How is a Testamentary Trust Different to a Simple Will?
If you leave your assets to your family through a standard Will, those assets are usually distributed directly to your beneficiaries. Once transferred, they are generally owned outright by the recipient. While simple, it may leave the inheritance more exposed to personal, financial or relationship risks.
A testamentary trust changes that structure. Instead of giving your assets directly to an individual, your Will directs that some, or all, of your estate be placed into a trust on your death. The trust does not operate during your lifetime; it is created by the Will and comes into effect after death. Think of a testamentary trust as a safety deposit box established by your Will. The trust assets are placed inside that structure and a trustee manages them according to the rules you set.
Wills and the powers a trustee can be given, are governed by legislation in each Australian state and territory (each jurisdiction has its own equivalent Wills, Succession and Trustee Acts). The core concepts of testamentary trusts are consistent nationally, but the drafting detail should always be checked against the legislation of the state or territory in which the Will is made.
The Key Roles
To understand how trusts function, it helps to identify the main roles:
- The testator: The person making the Will. You set the rules of the trust, decide what assets go into it and nominate who fills the other roles.
- The trustee: The person or company responsible for administering the trust. The trustee holds legal title to the trust assets and manages the trust in accordance with the Will. Trustees must exercise their powers honestly and for proper purposes, consistent with the duties owed under general trust law and the relevant state or territory legislation.
- The beneficiaries: The people or entities who may receive income or capital from the trust, depending on the terms of the Will and the trustee’s discretion. Beneficiaries might include your spouse, children, grandchildren, or entities like charities.
Discretionary Testamentary Trusts
Most testamentary trusts are set up as discretionary trusts. That means the trustee generally has flexibility to decide how much income or capital each beneficiary receives and when.
Beneficiaries usually do not own trust assets outright. Instead, they have an interest under the trust terms and may be considered by the trustee for distributions. That distinction matters because it is one reason testamentary trusts can assist with asset protection and tax planning, although those benefits are not absolute.
Benefits of a Testamentary Trust
A testamentary trust can provide useful advantages for families with meaningful assets, blended family structures, or vulnerable beneficiaries.
1. Protection of Assets
Because trust assets are not usually owned outright by one beneficiary, they may be better protected from external risks than assets held personally.
If one of your children runs a business and faces financial difficulty or bankruptcy, a creditor may not be able to access assets held in the testamentary trust in the same way they could access assets owned personally by that child. The trustee can choose not to distribute funds to that child until the financial danger passes, subject to the trust terms and their legal duties.
If a beneficiary goes through a divorce or separation, assets held within a properly structured testamentary trust may be more secure than assets held directly by the individual. That said, the Family Law Act 1975 (Cth) gives the Family Court broad powers to look at all the property and financial resources of the parties to a marriage or de facto relationship. Depending on the circumstances, trust assets can be treated as available for division. So, while a trust structure can make it harder for an ex-partner to claim a direct share of an inheritance, this is not guaranteed. The circumstances, how the trust is drafted and how it has been administered can all affect the outcome.
Testamentary trusts can also be useful for vulnerable beneficiaries. If a beneficiary has a gambling problem, substance use disorder, or intellectual disability, a testamentary trust can provide for their needs without giving them a large lump sum they may not be able to manage. The trustee can release funds gradually, pay providers directly (for example, for housing, medical care, education, or daily living expenses) and set conditions that match the beneficiary’s best interests. This provides greater control than an outright inheritance, though the trustee must still act in accordance with the Will and their fiduciary duties.
2. Solutions for Blended Families
Blended families often need to balance the interests of a current spouse with the long-term interests of children from a previous relationship. A testamentary trust can help with that, provided it is drafted carefully. For example, you can structure the Will so your current partner can receive income or occupy the family home for a specified period, while the remaining capital is preserved for your children later.
3. Favourable Tax Treatment
When a trust earns income, such as rental income or dividends, that income is taxed. In a discretionary testamentary trust, the trustee can usually decide which beneficiary receives the income, subject to the terms of the trust and tax law.
Testamentary trusts are often used to direct income toward beneficiaries on lower tax rates, including, in some circumstances, minor children or grandchildren. This can result in worthwhile savings for the family. The precise tax outcome depends on the trust’s structure and the rules in force at the time, so this benefit should not be assumed without advice.
It’s also worth knowing that the tax treatment of trusts is an area of ongoing government attention. Federal budget announcements in 2026 proposed changes to how discretionary trusts (including some testamentary trusts) are taxed from 2028 onward, though early indications suggest deceased estates and existing testamentary trust arrangements are likely to be treated more favourably than newly created structures. Because this is still developing, anyone relying on a testamentary trust for tax purposes should have their plan reviewed by a lawyer or accountant periodically.
Important Considerations
A testamentary trust is not a one-size-fits-all solution. There are administrative and ongoing compliance costs, including tax returns and financial records, so the structure should be justified by the size of the estate and the family’s needs.
Choosing the right trustee is also critical. The trustee may be an individual or a company, and they should be capable, impartial and able to manage conflicts if they arise.
Because succession law is state and territory based, the precise powers a Will can confer on a trustee and the formal requirements for a valid Will, will depend on where you live. This article covers the general principles; your lawyer will apply the specific legislation of your state or territory.
Key Takeaways
- A testamentary trust is written into your Will but only comes into effect after your death.
- A trustee manages the trust and distributes income or capital according to the Will and trust terms and owes fiduciary duties under general trust law and the trustee legislation of your state or territory.
- Tax benefits may be available, however, legislative changes regarding the taxation of certain trusts should be monitored.
- Asset protection is useful, but it is not absolute. Australian family law and bankruptcy law can still bring trust assets into account in some circumstances.
- Testamentary trusts can be particularly valuable for vulnerable beneficiaries, including those with gambling or drug addictions or intellectual disabilities, by allowing the trustee to control distributions and pay providers directly.
How Can We Help?
This is general information only and does not constitute legal, financial or any other professional advice. Testamentary trusts, tax law and family law are complex and depend on your personal circumstances and the state or territory in which you live. For guidance on estate planning and testamentary trusts, always seek advice from a qualified professional.
For more information or advice, please call 02 9150 6991 or email [email protected].