What Exactly Does Having a Trust Fund Mean?

Table of Contents:

• What is a Trust Fund?
• Types of Trust Funds
• What is the Purpose of a Trust Fund?
• Setting Up a Trust Fund: A Step-by-Step Guide
• Who Can Have a Trust Fund? (Hint: It's Not Just for the Rich)
• Can a Trust Fund Make You Money?
• How to Withdraw Money from a Trust Fund
• How Does a Trust Fund Work in Nigeria?
• To Recap
• FAQs
  

Ever heard the term “trust fund baby”?

In popular context, to be a trust fund baby is to live a soft life, being placed on a permanent bankroll that you don’t even have to work for.

We’ve all had that wish at one point in our lives, especially when we realised that adulthood is just a game of playing Russian roulette with your funds.

But what exactly does having a trust fund mean?

This article answers these questions and even gives you a glimpse of what having a trust fund looks like.

Shall we?

What is a Trust Fund?

A trust fund is a legal arrangement where money or assets are set aside and managed by a third party, known as a trustee, for the benefit of someone else, referred to as the beneficiary.

This setup can be created by anyone—parents, guardians, or even a business—who wants to ensure that their assets are protected and distributed to beneficiaries in a specific way.

Trust funds are often associated with wealth management, but contrary to public opinion, they aren’t exclusively for the rich.

In fact, setting up a trust fund can be a smart financial move for anyone looking to secure their children’s future or manage their assets in a structured way.

Imagine you want to give your child access to a sum of money when they turn 25. Instead of handing it over directly, you can create a trust fund.

A trustee (it could be a bank, a lawyer, or even a family member) will manage the money until your child reaches the set age.

Until then, they can only access the funds under certain conditions, like for education or medical expenses.

Types of Trust Funds

Trust funds aren't designed to be one-size-fits-all. Different types of trust funds are tailored to serve various purposes, depending on who’s involved and the financial goals.

Here are some of the most common types:

1. Revocable Trust Fund:

A revocable trust fund allows the person who set it up (the grantor) to maintain control over the assets while they're alive. It can be changed or dissolved at any time.

This type of trust is often used for estate planning, helping individuals avoid the lengthy and expensive probate process.

For example, a parent in Nigeria might set up a revocable trust fund for their children to ensure that their wealth is distributed smoothly after death without government interference.

It’s flexible, but since the assets still belong to the grantor, they remain subject to estate taxes.

2. Irrevocable Trust Fund:

Unlike a revocable trust, once an irrevocable trust is established, it cannot be altered without the beneficiary's consent.

This type of trust offers more tax benefits because the assets are no longer legally owned by the grantor.

People often set up irrevocable trusts to shield their assets from creditors or reduce estate taxes.

This is ideal for someone who wants to preserve their wealth for future generations.

A wealthy business owner may use an irrevocable trust to protect their assets from being seized by creditors if their business runs into financial trouble.

3. Blind Trust Fund:

A blind trust fund is where the beneficiary has no knowledge or control over how the trust is managed.

It’s called "blind" because the beneficiary is in the dark about the assets and investments within the trust.

This type is popular among politicians and business leaders who want to avoid conflicts of interest.

For example, a politician may use a blind trust to ensure that their business dealings do not influence their political decisions.

4. Testamentary Trust Fund:

A testamentary trust fund is created through a will and only comes into effect after the grantor’s death.

This is a common choice for parents who want to ensure their minor children are financially supported until they come of age.

A parent might set up a testamentary trust to provide for their children’s education, healthcare, and other needs.

The funds are managed by a trustee until the children reach a certain age.

5. Survivor’s Trust:

A survivor’s trust is typically used by married couples. When one spouse passes away, the trust allows the surviving spouse to manage the assets, while ensuring that the remaining assets will pass to the children or other beneficiaries when the second spouse dies.

This type of trust ensures that the family’s wealth stays within the family and avoids disputes after the death of the surviving spouse.

This trust could prevent family quarrels over inheritance and guarantee that the wealth goes to the intended beneficiaries.

6. Charitable Trust:

A charitable trust is set up to benefit a charitable organisation.

This type of trust provides tax deductions and allows the grantor to support causes they care about.

The assets in the trust would be managed by trustees and used to benefit the chosen cause over time.

7. Spendthrift Trust:

A spendthrift trust is designed to protect the beneficiary from themselves—literally.

If the beneficiary has poor financial habits or is vulnerable to creditors, this trust limits their access to the funds.

The trustee releases the money according to a set schedule or under certain conditions, like covering education fees or healthcare costs.

This type of trust is common when a parent wants to prevent their child from squandering their inheritance on things like luxury goods.

What is the Purpose of a Trust Fund?

1. Financial Security for Beneficiaries:

One of the main purposes of a trust fund is to provide long-term financial security for beneficiaries, whether it’s a child, an adult, or even a charity.

For example, parents might set up a trust fund for kids to ensure their education and basic needs are taken care of, regardless of what happens to them.

