What Is a Blind Trust in Arizona?

A blind trust is a type of trust in which neither the settlor/trustor (the person who creates the trust) nor the trust’s beneficiaries can control the trust’s assets or influence the trustee’s management. Instead, the trustee has complete discretion to manage those assets, including selling them and buying new assets with the proceeds, as guided by the trust document’s terms.

How Is a Blind Trust Established in Arizona?

A trustor may create a blind trust by executing a trust document that appoints a trustee and gives them complete discretion in managing trust assets. The trust document can also establish guidelines or restrictions consistent with the trustor’s preferences, such as directing the trustee not to invest in tobacco companies.

The trust document should state that the trustor and the trust’s beneficiaries cannot communicate with the trustee regarding the management of trust assets, nor can they receive information about the trust’s holdings. After creating the trust, the trustor can transfer their money or assets to the trustee, who can then buy or sell investments or assets as they deem prudent.

What Is the Purpose of a Blind Trust?

A blind trust ensures that a settlor and the trust’s beneficiaries have no knowledge of the trust’s current assets or investments and cannot control or influence how the trustee manages trust assets. So, blind trusts avoid conflicts of interest that beneficiaries may have between their work and financial interests.

What Is the Difference Between a Blind Trust and a Trust?

Blind trusts differ from ordinary trusts because the settlor and beneficiaries of the trust do not know how the trustee has managed and invested the trust’s assets, nor can they control or influence the trustee to manage the trust in a specific way.

In contrast, a beneficiary of an ordinary trust may receive or demand an accounting from the trustee that documents how the trustee has managed the trust and what investments they have made with the trust’s assets. A settlor may also amend or revoke a revocable trust. In ordinary trusts, trustees frequently consult settlors and beneficiaries regarding the trust’s management. A settlor can also name themselves as a trustee to manage their assets for their benefit and the benefit of other beneficiaries.

When Might a Blind Trust Be Necessary?

Certain circumstances might necessitate the creation of a blind trust. For instance, resolving conflicts of interest between a settlor’s professional duties and personal finances may be necessary.

An elected official or judge may place their wealth into a blind trust to avoid conflicts of interest or the appearance of them. Since the official cannot know how the trustee has invested their money, their financial interests cannot influence how the official exercises their duties. Blind trusts can relieve public officials from recusing themselves from various matters.

Corporate officials may also need a blind trust to avoid the appearance of engaging in insider trading. Since a corporate officer cannot control how a trustee manages the officer’s investments or stock holdings, the officer cannot direct the trustee to buy or sell stock based on non-public information the officer knows. Blind trusts can also help corporate officers avoid any appearances that they have acted to further their financial interests rather than the company’s best interests.

What Are the Advantages of a Blind Trust?

Some of the benefits of placing wealth into a blind trust include:

• Avoiding the appearance of conflicts of interest – Blind trusts can eliminate any appearance of conflict between an individual’s professional duties and financial interests since the person does not control or influence the trust.
• Preventing the need for recusals – Officials sometimes need to recuse themselves from specific professional duties that may create an appearance of a conflict of interest. However, they can avoid having to do so by keeping their financial interests in a blind trust, since their lack of knowledge of their financial holdings and inability to control the management of their wealth means their economic interests cannot influence their decisions.
• Maintaining financial privacy – The beneficiary of a blind trust cannot know what assets or investments the trust owns. So, a blind trust can help keep the beneficiary’s wealth and financial interests private.

Are There Disadvantages to a Blind Trust?

However, blind trusts can also have downsides, including:

• Loss of control over wealth – A person who places their wealth into a blind trust gives up the ability to manage their investments to the trustee.
• Obligation to depend on the trustee’s skill – Because the trustee has full authority to manage trust assets (within the guidelines set by the trust document), a beneficiary’s financial interests depend entirely on the trustee’s skill in managing investments. Poor decision-making by the trustee of a blind trust may cause a beneficiary to lose hard-earned wealth.
• Additional administrative expenses – Blind trusts often incur more administrative costs than managing one’s wealth independently. A blind trust will require a settlor and beneficiaries to pay an independent trustee to manage the trust. The trustee may also incur other expenses to preserve the secrecy of the trust’s holdings.

Furthermore, some people have criticized the effectiveness of blind trusts in eliminating conflicts of interest. Because a settlor knows what investments or holdings they put into the trust, that information may continue to influence their decision-making. Alternatively, a settlor may select their long-time financial advisor to serve as trustee of the blind trust and use their knowledge of the advisor’s tendencies to predict what investments the advisor may make.

Contact an Arizona Wills and Trust Attorney

Are you interested in incorporating a blind trust into your estate plan? If so, talk to an experienced estate planning lawyer to help you determine its suitability for your legal and financial needs and goals. At Mushkatel, Gobbato, & Kile, P.L.L.C., we can provide an initial consultation and explain more about the benefits and disadvantages of blind trusts.

Our legal team has over 50 years of combined experience helping clients plan for the future. As a full-service law firm, we can help you with estate planning, estate litigation, special needs and benefits planning, and guardianship/conservatorship. Contact us today to get started.