Most Australians have heard of a will. Far fewer have heard of a testamentary trust — even though it can be one of the most powerful tools in an estate plan for protecting wealth and reducing tax across generations.
Here's what it is, who it's for, and when it makes sense.
What Is a Testamentary Trust?
A testamentary trust is a trust created by your will that comes into existence when you die. Unlike a family trust you set up during your lifetime, a testamentary trust only activates on your death — it's written into your will as instructions for how your estate should be managed after you're gone.
Instead of leaving assets directly to beneficiaries (as a standard will does), your estate passes into the trust. A trustee — appointed by you — then manages and distributes those assets to your beneficiaries according to the trust's terms.
How Is It Different From a Standard Will?
A standard will says: "I leave $X to person Y."
A testamentary trust will says: "I leave $X to a trust, managed by Trustee Z, for the benefit of person Y and their children, to be distributed at the trustee's discretion."
That difference — control over timing, discretion over distribution, and protection from external claims — is where the value lies.
The Tax Advantage
The most significant benefit of a testamentary trust for many families is the tax treatment of income distributed to minor children (under 18).
Under normal circumstances, investment income (interest, dividends, rent) distributed to minor children is taxed at the top marginal rate. But income distributed from a testamentary trust to minor beneficiaries is taxed at ordinary adult marginal rates — meaning each child can receive up to the tax-free threshold ($18,200) annually with no tax payable.
For families with significant investment assets, this can result in thousands of dollars in tax savings each year.
Asset Protection
Assets held in a testamentary trust are generally protected from:
- Relationship breakdown: If a beneficiary divorces, the assets in the trust may be protected from family law claims — because the beneficiary doesn't personally own them.
- Creditors: If a beneficiary becomes bankrupt, trust assets may be protected from their creditors.
- Poor financial decisions: A trustee can withhold distributions if a beneficiary is going through a difficult period financially or personally.
Control Over Young or Vulnerable Beneficiaries
A testamentary trust lets you specify conditions — for example, that a young beneficiary doesn't receive the full capital until they're 25, or that a vulnerable beneficiary receives income for living expenses but not a lump sum they might spend quickly.
This is particularly valuable for parents of young children, families with members who have disabilities, or anyone concerned about a beneficiary's financial maturity.
Who Should Consider One?
A testamentary trust is worth considering if you:
- Have minor children or grandchildren
- Have significant investment assets (property, shares, business interests)
- Have a beneficiary going through or at risk of relationship breakdown
- Have a beneficiary with a disability or support needs
- Have a blended family and want to protect certain beneficiaries
- Want to leave assets to charity in a structured way
A testamentary trust adds some complexity and cost to your estate planning — but for many families, the tax savings and protection it provides far outweigh that cost.
How Is It Set Up?
A testamentary trust is drafted as part of your will by an estate planning attorney. It requires careful drafting — particularly around the definition of beneficiaries, the trustee's powers, and the trust's duration.
Once your will is signed, the trust exists in your will but doesn't operate until you die. At that point, your executor administers your estate and establishes the trust as directed.
Our estate planning team can advise whether a testamentary trust is appropriate for your situation and draft one as part of your will. Request a confidential consultation to discuss your options.
Store Your Will Securely
A testamentary trust only works if your will can be found and acted upon. Store your original will — and any letter of wishes or trust guidance you leave alongside it — in a secure, accessible location.
Custodium Vault gives your executor immediate access to your documents, instructions, and contact details — so the trust you've carefully planned can actually be administered as intended. See our plans here.