2. Control Over Asset Distribution:

A trust fund gives the person creating it (called the "grantor") control over how and when the assets are distributed.

This is particularly useful in situations where a beneficiary might not be financially responsible, such as a young adult or someone with spending problems.

3. Tax Benefits:

By placing assets in a trust, the grantor can sometimes reduce estate taxes and other liabilities.

For example, in the U.S., trust funds are often used to shelter money from high estate taxes, ensuring that more of the assets go to the intended beneficiaries rather than the government.

The same applies in many other countries, including Nigeria.

4. Protection from Creditors and Legal Issues:

In some cases, assets placed in a trust are shielded from creditors or legal judgments, making them safer for the beneficiaries.

This can be particularly useful if the beneficiaries are involved in risky businesses or could potentially face lawsuits.

By setting up a trust, the grantor can ensure that these assets are safeguarded from being seized to settle debts or legal claims.

5. Providing for Special Needs Beneficiaries:

A trust fund can also be created to provide for someone with special needs. This fund, known as a Special Needs Trust, allows the grantor to set aside money to care for a child or adult with disabilities without jeopardising their eligibility for government benefits like healthcare and social assistance.

6. Legacy and Charitable Giving:

For those looking to leave a lasting legacy, a trust fund can be used to support charitable causes long after the grantor’s death.

Many wealthy individuals and middle-class families create trust funds dedicated to philanthropy. This is often seen in Survivors' trusts or charitable trusts, where the assets are allocated to causes close to the grantor’s heart.

Setting Up a Trust Fund: A Step-by-Step Guide

Creating a trust fund might sound like something only the super-wealthy do, but it's a valuable tool that can be used by anyone to protect and manage assets for their family or loved ones.

Whether you're setting up a trust fund for children or adults, the process can seem overwhelming at first.

However, with the right steps, it becomes manageable and straightforward. Here’s a step-by-step guide to help you through the process:

1. Decide on the Type of Trust Fund:

First, you need to decide on the type of trust fund that fits your goals. Research all the types of trust funds before making a decision.  

2. Choose a Trustee:

A trustee is the person or entity responsible for managing the trust fund. This could be a family member, a trusted friend, or a professional, such as a lawyer or a financial institution.

The trustee decides how the assets in the trust will be distributed according to the terms you set. When creating a trust fund, ensure that your trustee is reliable and financially responsible.

Remember, this person will be in charge of handling potentially large sums of money or assets.

3. Define the Trust's Purpose and Beneficiaries:

Next, you must clearly state why you are setting up the trust and who will benefit from it.

Is it a trust fund for a child to secure their future education? Or perhaps a trust for your spouse or another adult in your life?

You have to be clear about who will benefit from the trust and under what conditions.

4. Outline the Terms of the Trust:

When establishing the terms, specify how and when the beneficiaries will receive their inheritance.

You can distribute the funds in installments, give access at certain life milestones, or provide a lump sum.

5. Fund the Trust:

After setting the terms, you’ll need to transfer assets into the trust.

This could include cash, property, stocks, or other valuable assets.

Make sure to update your financial records to reflect that these assets now belong to the trust and not to you personally.

This step is essential for ensuring that your assets are properly protected and managed within the trust.

6. Consult a Lawyer or Financial Advisor:

Although setting up a trust fund can be done independently, it's advisable to consult with a professional.

A lawyer or financial advisor can help ensure that everything is set up correctly, from the legal documents to the tax implications.

They can also guide you through any legal obligations that may arise, especially if the trust becomes quite complex.

7. Review and Update the Trust as Needed:

Your financial situation or goals may change over time, so it's important to review your trust fund from time to time.

This is particularly important if you've set up a revocable trust, as you have the flexibility to make adjustments.

For example, you might want to add a new beneficiary or change the distribution schedule.

Keeping your trust up-to-date ensures that your assets will be distributed exactly as you wish.

Who Can Have a Trust Fund? (Hint: It's Not Just for the Rich)

When you hear the term "trust fund," it’s easy to think it’s only for wealthy families or trust fund babies who never need to worry about money.

However, trust funds aren't just reserved for the rich.

In reality, anyone can set up a trust fund—yes, even middle-class families or individuals with modest assets can benefit from one.

Setting up a trust fund doesn’t require millions. You can start small, and the structure of the trust can help protect assets from unnecessary taxes, court fees, or mismanagement.

Here’s a quick look at who can benefit from setting up a trust fund:

1. Parents - To secure future educational and living expenses for their children.

2. Individuals with Disabilities - To ensure long-term care and financial support.

3. Business Owners – To protect assets and facilitate smooth succession planning.

4. Young Adults – To manage inheritance responsibly and avoid misusing large sums.

5. Charitable Donors – To support causes while maintaining control over how funds are used.

6. Anyone Planning for the Future – To manage wealth and avoid family conflicts after passing away.

Can a Trust Fund Make You Money?

Absolutely! A trust fund can do more than just give you access to money—it can also be a tool for generating more wealth.

A trust fund is often invested in various assets like stocks, bonds, or real estate.

