What is a Direct Trust?

A direct trust is a special kind of legal instrument in which the trustee does not have complete authority to manage the funds held in trust. This option allows the trustee to transfer assets to the beneficiaries, if desired. It also gives the trustee the authority to give control over some of the assets held in trust to a trusted individual or corporation, or to an investment manager to work with.

A trust is put in place to hold money, property or other assets before they are transferred to the people who will ultimately own them. The trustor is the person who is establishing the trust and he or she appoints a trustee to manage its contents on behalf of the beneficiaries. The trustee assumes the legal title to the assets held in trust but is limited to using them for the benefit of the beneficiaries only. The trustee is barred from directly profiting from having control of the assets held in trust.

The trustee's powers are set out in the documents setting up the trust. If a direct trust has been set up, the trustee may have the authority to transfer some of the assets held in trust to one or all the beneficiaries. A situation where this may arise is when the direct trust was set up to hold assets for minor children after the death or one or both parents. The trustee may choose to release certain assets to a child before he or she is entitled to the entire contents of the trust.

The assets held in a direct trust may also be turned over to a fiduciary who is not the trustee. This individual may be entrusted to act as an agent to convert property to cash or to perform some other function on behalf of the trust.

Part of the function of a trustee is to manage the assets held in the trust. Not all people who are named as trustees are knowledgeable or experienced in dealing with investments, for example. If the arrangement is for a direct trust, the trustee can arrange for an experienced investment manager to take over managing a portion of the assets being held in trust. The investment manager will recommend an investment plan that will help the assets grow in value while offering a relatively low level of risk to the principal.