Trust fund baby is not a legal term. Instead, when someone is called a trust fund baby, that generally just refers to the fact that the person receives money and support without having to work.
Trust fund babies usually drum up negative connotations as they may be perceived to be lazy or spoiled. While this may be the case in some situations, the truth is that trust funds can be set up in an unlimited number of ways, including ways that encourage hard work and success.
Generally, when someone wants to leave property to another after death, that person can give away the property directly to the beneficiary such as an inheritance in a will, or that person can set up a trust and provide the benefits indirectly.
If a benefactor gives property outright to his heirs, the heirs can dispose or use the assets in any manner they choose. On the other hand, with a trust, the benefactor can set conditions for the release of the assets. For example, a trust could be set up where money is only released if the beneficiary graduates from college, starts a family, earns over $100,000, buys a dog, etc.
To establish a trust, the benefactor must turn over the property to a trustee who will manage and distribute the property according to the benefactor's instructions. The benefactor can create instructions for any legal purpose, and the beneficiary will only receive funds pursuant to the instructions.
A trust fund baby generally just means someone who receives money according to a trust. Being a trust fund baby does not always mean that the person is spoiled. Instead, beneficiaries may have had to earn their funds.