There is been a lot of discussion in the news lately about Donald Trump needing to transfer his investments to a blind trust. For example, the Wall Street Journal suggested in a November 17, 2016 editorial that Donald Trump transfer his real estate holdings so he does not have a conflict of interest in serving as President of the U.S. The conflict of interest concern is that Mr. Trump could push for legislation that will benefit his businesses, thus making his family money, whether or not it is good for the U.S.
So, what is a blind trust anyway? A “blind trust” is a common name for a variety of irrevocable trust in which a person names an independent person to manage the person’s assets. Let me start from the basics and explain so you understand.
A trust is a type of legal vehicle roughly similar to a corporation. You can’t feel or touch a trust. But it exists from a legal standpoint. A trust can own buildings and property. It can sue people in court. It can buy and sell things. It can hire and fire people.
You may have heard of a “living trust.” That’s a colloquial name for a trust that is commonly created by people who own a house and investments and want to avoid probate when they die. It is “revocable” because if you create one, you want to be able to make changes. Maybe you want to add a beneficiary. Or maybe you no longer like the trustee you named to take over when you die, so you insert a new person.
A blind trust is a type of irrevocable trust, meaning that (officially) it cannot be changed by the person who created it. I put the word “officially” in parentheses because there are indirect loopholes. With a blind trust, you create the irrevocable trust, but you remain the beneficiary. Here’s how a blind trust basically works:
- You go to a lawyer (don’t try doing this on your own) to write the trust document.
- You are the “grantor” or “trustor” or “creator”, which are all words that mean the same thing. They mean that you are creating the trust.
- You choose a trustee who is a person other than yourself. The best bet is usually to name a trust company.
- For a blind trust, you would name yourself as the beneficiary. An asset protection trust is a type of blind trust. Otherwise, you could name your children or other people as the beneficiaries; but then it wouldn’t be a blind trust.
All the news media is going crazy over talk about a “blind trust” as a way of eliminating the potential conflict of interest for Donald Trump. I agree that Mr. Trump can’t transfer his assets to a trust naming his children as beneficiaries. That would trigger a gift tax of roughly 50%.
But if Mr. Trump transfers his holdings to a “blind trust”, he is a smart person and will have checks and balances. He’s not going to risk having some independent company in control and making bad decisions. He will name a Trust Protector, which is an (officially) independent person with the power to make changes to the trust, add/remove beneficiaries, add/remove trustees, and so on. This independent Trust Protector will be someone loyal to Mr. Trump. And Mr. Trump will have the ability to replace the Trust Protector. So even if Mr. Trump is (officially) not managing his properties and businesses, he will have indirect control over them. And he will still be the beneficiary.
Again, the only other way for Mr. Trump to completely divest himself of his businesses is to pay a 50% gift tax and transfer everything to a trust for his kids. But a real estate investor has most of his wealth tied up in real estate. He can’t write a check for 50% of his wealth. So Mr. Trump is stuck. He MUST remain at least someone in control of all of his wealth.
He can do the best he can to transfer his investments to a blind trust. But he will still have some sort of control.
Mr. Trump will probably transfer his investments to a blind trust, and everyone will breathe a sigh of relief. He will have (officially) set things aside so he is no longer in control. But he will still have indirect control, such as being able to ask the Trust Protector to ask the trustee to do things he wants. There is no other way.
That being said, keep in mind that what is good for Mr. Trump as a real estate investor is going to be good for other real estate investors as well. Maybe the lesson out of all of this is to start investing in real estate.