Trust funds are becoming increasingly popular as more people seek to secure their financial future and provide for their loved ones beyond traditional savings and investments. But what exactly are they?

In simple terms, a trust fund is a legal entity that holds assets (cash, real estate and even investments) on behalf of beneficiaries. It’s a common financial tool used to manage and protect wealth for future generations.

In this article, we’ll explain trust funds in detail and discuss the various types available today. Then, we’ll show you how to set up your own trust fund in Nigeria without wahala. Ready? Let’s dive in!

How do trust funds work in Nigeria?

Trust funds in Nigeria operate similarly to those in other countries. Therefore, our explanation in this section applies to all types of trust funds worldwide.

But before we proceed, let’s list the parties required for a trust fund to exist:

• A settlor
• A beneficiary
• A trustee

First, an individual creates a trust fund through a legal document known as a trust deed, which outlines the trust’s terms and conditions. These terms and conditions highlight the fund’s assets, duration, parties involved and every other information related to the fund.

The person creating the trust (the settlor or grantor) then transfers assets into the trust. These assets may include cash, property, investments, cryptocurrency or any other valuable item. The settlor then determines how and when the assets will be distributed to the beneficiaries.

The beneficiaries are those who will benefit from the trust fund. They can be individuals, organisations or even charitable causes — anyone the grantor wants.

That’s all. A pretty simple process, yes?

Still, trust funds would not exist without trustees. Trustees are individuals or entities appointed to manage the trust fund in accordance with the trust deed. They have a fiduciary duty to act in the best interests of the beneficiaries and to administer the trust responsibly.

Therefore, they’re typically chosen for their financial acumen and integrity.

Who regulates trust funds in Nigeria?

Trust funds in Nigeria are subject to regulatory oversight to ensure they comply with relevant laws and regulations. The Securities and Exchange Commission, Nigeria (SEC) and the Corporate Affairs Commission (CAC) are among the regulatory bodies that oversee how trust funds are set up, maintained and disbursed to safeguard the interests of all the parties involved — especially the beneficiaries.

These organisations specifically help maintain transparency and accountability in managing trust funds.

What is a trust fund baby?

A trust fund baby is a term for someone who receives substantial financial support or inheritance from a trust fund. This term often describes people who come from wealthy families and have a significant financial advantage from birth — proper rich kids.

Trust fund babies typically enjoy a comfortable lifestyle, as their financial needs are taken care of by a trust fund. These individuals may have access to funds for education, healthcare, housing and other expenses without the need to work for a living.

While it might be a popular sentiment, we must note that not all trust fund babies fit the stereotype of being lazy or entitled. Many beneficiaries of trust funds use their financial resources to pursue their passions, start businesses or support charitable causes.

Why would you put your money in a trust fund?

Now that we’ve clarified the definitions, let’s discuss you, your money, and trust funds. Why do they exist, and why would you set one up? What’s the purpose of trust funds?

One might put their money in a trust fund for any of the following reasons:

1. Asset protection: Trust funds offer some protection for your assets from creditors, lawsuits, and other potential risks.
2. Control over distribution: By creating a trust fund, you can determine how and when your assets will be distributed to the beneficiaries. This allows you to have control even after your passing.
3. Continuity of wealth: Trust funds provide a way to preserve wealth for future generations.
4. Tax efficiency: Depending on the type of trust, there may be tax advantages associated with transferring assets into a trust fund.
5. Privacy: Unlike wills, which become public records upon death, trust agreements are typically private documents. This confidentiality can be appealing to those who prefer to keep their financial affairs out of the public eye.

Trust funds can also serve as a valuable tool for individuals who want to exert some influence on how their beneficiaries use their wealth/inheritance.

By setting up specific conditions for asset distribution, such as reaching a certain age or achieving educational milestones, trust funds can help ensure that the wealth is used wisely and prudently by the recipients.

How much money is usually in a trust fund?

The amount of money in a trust fund can vary greatly. Some trust funds can have millions or even billions of naira worth of assets, especially for high-net-worth individuals (HNIs). However, you can also create trust funds with smaller amounts, depending on your goals and financial situation.

It’s important to note that the amount of money in a trust fund is not the only factor to consider. The terms of the trust, the investment strategy and the expertise of the trustee all play a significant role in determining the success and effectiveness of a trust fund.

That’s why trust funds can be powerful tools for wealth management and legacy planning. They offer flexibility and control over how assets are distributed during the grantor’s lifetime and after their passing.

Can a trust fund make you money?

