Blind Trust: What It Is, How It Works and Whether Brazil Has One

A blind trust is a trust in which an independent trustee makes investment decisions without the participation of the asset owner, to reduce conflicts of interest. The formal regime exists in the US, for the federal executive branch (qualified blind trust, 5 CFR 2634, subpart D).

Brazil's Law No. 12,813/2013 (Lei 12.813/2013), which addresses the subject, does not mention trusts.

What is a blind trust?

A blind trust is a trust whose administrator (trustee) has exclusive responsibility for managing the assets, without the participation or knowledge of the interested person. That is how US regulation describes the purpose: the trustee decides when to sell the original assets and what to reinvest the money in, without influence from the interested party.

In this article, the precise meaning is that of the US regime, called a qualified blind trust and checked against the official OGE text.

How does the qualified blind trust work in the US?

The qualified blind trust grew out of the Ethics in Government Act of 1978 and is now regulated by the Office of Government Ethics (OGE) in 5 CFR 2634, subpart D. It is only "qualified" if it meets four cumulative requirements:

1. •be certified by the director of the OGE;
2. •have the initial portfolio provided for in the rule;
3. •follow the trust document template prepared by the OGE;
4. •have an independent trustee, approved by the OGE.

Certification comes before signing: no trust is considered qualified until the OGE certifies it before execution. The rule also restricts communication between the trustee and the interested party. Only the reports required by law and written communications previously reviewed by the OGE are allowed, and even matters unrelated to the trust fall under this rule.

What are the steps to create a qualified blind trust?

1. •The interested party consults the OGE and chooses an eligible institution to act as trustee.
2. •The OGE approves the trustee as independent.
3. •The interested party, or their representative, drafts the trust instrument using the OGE template. Deviations require the director's approval.
4. •The OGE certifies the trust before execution.
5. •On dissolution, the interested party delivers to the OGE, within 30 days, a report listing the trust's assets at that time.

Who can be the independent trustee?

It can be a bank (under 12 U.S.C. 1841(c)) or an investment adviser (under 15 U.S.C. 80b-2(a)(11)), as long as no single individual holds or controls more than 10% of the institution. The OGE only approves the trustee if it cannot be controlled or influenced by the interested party, has no ties to them, and is not their partner in a joint business or investment.

What is the difference between a blind trust and a diversified trust?

The same subpart provides for two types of qualified trust. The difference lies in the assets accepted and the effect on conflict-of-interest laws.

One detail undoes the idea of "total blindness": in the qualified blind trust, the interested party knows which assets they placed there, and the rule acknowledges that they may still be influenced by those interests until the assets are sold.

Who can use a qualified blind trust?

The rule calls the beneficiary of the regime the interested party: the president, the vice president, the federal executive branch employee, the appointee or candidate described in the rule, plus the spouse and minor or dependent children, when they hold an interest in the trust's assets. In other words, it is a US public ethics instrument, not a product open to any investor.

Does Brazil have a blind trust?

Law 12,813/2013, which regulates conflicts of interest in the federal executive branch, makes no mention of a trust or a blind trust. The law works with other mechanisms:

• •Definition. A conflict of interest is the situation created by a clash between public and private interests that may compromise the collective interest or improperly influence the exercise of a public function (art. 3, I).
• •Duty of prevention. The officeholder must act to prevent or stop the conflict and, in case of doubt, consult the Public Ethics Commission (Comissão de Ética Pública) or the Office of the Comptroller General (CGU) (art. 4 and § 1).
• •No loss required. The conflict exists even without harm to public assets or gain to the official (art. 4, § 2).
• •Conduct prohibited in office. These include using privileged information for one's own benefit or that of a third party and providing services to a company regulated by the body where the official works (art. 5, I and VII).
• •Cooling-off period. In the 6 months after leaving office, there are restrictions such as providing services to anyone who had a significant relationship with the official, unless authorized (art. 6, II).
• •Authorization and exemption. The Public Ethics Commission and the CGU may authorize private activity when there is no conflict, or it is irrelevant (art. 8, V).
• •Declarations. The officials covered by art. 2 submit an annual declaration of their financial position and corporate holdings (art. 9, I).

In practice, anyone holding a federal public function in Brazil who has a question about an investment should take the specific case to the Public Ethics Commission or the CGU, as art. 4, § 1 provides. Setting up a trust abroad on your own does not replace that path, and this article does not state that the body would accept the measure.

How does Law 14,754/2023 treat a trust abroad?

For a Brazilian tax resident, Law No. 14,754/2023 (Lei 14.754/2023) defines a trust as a contractual arrangement governed by foreign law that organizes the relationship among the settlor, the trustee and the beneficiaries (art. 12, I). The main points of arts. 10 to 13:

• •The trust's assets and rights remain with the settlor after creation and pass to the beneficiary on distribution or on the settlor's death, whichever comes first (art. 10, I and II).
• •Income and capital gains are treated as earned by the owner of the assets on that date and are subject to individual income tax (IRPF) under the rules that apply to the owner (art. 10, § 3).
• •If the trust has a controlled entity abroad, it is treated as held directly by the owner, under the controlled-entity rules of Section III of the law (art. 10, § 4).
• •The settlor or beneficiary must ask the trustee for the resources and information needed to pay the tax and meet the obligations in Brazil (art. 10, § 5).
• •If the trustee does not comply with the request, this does not remove the duty of the settlor or beneficiary to meet the tax obligations (art. 10, § 8).
• •The trust's assets and rights must be declared directly by the owner on the annual return, at acquisition cost, with a base date of December 31, 2023 (art. 11).
• •The same logic applies to other contracts under foreign law with characteristics similar to a trust that are not controlled entities (art. 13).

Arts. 10 to 13 contain no specific rule for a blind trust, and nothing in them makes the duty to declare and pay tax depend on the type of trustee.

Does a blind trust protect assets or hide them?

According to the official texts, neither. The purpose stated in the US rule is to reduce actual or apparent conflicts of interest for those who hold public office. And, for a Brazilian resident, the assets of a trust abroad are still declared by the owner, as Law 14,754/2023 shows.

Anyone looking for estate organization, succession or risk separation needs to evaluate other structures, case by case. The starting point is to understand asset protection with offshore structures, such as succession through an offshore and the legal reduction of taxes. To set up a structure, see the services for succession planning, tax planning, corporate structures and compliance.

When does a blind trust make sense?

It makes sense for a person who fits the US interested party regime and needs to separate their investments from the decisions of their office. Outside that profile, the name "blind trust" does not define the applicable regime: what matters is the contract and the law that governs it.

Before any decision, confirm three points:

1. •whether you are a tax resident in Brazil, the US or another country;
2. •whether you hold or will hold public office, and at what level of government;
3. •which assets, including those abroad, must be declared. For Brazil's Federal Revenue Service (Receita Federal) and the Central Bank of Brazil's CBE (Brazilian Capital Abroad report), consult the official pages listed in the sources.

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