Blind Trust

A blind trust is an arrangement in which someone transfers assets to an independent trustee who manages them without telling the beneficiary what is held, so that the beneficiary cannot make decisions influenced by particular holdings. As a legal category it exists in one place: 5 U.S.C. 13104(f)(3), part of the federal financial disclosure regime, which defines a "qualified blind trust" and sets out the conditions such a trust must satisfy. Outside that context the phrase has no fixed meaning, and a private trust described as blind is an ordinary trust whose beneficiary has agreed not to be told what is in it.

What the statute actually requires, condition by condition. The definition at 5 U.S.C. 13104(f)(3) is not a description of a style of trust. It is a list, and every item has to be met.

On the trustee: the trustee and any other entity designated to perform fiduciary duties must be "a financial institution, an attorney, a certified public accountant, a broker, or an investment advisor" who "is independent of and not associated with any interested party so that the trustee or other person cannot be controlled or influenced in the administration of the trust by any interested party," who "is not and has not been an employee of or affiliated with any interested party and is not a partner of, or involved in any joint venture or other investment with, any interested party," and who "is not a relative of any interested party." The same three tests apply to any officer or employee of the trustee involved in managing the trust. "Interested party" is defined as the reporting individual, their spouse, and any minor or dependent child.

On the instrument: it must provide that the trustee "shall not consult or notify any interested party" in exercising authority over the assets; that the trust will hold no asset the interested party is prohibited from holding; that the trustee "shall promptly notify the reporting individual and the reporting individual's supervising ethics office when the holdings of any particular asset transferred to the trust by any interested party are disposed of or when the value of such holding is less than $1,000"; that the trust's tax return is prepared by the trustee and not disclosed to the interested party; that the interested party receives no report on holdings or sources of income except a quarterly report on total cash value or net income, "but such report shall not identify any asset or holding"; that communications between trustee and interested party are restricted to a short list of written subjects; and that "the interested parties shall make no effort to obtain information with respect to the holdings of the trust."

And on approval: "The proposed trust instrument and the proposed trustee are approved by the reporting individual's supervising ethics office." The Office of Government Ethics has stated the timing in an advisory dated May 10, 1988: OGE "must approve proposed qualified blind trust arrangements prior to the time the instruments are executed and the assets placed within the trust," and otherwise "the instrument will not be recognized as creating an efficacious blind trust under the Ethics in Government Act." Approval is a precondition, not a formality that can be caught up on afterwards.

The fact that is most often stated backwards. Funding a qualified blind trust does not clear the conflict on what was put into it. Section 13104(f)(4)(A) provides that "An asset placed in a trust by an interested party shall be considered a financial interest of the reporting individual, for the purposes of any applicable conflict of interest statutes, regulations, or rules of the Federal Government (including section 208 of title 18), until such time as the reporting individual is notified by the trustee that such asset has been disposed of, or has a value of less than $1,000."

The Office of Government Ethics' own regulation gives the reason, in one sentence: "Because the interested party knows what assets he or she placed in the trust and there is no requirement that these assets be diversified, the possibility still exists that the interested party could be influenced in the performance of official duties by those interests." So the blindness accrues over time as the trustee sells the original holdings and buys things the official knows nothing about. On day one the official knows exactly what is in there, and the law treats them accordingly.

A separate instrument, the qualified diversified trust, works the other way. Under 5 U.S.C. 13104(f)(4)(B) and 5 CFR 2634.403(b), it may hold only readily marketable securities meeting diversification requirements, none of them in entities with substantial activities in the official's primary area of responsibility, and the conflict of interest laws then do not apply to the assets transferred in, because "the diversification achieves 'blindness' with regard to the initial assets."

What a private blind trust is, and is not. Nothing stops a private individual from creating a trust, appointing an independent trustee, and instructing that trustee not to tell them what it holds. What that arrangement does not do is worth stating plainly. Nobody certifies it, because the approval mechanism belongs to federal ethics offices and exists for people with disclosure obligations. It produces no legal effect on any conflict, because the attribution rule in section 13104(f)(4) is part of a statute about federal officials. It does not make the owner anonymous: the trust is still theirs, the trustee knows who the beneficiary is, and questions of what creditors can reach and what the public can discover are governed by ordinary trust law and belong to the entries on asset protection and spendthrift provisions. And it does not change the income tax treatment, which depends on how the trust is structured and not on what it is called.

What it does do is real but narrow: it prevents the beneficiary from acting on knowledge of particular holdings, which can matter to someone who trades on their own account, sits on a board, or wants to remove the temptation to interfere with a manager. That is an ordinary trust with an information restriction, and describing it as a blind trust invites the reader to think it is the statutory instrument.

1. The instrument is drafted to the statutory list, covering the trustee's independence, the no-consultation rule, the limits on reporting, the restriction on communications, and the undertaking that the interested parties will make no effort to learn the holdings.

2. A qualifying trustee is identified, meaning a financial institution, an attorney, an accountant, a broker or an investment adviser who is not an employee, affiliate, business partner or relative of the official, spouse or dependent children.

3. The supervising ethics office approves both the instrument and the trustee, before signing and before funding. Approval after the fact does not create a qualified blind trust.

4. The assets are transferred in, and they must be free of restrictions on transfer or sale unless the ethics office has expressly approved the restriction.

5. The trustee manages and sells without consulting, and reports the disposal of any originally transferred asset, or its falling below $1,000, to the official and the ethics office.

6. The official receives only a quarterly figure, either total cash value or net income or loss, identifying no asset.

7. The conflict clears asset by asset, as each original holding is reported gone.

A hypothetical showing step 7. Rowan funds a qualified blind trust with $2,000,000, including $300,000 of stock in one company. From the moment of funding, section 13104(f)(4)(A) treats that $300,000 holding as Rowan's financial interest for conflict of interest purposes, including 18 U.S.C. 208, even though the trust now owns it. The trustee sells most of the position and notifies Rowan that $290,000 of it has been disposed of, leaving $10,000. That does not clear it: the statute lifts the attribution when the asset has been disposed of, or when its value is less than $1,000, and $10,000 is neither. Only when the trustee reports the remaining position sold, or reports its value below $1,000, does the attribution end. Everything the trustee has bought in the meantime with the proceeds is genuinely blind to Rowan, which is the part of the arrangement that works from the first day.

What the statutory instrument achieves

• It removes the beneficiary's knowledge of particular holdings, so decisions cannot be shaped by them.
• The trustee's independence is defined by statute rather than asserted, with tests covering employment, business ventures and family relationships.
• Approval by a supervising ethics office puts an outside body between the official and the terms of their own arrangement.
• Reporting is limited by law to a figure that identifies nothing, so compliance does not itself reintroduce the knowledge.
• The conflict on original assets clears automatically as the trustee reports each one sold, without anyone having to certify a state of mind.

What it does not do, and what a private version does not do at all

• It does not clear the conflict on the assets that went in. Those stay attributed until reported sold or worth less than $1,000.
• The official still knows what they contributed, and the statute assumes so, which is why the attribution rule exists.
• It is unavailable as a legal category to anyone without a federal reporting obligation, because the approval mechanism belongs to ethics offices.
• A private trust described as blind is certified by nobody, produces no conflict of interest effect, and does not by itself make an owner anonymous.
• The beneficiary gives up control of assets they may have strong views about, to a trustee they may not choose freely, and pays for the service.
• Setting one up is slow, because approval has to come before execution and funding rather than after.