These investments have the potential to grow over time, creating a return on the money already in the trust.

For example, if you inherit a trust fund that’s worth $100,000 and it’s invested in the stock market with an average annual return of 7%, the fund could grow by $7,000 each year.

That’s money being made without you lifting a finger!

There are also different types of trust funds that offer various opportunities for wealth growth.

For instance, a blind trust fund allows a trustee to manage the investments without your involvement, helping to build wealth while maintaining privacy.

Meanwhile, a survivor’s trust can help a spouse continue to receive income after the other spouse’s death, ensuring ongoing financial stability.

The way a trust fund is set up can also impact its money-making potential.

A well-managed trust fund for kids, for example, can be structured to support their education, business ventures, or other future investments, helping them build their own wealth.

For adults, a trust fund can provide financial security while also serving as an investment vehicle.

But here's the catch!

The ability of a trust fund to make you money depends heavily on how it is managed and the type of assets it holds.

Some trust funds are more conservatively invested, which means lower returns, but also lower risks. Others are geared toward higher-risk, higher-reward investments.

Either way, creating a trust fund with the right structure can help ensure your wealth grows, benefiting you or future generations.

So yes, a trust fund can indeed make you money, but like any financial tool, its success hinges on proper management.

How to Withdraw Money from a Trust Fund

Withdrawing money from a trust fund might seem like an easy task, but it’s important to understand the rules set by the trust itself.

A trust fund is essentially a financial safety net, and how you access the funds largely depends on the terms laid out by the person who set it up (the grantor).

For example, trust funds for kids often have restrictions, one of them being that the beneficiary can only access the money after reaching a certain age, say 18 or 21.

Some trust funds may also allow partial withdrawals over time instead of receiving a lump sum all at once. This is to ensure that the beneficiary doesn't spend all the money too quickly.

The process of withdrawing money typically involves contacting the trustee, who ensures that any withdrawal follows the trust's rules.

Let’s say you’re inheriting a trust fund that’s worth ₦10 million; the trustee may release a portion of the funds to you regularly, or only when certain conditions are met.

Some trusts, like a blind trust fund, have very strict withdrawal rules, and the beneficiary might not even know the specific details of how much is in the fund.

On the other hand, survivor’s trusts often allow for quicker access to funds, especially when they are set up to support loved ones after someone passes away.

Keep in mind, withdrawing money from a trust fund might involve taxes.

In some cases, depending on the type of trust, the money could be taxed when you withdraw it. It’s always a good idea to check with the trustee or a financial advisor before making any decisions.

How Does a Trust Fund Work in Nigeria?

A trust fund operates in Nigeria similarly to how it functions in many other parts of the world but has its own specific legal and cultural implications.

The Nigerian Trust Fund (NTF), established in 1976, is a notable example of a trust fund that operates at a national level.

Created through an agreement between the Bank Group and the Nigerian government, the NTF is a self-sustaining revolving fund that supports low-income regional member countries.

It provides concessional financing for development projects, complementing the efforts of the African Development Bank and the African Development Fund.

The process of creating a trust fund in Nigeria typically begins with drafting a trust deed, which is a legal document that outlines the terms of the trust.

This deed includes details such as the purpose of the trust, how the assets should be managed, and the conditions for distributing the assets to beneficiaries.

To Recap

• A trust fund is a legal arrangement for money and assets to be set aside and managed by a trusted third party.
• Trust funds are not only for the creme-de-la-creme of society. You could have one, too, if you plan towards it.
• Trust funds can be set up for kids as well as adults. They are not suited to serve only one group.
• Besides giving you access to money, a trust fund can also be a tool for generating more wealth.
• Withdrawing from a trust fund might incur some tax fees.
  

FAQs

Q1. How does trust fund work in Nigeria?

A trust fund in Nigeria works similarly to other countries, where assets are held by a trustee for the benefit of a beneficiary.

Q2. How do I withdraw money from a trust fund?

It depends on the terms of the trust. Some allow regular withdrawals, while others restrict access until a certain age or milestone.

Q3. Can a trust fund make you money?

Yes, if the assets are invested wisely by the trustee, the trust fund can grow and generate income.

Q4. What is the purpose of a trust fund?

The purpose is to manage and protect assets for the benefit of someone else, like a child or family member.

Q5. Are trust funds for only the rich?

No, trust funds can be set up by anyone with assets they wish to protect or pass on.

Q6. What is a blind trust fund?

A blind trust is where the beneficiaries don’t know the details of the assets, often used to prevent conflicts of interest.

Q7. How do you set up a trust fund for kids?

Consult a lawyer, choose the assets, appoint a trustee, and outline the terms for distributing the money to your child.

Q8. What is a survivor’s trust?

A survivor’s trust allows a spouse to manage the trust after the other spouse passes away.

Q9. What happens if I inherit a trust fund?

You become the beneficiary of the trust and can receive distributions according to the terms set by the grantor.

Q10. What are the different types of trust funds?

Revocable trusts, irrevocable trusts, survivor’s trusts, and blind trusts are just a few examples.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.