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WILLS AND ESTATES
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You have created a will to ensure your assets go where you intend, but have you considered how your beneficiaries will receive and manage their inheritance? A testamentary trust in Australia is one of the most powerful estate planning tools available, yet many people don’t understand what it is or how it can benefit their family.
Unlike a standard will that distributes assets directly to beneficiaries, a testamentary trust is established through your will and only comes into effect after your death. It provides significant tax advantages, asset protection, and flexibility that can save your family hundreds of thousands of dollars over time.
A testamentary trust (also called a will trust) is a trust your will creates that comes into existence when you die. Rather than leaving assets directly to beneficiaries, your will establishes a trust structure that holds and manages assets on behalf of your chosen beneficiaries.
A trustee manages the trust who distributes income and capital to beneficiaries according to the terms you set out in your will. Beneficiaries can include your spouse, children, grandchildren, and other family members.
Unlike a living trust created during your lifetime, a testamentary trust only comes into effect after you die. You can’t access or control it during your life because it doesn’t exist yet.
Testamentary trusts offer exceptional tax benefits, particularly for minor children.
Normally, some types of ‘unearned’ income received by children under 18 (that is not excepted income) are taxed at penalty rates. By way of example, under the ATO’s minor tax rates, income between $417 and $1,307 is taxed at 66% of the amount above $416, and income above $1,307 is taxed at 45% (subject to the minor tax rules and any applicable exceptions)
Example (general): Where income distributed to a minor qualifies as ‘excepted trust income’, it may be taxed at ordinary individual rates rather than the higher minor penalty rates. The actual tax outcome depends on the nature of the income, whether it is excepted income, the beneficiary’s circumstances, and current ATO rates, so you should obtain accounting advice for your specific situation.
The trustee can also distribute income among multiple beneficiaries to minimise overall tax. Distributing investment income to adult children in lower tax brackets, a retired spouse, or grandchildren can significantly reduce the family’s total tax burden.
Assets held in a testamentary trust are protected from various risks:
Protection from Relationship Breakdown: If a beneficiary divorces, assets in the trust are generally not considered part of their personal estate and are protected from family law property settlements. This can help reduce exposure in the event of a relationship breakdown, depending on how the trust is structured.
Protection from Bankruptcy: If a beneficiary faces financial difficulties or bankruptcy, trust assets are typically protected from creditors because they don’t personally own them, the trust does.
Protection from Poor Financial Management: If you’re concerned about a beneficiary’s money management skills or vulnerability to financial exploitation, a trustee can manage distributions responsibly on their behalf.
Testamentary trusts provide ongoing flexibility that direct inheritances don’t. The trustee can adjust distributions based on beneficiaries’ changing needs, education expenses, medical costs, housing assistance, or business opportunities.
Rather than giving young adults a lump sum they might spend unwisely, the trustee can provide regular income and capital for specific purposes over time. One trust can benefit multiple people, for example, providing for your spouse during their lifetime, then for your children, and eventually grandchildren.
For beneficiaries with disabilities, a trust can be an important planning tool, but the Centrelink treatment depends on the structure and who has control of the trust. If the goal is to obtain specific social security means test concessions, a Special Disability Trust (which can be established under a will if it meets the requirements) may be more appropriate. You should obtain specific legal and financial advice to ensure the arrangement aligns with the beneficiary’s needs and any Centrelink rules.
You create testamentary trusts through specific clauses in your will. You need to specify who the beneficiaries are, who the trustee will be, the trustee’s powers, and how income and capital can be distributed.
Who Can Be a Trustee? You can appoint family members, professional trustees (lawyers, accountants), corporate trustees, or a combination. The trustee should be trustworthy, financially competent, and willing to act in beneficiaries’ best interests.
How Long Can They Operate? In most Australian states, trusts can operate for up to 80 years. Some people structure testamentary trusts to end when the youngest child reaches a certain age (e.g., 25), continue for the lifetime of the surviving spouse, or operate for the maximum period to benefit multiple generations.
Testamentary trusts aren’t just for the wealthy. Consider them if:
Testamentary trusts work best as part of a comprehensive estate plan that includes an updated will, enduring power of attorney, advance care directive, and properly coordinated superannuation nominations. Remember, superannuation doesn’t automatically form part of your estate, so your super beneficiary nominations need to align with your testamentary trust strategy.
Each state has different legislation and requirements. If you own property or have beneficiaries in multiple states, your lawyer must carefully draft your testamentary trust to comply with all relevant jurisdictions.
Disclaimer
The contents of this article are considered accurate as at the date of publication. The information contained in this article does not constitute legal advice. Readers should seek legal advice about their specific circumstances.
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Please describe your enquiry below
Yes, while you’re alive you can change testamentary trust provisions by updating your will. Once you die and the trust comes into effect, the terms generally can’t be changed except within the flexibility you’ve built in for the trustee.
Generally yes. Assets held in a properly structured testamentary trust are typically not considered the beneficiary’s personal property and are protected from family law property settlements, though each case depends on specific circumstances.
Savings vary based on your estate size and beneficiaries’ circumstances. For a family with young children receiving $50,000 annually in investment income, tax savings could exceed $25,000 per year, potentially hundreds of thousands over the trust’s life.
Possibly. Testamentary trusts still provide asset protection, income splitting among adult beneficiaries, protection from relationship breakdown, and flexibility for future generations. They’re valuable for many families beyond those with young children.
No. It is only creatable under your Will. A trust made “inter vivos” has different rules.