There are quite a few situations where a person, usually a politician or an executive in the area of sports or business, is found to a position where he has to use the “tool” of a blind trust. Usually, this tool is used when this person needs to find ways to remove potential conflicts of interest.
But what is a “Blind Trust”?
A blind trust is a trust established by the owner (or trustor) giving another party (the trustee) full control of the trust. The trustee who acts as the fiduciary has full discretion over the assets and investments while being charged with managing the assets and any income generated in the trust. The trustor can terminate the trust, but otherwise exercises no control over the actions taken within the trust and receives no reports from the trustee while the blind trust is in force.
The trustor (and the beneficiary, if exists) has no control or say in how the investments are managed, including whether to buy or sell specific securities.
A blind trust can be a revocable trust, meaning the trustor can make any changes to the trust, trustee, and terminate the trust. A blind trust can also be an irrevocable trust, which means nothing can be changed once it has been established. Whether the trustor would set up a revocable or irrevocable trust depends on the particular situation and goal of the trust. An irrevocable trust, for example, can be designed so that assets are no longer the legal property of the trustor and thus preventing creditors or the government from claiming the assets.
There are challenges and issues that can arise with a blind trust, since the trustor establishing the trust is at least aware of the investment mix at the onset, and cannot realistically forget that information when weighing future decisions. The trustors may also set the rules under which the investments are managed and, of course, pick trustees that they are confident will act in a certain way in potential situations. As a result, the efficacy of a blind trust, in truly eliminating conflict of interest, is far from proven. However, in some cases the competent Authority might establish a committee which is responsible with monitoring the trustee’s decisions and at the end of the day, the efficacy of the blind trust.
Where establishing a blind trust can be expensive, there are alternative tools with similar results such as index funds and bonds.
Theo Makris, Legal Consultant – teo@makrislawoffice.com