A trust fund has the potential to generate income and grow over time. A trustee can — with the grantor’s permission — invest the assets held in a trust fund in various financial instruments (like stocks and bonds). The investment returns can then be distributed to the beneficiaries (at the time stipulated by the deed) or reinvested back into the trust fund, allowing it to accumulate wealth over time.

Still, the success of a trust fund in making money depends on various factors, including the expertise of the trustees managing the fund, the economic conditions and the investment strategy employed.

Can you spend money from a trust fund?

The ability to spend money from a trust fund depends on the terms set out in the trust deed. Since the settlor dictates the terms in the deed, they can specify when and how the assets can be accessed or distributed. In some cases, the beneficiaries may have limited access to the funds until they reach a certain age or fulfil certain conditions.

However, the trust deed will always outline the rules for accessing and using the funds.

How do trust funds pay out?

Trust deeds are the holy book of trust funds, and they dictate how everything happens — including payouts. A grantor can set up payouts in many different ways and the trustees will ensure distribution happens according to their wishes.

Trust funds pay out using any of the following structures:

• Regular distributions: The trust fund may provide for regular distributions of income or principal to the beneficiaries at predetermined intervals, such as monthly or annually.
• Discretionary distributions: The trustee has the discretion to distribute funds to the beneficiaries based on their needs and circumstances (like when their bank account goes below a certain balance).
• Specific purpose distributions: The trust fund may specify that funds can only be used for specific purposes, such as education or healthcare.

But how long could these payouts take?

How long does it take to withdraw money from a trust fund?

The timeframe for withdrawing money from a trust fund depends on the specific circumstances and the terms outlined in the trust deed. Therefore, it’s important to consult with the trustee to understand the procedures and any applicable timelines for withdrawals.

In some cases, certain restrictions may be in place to ensure the long-term sustainability of the trust fund.

Types of trust funds

You can set up trust funds for different situations. In this section, we’ll go over the different types of trust funds that exist today.

The following are some of the types of trust funds:

• Education trusts: These are solely for educational purposes (high school, university and even postgraduate studies).
• Charitable trusts: They are designed to support charitable organisations or causes.
• Discretionary trusts: These provide the trustee with discretion over how and when to distribute funds to the beneficiaries.
• Spendthrift trusts: They protect beneficiaries from creditors by limiting their access to the trust funds.
• Special needs trusts: Trustees create these for individuals with disabilities to ensure their continued financial support without affecting their eligibility for government benefits.

This isn’t an exhaustive list, but they’re some of the most common trust funds you’ll encounter in real life.

Irrevocable versus revocable trust funds

Trust funds can also be classified as either irrevocable or revocable — depending on whether they can be modified.

An irrevocable trust fund cannot be modified or revoked once it is created without the consent of all the beneficiaries involved. This type of trust provides greater asset protection and may have tax advantages, but it limits the settlor’s control over the assets.

A revocable trust fund (also known as a living trust) allows the settlor to modify or dissolve the trust at any time during their lifetime. This type of trust offers more flexibility and control.

Is a trust fund worth it?

Deciding whether a trust fund is worth it depends on your individual circumstances, life goals and financial situation. Trust funds can provide numerous benefits, including asset protection, tax efficiency and continuity of wealth. However, they also come with administrative costs and legal complexities.

Working with a qualified professional (like an attorney or a financial advisor) can help you determine if a trust fund aligns with your financial objectives. They can also help you avoid legal troubles and save you (and your beneficiary) from financial ruin.

How to create a trust fund in Nigeria

Creating a trust fund in Nigeria is a big deal. Therefore, we advise you seek the assistance of a qualified professional — specifically an attorney or wealth manager — who specializes in trust and estate planning.

Here’s how to create a trust fund in Nigeria:

1. Identify your goals: Determine the purpose and objectives of the trust fund, as well as the beneficiaries and assets you wish to include.
2. Choose a trustee: Select a trustee who will be responsible for managing the trust and ensuring its compliance with the trust deed.
3. Create a trust deed: Work with a professional to draft a trust deed that outlines the terms and conditions of the trust fund.
4. Transfer assets: Transfer the selected assets into the trust fund, ensuring that you satisfy all the legal requirements.
5. Review and monitor: Regularly review and update the trust fund as needed, taking into account changes in personal circumstances and relevant laws.

We summarized these steps for your convenience, but your trustee or financial advisor might suggest a slightly different variation when you set up your own trust fund.

Summary

Trust funds are valuable tools for managing and protecting wealth in Nigeria. Whether you’re interested in securing your financial future, providing for your loved ones, or supporting charitable causes, a trust fund can help you achieve these goals.

It’s important to understand the workings of trust funds, their potential benefits and disadvantages, and seek professional guidance to ensure that the fund you create aligns with your specific needs and objectives.