simple devices that can be created with as little as a transfer of property and a verbal agreement between a settlor and a trustee in which the latter agrees to hold and administer the assets on behalf of the designated beneficiaries.

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What's different about blind trusts in particular is the level of discretion handed over to the trustee and the identity of the various parties. As Legal Zoom explains:

In a blind trust, a settlor transfers assets to a third party who has complete discretion in how to use or invest the assets. In the typical blind trust, the settlor is also the beneficiary; thus, the trustee is managing the assets for the benefit of the settlor. However, the settlor/beneficiary can't give any instructions to the trustee about what to invest in; he has absolutely no knowledge of how the assets are invested or what they're being used for.

In short, blind trusts serve a narrowly defined function of giving politicians an effective way to sidestep allegations that their personal finances will influence decisions they make on behalf of their constituencies. As such, these aren't used as frequently as trusts meant to shelter a person's assets from estate taxes or creditors. But for someone who needs one, and after consulting with an accountant or tax attorney, blind trusts can play a vital role in allowing the person to navigate the potential chasm between private wealth and public life.

The article What Is a Blind Trust? originally appeared on Fool.com.

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