Blind trusts can help prevent conflicts of interest — here's how to tell if they're right for you

A blind trust is a rather unique concept for many people as it predominantly applies to politicians and government officials. That being said, it does have its uses outside of these more high-profile positions. The aim of a blind trust is to prevent any financial conflicts of interest from people who are expected and required to make objective decisions that may affect their personal financial well-being.

A blind trust is most common with public officials whose decisions can directly affect the financial markets, but another example would be creating a blind trust to hide its monetary value from an individual whose behavior and actions would change if they were privy to it. Below, CNBC Select breaks down everything you need to know about a blind trust.

• How a blind trust works
• Blind trust vs. traditional trust
• How to set up a blind trust
• Who needs a blind trust?
• Pros and cons of a blind trust
• Bottom line

A blind trust is a type of living trust that separates an individual from key financial knowledge of their assets. The individual would assign their assets to a trustee who would then be in control of all of the decision-making processes regarding the assets. The individual can be involved with the conception process of the trust and help guide the creation, but once the documents have been signed, they are no longer involved in the handling of the assets.

A blind trust can contain a wide range of investments, including stocks, bonds and real estate. If you're new to investing, there are a few free stock trading platforms and investing apps CNBC Select recommends, such as E*TRADE and Robinhood*.

E*TRADE has a wide selection of ETFs and mutual funds available for zero-commission trading. It also boasts a wide collection of literature ranging from investing basics such as diversification to more complex elements like technical charts and in-depth financial data.

Robinhood* was one of the first investing apps to offer zero-commission trading, and offers access to a wide range of assets, including stocks, bonds, cryptocurrencies and even fractional shares. Robinhood* has an easy-to-use mobile interface for trading on the go and is a great way to build your own portfolio.

The largest difference between a blind trust and other types of living trusts is the level of information available to the trustor.

In a more traditional trust, the trustor has both visibility and control over the assets involved. In a blind trust, the trustor willingly waves his ability to know information about the finances involved or be involved in any decision-making processes moving forward.

A traditional trust is often used to avoid probate, reduce potential taxes on your wealth and have a larger control over its distributions. Meanwhile, a blind trust is typically only used when there is the possibility of financial conflict impacting the decision-making process of an individual who is required to remain impartial.

In general, the people involved in the creation of a blind trust are:

• The trustor or settlor. This is the person who the blind trust is set up for.
• The trustee. The person who has full control over the assets.
• A trust attorney. Trust laws can often be complex and vary from state to state, so having an expert assist with the process is recommended.

To set up the blind trust, you'll need to gather documentation proving that you own the assets that you want put into the trust and select a trustee. While it's important for the trustee to be a trustworthy individual, it should not be someone you have a close relationship with, such as a family member or friend, as the whole point of the trust is to separate yourself from your investments. You'll then create the trust agreement itself, which is where the trust attorney comes in. Once that's signed, you'll transfer the assets to the trust and cease communication with the trustee regarding how the assets are being handled.

Similar to a traditional trust, a blind trust can be revocable or irrevocable depending on the individual's preference. A revocable blind trust means that the trustor can make a number of changes to the trust, including changing the trustee or simply terminating the blind trust altogether. An irrevocable blind trust is the opposite, which means nothing can be changed once the trust is established.

A common use case of a blind trust is when an individual is elected to public office. The Ethics in Government Act of 1978 requires all government officials to disclose their financial assets unless they are transferred to a qualified blind trust. This is often utilized by public officials to avoid disclosing their personal assets as well as circumnavigating the high levels of public exposure that accompany the release of their information.

As of January 2023, the Transparent Representation Upholding Service and Trust Act (TRUST) was reintroduced in Congress which would require all members of Congress and their immediate family members to put certain assets in a blind trust "effectively banning them from trading individual stocks."

Another example of an individual who might require a blind trust would be a news reporter whose job often involves receiving knowledge of events that are yet to be published publicly. Having their assets in a blind trust can remove any shred of doubt that they might be tempted to improperly use this undisclosed information for personal gain.

Pros of a blind trust

• The largest benefit of a blind trust is it removes any responsibility for the assets from an individual. This allows them to remain impartial in their decision-making without worrying about any personal financial impact.
• Blind trusts are also great for maintaining a level of financial autonomy. If you're among the lucky few to hit a jackpot, you might consider setting up a blind trust for lottery winnings. Through the use of a blind trust, lottery winners who wish to remain anonymous can have their winnings claimed and controlled by a third-party trustee while still reaping the financial rewards.

Cons of a blind trust

• Similar to a traditional trust, there are going to be a fair amount of state and federal laws to follow, so it's recommended that you involve a lawyer which can make the process longer and more expensive.
• In a blind trust, the trustor has no control over their investments in the trust and may disagree with some decisions being made on their behalf. This is why it's important to be involved in the creation process and to find a trustee that you have set certain expectations with.

A blind trust allows individuals who are required to be impartial to still participate in the financial markets without concerns over fraudulent behavior. While blind trusts are often used by people in public office, there are a handful of other positions where unbiased individuals would require one.

Depending on the situation, determining if a trust is revocable or irrevocable will determine if changes can be made to the blind trust at a later date. In addition to appointing a trustworthy trustee, it's recommended to draft all legal documents with a lawyer to ensure the individual is satisfied with the state of the blind trust.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.

*(Review Robinhood disclosures here.)