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What is a Blind Trust and How Does it Work?

Written by: Daniel A. Prestosh on January 31, 2017 | Category: Blog | Tags:

Anyone who has been following news lately has likely heard the term “blind trust” referenced often. While I will avoid engaging in any political discourse on this topic, an overview of a “blind trust” and its purposes is a timely topic for review.

A “blind trust” is a fiduciary arrangement in which the beneficiary of the trust is not allowed to handle, manage, or even have knowledge of the assets within the trust. In such cases, a trustee is appointed to maintain complete discretion over the management of the blind trust. The trustee is subject to certain rules for management of the fund, set by the beneficiary.

The obvious questions that come to mind are: why would an individual seek to maintain a trust over which he or she maintains no control and what is the purpose of such a trust?

A blind trust ensures that its beneficiaries are unaware of the assets of the trust and therefore cannot be accused of a conflict of interest with regard to trust assets. This is especially important for politicians, public officials, government employees, or other individuals holding sensitive positions because these individuals may wield power to direct public monies to the private sector. If such an individual is known to hold certain assets in the private sector, allegations of partiality could arise if any public monies are used to benefit companies in which the individual maintains investments. However, if such individual has no knowledge of specific assets in the trust, allegations of conflicts of interest are avoided.

18 U.S.C. Section 208, and other relevant statutes, mandate that government officials and employees must avoid conflicts of interest in carrying out his or her official duties. Federal regulations have been enacted to adopt a “qualified blind trust” recognized to insulate trust beneficiaries from conflicts of interest. In order for a qualified blind trust to be recognized, the trustee must not be affiliated, associated, related to, or subject to the control or influence of the beneficiary. Furthermore, the trustee should not be a present or past advisor, partner, accountant, attorney, or relative to the beneficiary. Of course, the beneficiary will know of the assets that are initially placed into a blind trust, thereby continuing the potential conflict of interest until such assets are replaced or significantly reduced. Pursuant to 5 C.F.R. 2634.403, until the initial assets of a qualified blind trust are replaced or reduced below the threshold of $1,000.00, there remains a potential for conflicts of interest to occur. Accordingly, the trustee should be directed to replace or reduce initial assets as quickly as possible to effect the purposed of the qualified blind trust.

The efficacy of blind trusts is still questioned by some because the beneficiary is able to select his trustee and set rules for management of investments. However, a blind trust does erect a “wall” between the beneficiary and assets that could conflict with the performance of duties and is presently recognized to be the best means of avoiding conflicts of interest with regard to investments held by public officials.

Attorney Daniel A. Prestosh is a member of the firm’s Business Services Group, providing counsel to business owners and corporations.

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