Whose Blind Is It Anyway?

Blind trusts. We’ve heard of them because Mitt Romney (among others) made them famous. But was he really blind or was that just political cover?

Keep in mind that in every trust scenario, three roles exist: the settlor, the trustee, and the beneficiary. The settlor is the person who creates and funds a trust. The trustee is the person who holds legal title to the trust, and who also manages and distributes trust assets. The beneficiary is the person who receives distribution, and on whose behalf the trustee is managing the assets. A beneficiary can be the same person as the settlor. So here’s the question: in a blind trust scenario, who precisely is blind?

A blind trust erects a Chinese wall between the trustee and the beneficiary to effectively blind the beneficiary. In theory, the beneficiary has no information about and no influence over trust assets and management decisions. The terms of the trust endow an independent trustee with full discretion to do whatever he or she thinks is best, although as a fiduciary that person is bound by fiduciary duties to exercise the same level of care as a reasonably prudent investor standing in the same shoes.

How Blind is the Beneficiary?

Once the beneficiary resides behind the Chinese wall, he or she has no legal access to information regarding the specific assets being held and managed in trust. However, their blindness only applies to investment management going forward from the creation date of the trust. If the settlor and the beneficiary are the same person, as is generally the case, one can’t expect the settlor-come-beneficiary to magically forget what assets went in the trust in the first place. So a degree of distortion blindness might exist.

However, be aware of this one caveat: blind trusts aren’t very useful anymore. For starters, the widespread availability of index funds can give 99% of settlors enough distance from investment decisions that the need to create a special trust and pay an independent manager is unnecessary. And the driving motivation behind blind trusts, political cover, might be more of a liability than an asset nowadays.

Politicized Blind Trusts

The political cover provided by a blind trust is dubious at best. Just creating or having a blind trust can now be controversial for politicians. Some recent examples include:

Mitt Romney – he got so much mileage out of the blind trust rationalization over the course of his career that he essentially took up the entire runway.
In 2007, the Clinton’s trustee liquidated their blind trust (converted the assets to all-cash) ahead of Hillary’s primary run to stave off any appearance of conflicts of interest.
During the same campaign cycle, Barack Obama’s trust sparked a bit of controversy when it invested in the companies of a few of his major campaign donors. The blind trust facet of Mr. Obama’s trust had yet to be finalized, so these investments landed him on the front page of the New York Times.
As of 2010, only 12 of the 435 members of the House of Representatives had blind trusts.
In 2012, only 7 of 100 senators applied to get approval for a blind trust.

So there you have it. Blind trusts are ineffective at completely blinding the beneficiary, they are expensive to set up, they are magnets for political controversy, and their objective can be achieved in other ways. It’s safe to say that they are a disfavored wealth management tool.

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Misha is an estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, Misha can be reached at (703) 553-2577 or [email protected].

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