Blind trusts are typically associated with politicians who seek to avoid conflicts of interest while occupying public office. However, Donald Trump, Barack Obama and Hillary Clinton are not the only ones who have had to consider this unique planning tool. Executives in the private sector can also benefit from blind trusts to remain in compliance with securities and insider trading laws while accomplishing their personal and financial objectives.
A blind trust is a device whereby the creator (the “grantor”) places assets into trust to be managed by an independent trustee without his or her knowledge or participation. Blind trusts have been a frequent topic of conversation recently, as President Trump was asked if he would follow tradition by transferring his business interests to a blind trust to be managed by an independent trustee. Trump’s response—that he would transfer control of his businesses to his children and former business associates instead—raised eyebrows throughout the political and financial establishments. It remains to be seen if his “alternate plan” will be workable in practice and comply with government conflict-of-interest laws.
Different rules apply to blind trusts in the public and private sectors. If the grantor of a blind trust is a government official, the trust must comply with the Ethics in Government Act of 1978, which applies to all three branches of the federal government. The Ethics Act requires that a qualified blind trust meet four requirements: (1) the trust must name an independent trustee who meets certain standards of independence; (2) the assets placed into trust must be transferable by the trustee; (3) the trust instrument must contain certain provisions to ensure that the grantor and trustee do not communicate with each other about investment decisions; and (4) the trust instrument and trustee must be approved by the grantor’s supervising ethics office before signing, and a copy of the signed trust and a list of transferred assets must be filed with the supervising office.
In the private sector there is no prescribed form for blind trusts, but they are similar in content and contain the same basic features of management by an independent trustee and “mutual blindness” between the grantor and trustee. However, private blind trusts must take into account additional issues that apply more often to business executives—things such as insider trading laws and regulatory oversight by the particular industry involved. These trusts involve the intersection of wealth management, ethics, estate planning and tax planning, and require the assistance of capable legal and financial advisors. Attorneys, accountants and investment advisors should be aware of blind trusts as a potentially powerful tool in accomplishing their clients’ objectives.
What are some practical uses for a blind trust in accomplishing the goals of a business executive?
• Diversification. Given the trend of executive noncash compensation, blind trusts allow business leaders to diversify their assets beyond their own companies and better manage portfolio risk. The sale of securities by a blind trust is less likely to be perceived as a sign of trouble than if a corporation’s securities are sold directly by an executive of the company.
• Compliance with fiduciary duty. Stock can be bought and sold by the trustees of a blind trust without running afoul of insider trading and other securities laws. A blind trust allows the executive’s investments to be managed effectively without breaching the executive’s duty of loyalty to the company. Blind trusts also allow a corporation’s stock to be sold at any time, rather than during the limited “open window” periods often imposed on executives to keep them from benefiting from material, nonpublic information.
• Professional management. The independent trustee is typically a professional with experience in wealth management and financial planning. This can be a significant benefit to a busy executive with limited time to devote to personal investment management.
• A customized plan. Blind trusts in the private sector can be revocable or irrevocable and are typically set up as “grantor trusts” for income tax purposes. A blind trust can specify the event terminating the trust (such as an executive’s death, incapacity or departure from a company) and can specify the timing, frequency or price limits of security sales in accordance with a plan for liquidating the executive’s portfolio.
• An income stream. Blind trusts can be useful for executives who receive a substantial part of their compensation through stock by providing a more dependable stream of income while the stock is restricted or appreciating in value.
• Estate planning. Assets placed inside of a blind trust will avoid probate in the event of the grantor’s death. A blind trust can also be used for tax planning and asset protection, depending on the type of trust used and the beneficial interests created by the trust. Blind trusts can even be structured to fulfill charitable giving objectives by naming tax-exempt organizations as present or remainder beneficiaries.
Blind trusts offer an array of benefits and should be considered as a potentially valuable planning technique for individuals in business or public service. Estate and financial planners should be aware of the benefits as well as pitfalls of blind trusts and must take care to structure these trusts in accordance with applicable law and the specific circumstances of the grantor. Properly used, blind trusts can offer significant value while allowing people of influence to avoid conflicts of interest in their wealth management.
Kathryn E. Szewczyk and Christopher G. Mehne are attorneys in the estate, financial and tax planning practice area of Bowditch & Dewey LLP, a Massachusetts law firm.
