Benefits of Establishing a Blind Trust in your Estate Plan
Our previous article New Legal Regime on Registration of Family Trusts in Kenya enumerates the multiple benefits a family trust has as the ideal tool for succession and estate planning. In today’s article, we delve into the concept of blind trusts which is a type of trust arrangement lauded for its effectiveness in preventing see-through to the assets held by the trust.
What is a Blind Trust?
A blind trust is a living trust that is controlled by the trustees. It is created to intimate that the settlor (the person whose assets are transferred to the trust) and the beneficiaries have little control or knowledge of the status of the assets held in a blind trust. Blind trusts have been used in the past by renown government officials such as former US. Presidents Jimmy Carter, Ronald Reagan, Bill Clinton, George W. Bush to name a few, and are designed to prevent conflicts of interest and maintain privacy.
What is the nature of a blind trust?
Blind Trusts are typically living trusts meaning they are created and operated during the lifetime of the settlor. They are commonly revocable but may take the nature of an irrevocable trust. A revocable trust is one where the settlor retains the power to terminate or modify the trust deed at any time. Inversely, an irrevocable trust is one where the settlor does not have a right to recall the trust. The Settlor cannot revoke the trust.
The benefits or entitlements payable to a beneficiary within a blind trust may either be fixed or fluid as per the terms of the trust deed. Fixed entitlements imply pre-determined distribution of benefits to the named beneficiaries, for example, the trust deed could provide that 33% of the income generated by the investments in the trust be allocated to Beneficiary X. On the other hand, where the entitlements are not fixed, the trust is discretionary and the trustees retain full control on the distribution of assets. A blind trust can also be structured as partly fixed and partly discretionary.
For avoidance of doubt, please note that even within a fixed blind trust, the trustees exercise full discretion on the management and administration of the trust including the powers of investment and any other powers of the trustees.
What are the benefits of establishing a blind trust:
1. Avoid conflict of interest:
Typically, blind trusts are created by public officeholders or politicians who want to separate their personal affairs and political roles in order to avoid conflict of interest while undertaking their duties in public office.
For example, the use of blind trusts can be traced back to the United States’ Ethics in Government Act of 1978 which came into force after Former President Nixon’s infamous Watergate scandal. Inquiries by the Watergate investigators and Congress revealed an administration that was prone to abusing its power through secret use of military force, domestic spying, bribery and the misuse of government machinery to attack political opponents. It was for this reason that the Ethics in Government Act was enacted in the US and introduced the concept of blind trust to prevent government officials from using government resources in their personal affairs. This helped restore public confidence in public officials as it became a popular tool for avoiding conflict of interest in public office.
2. Separation of Assets
A blind trust can be used to hold assets in the case where the founder of the trust does not want to disclose to his or her family members, peers, friends or the general public that they have obtained high value assets, properties or large amounts of money. It helps maintain much needed secrecy from third parties especially in the case of lottery winners or persons who have inherited huge amounts of money from their families.
A blind trust would allow one to separate assets and therefore not have to disclose the assets held in the trust as their assets. This placing of assets in a blind trust means one ceases to be the legal registered owner of the assets. A trust being a separate legal entity would then own the assets with the founder or settlor remaining as a beneficiary. This is effective and useful in maintain privacy as well mitigating risk especially for high net worth individual serving in senior public services offices or in volatile political landscapes.
3. It ensures privacy of personal investments devoid of public scrutiny
Blind trusts are also an effective way of reinforcing privacy and are used by high net worth individuals to achieve a high level of privacy in respect of their assets and private investments; safeguarding them from public scrutiny. This was the case back in 2019 when the current UK Prime Minister Rishi Sunak put his investments into a blind trust after he was appointed Chief Secretary to the Treasury in the UK. Rishi came under pressure by the opposition and transparency groups in the UK to reveal details of his financial interests, which he had no obligation to do since he was not in control over the investments held in the blind trust. Similarly, in Kenya, setting up a blind trusts protects the founder of the trust from having to disclose to the public the value of the assets held by the trust. This comes in handy especially during the vetting of political appointees, for example, cabinet secretaries who were recently requested by various parliamentary committees to disclose their net worth.
4. It is an excellent asset protection mechanism:
Political appointees such as Cabinet Secretaries or Principal Secretaries are often at risk of freeze orders as a result of biased investigations by government agencies. They often find themselves in a situation where they cannot access their funds and properties even to simply provide for their families. Establishing a blind trust leads to the transfer of the founder’s personal assets to the trust such that they become trust assets. Due to the change of legal ownership, trust assets cannot be subject to a freeze orders issued against such a political appointee in his personal name
What are the key safeguards when establishing a blind trust?
- The settlor should consult seasoned Wealth and Private client lawyers to assist them in drafting the trust deed in order to meet their unique objective without risking the trust being declared a sham trust.
- The settlor should exercise great caution when selecting the trustees of their blind trust. The appointed trustees should be of high integrity, independent, reliable and able to administer the trust strictly as per the terms of the trust deed. Corporate Trustees who are licensed and regulated make for good independent trustees in such a scenario. These are usually companies which are well capitalized and required to make annual reports to the regulators thereby mitigating the risk of truancy or misappropriation of assets by such trustees. (hyperlink article on Njenga Karume).
- The settlor can consider appointing an enforcer to the trust to ensure that the interests of the beneficiaries are upheld. Kenyan statutes on trusts have recently been amended to introduce the office of an enforcer (also popularly known as a protector in the UK), separate from the office of the trustee, who is usually appointed for purposes of safeguarding the interest of the beneficiaries as well as supervising the trustees and preventing cases of breach of trust.
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How can we help?
The Wealth and Private Clients team at CM Advocates LLP prides itself in having a wide variety of resources, skills and experience on matters estate planning spanning, trust management and trust administration spanning across the East African Region. It offers an edge to its clients based on its legacy of having structured, re-structured, amended, incorporated several forms of trusts and therefore well capable of guiding you through the process of creating a valid blind trust.
Should you have any questions regarding the subject of establishing a blind trust or a family trust, or related topic, please do not hesitate to contact us on firstname.lastname@example.org or email@example.com