What are testamentary trusts in Australia? A quick guide

Estate planning might sound like something only wealthy people worry about, but almost everyone should think about what happens to their money and belongings after they die. 

If you have ever wondered what a testamentary trust is, this guide explains what a testamentary trust is, why families use them in Australia, and some key benefits and disadvantages to consider.

“Estate planning isn’t about how much money you have; it’s about who you care about.” 

What is a testamentary trust?

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A testamentary trust is a legal structure in your Will that only begins after you die. It allows your estate assets, such as cash, property, or investments, to be held in a trust rather than given directly to your beneficiaries.

A person called a trustee is appointed to manage the trust. The trustee manages the assets and decides when and how the beneficiaries receive money or other benefits, in accordance with the instructions in the Will. This trust structure can give the will-maker more control over how assets are managed and distributed after death.

Unlike a standard Will, where assets are passed straight to your spouse or children, a testamentary trust adds an extra layer of control and protection. This is often one of the main reasons they are considered part of estate planning.

Here is a simple explanation of how a testamentary trust could work:

• You include a testamentary trust in your Will. This tells the executor of your Will to set up the trust after your death.
• The trust is created upon your death. It does not exist while you are alive.
• A trustee manages the trust. This could be a family member, friend, or even a professional, such as a lawyer or accountant.
• Beneficiaries receive payments from the trust. The trustee can distribute income or capital over time instead of giving everything at once.
• In some cases, the trustee may also control when income distributed from the trust is paid and whether assets are kept invested for longer-term protection.

Why do people use testamentary trusts?

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People choose testamentary trusts for many different reasons, especially when they want to protect their family’s future. The main reasons usually come down to protecting an inheritance, creating tax benefits, and improving asset protection.

#1: Protecting beneficiaries 

Some beneficiaries may not be good with money, may have addiction issues, or may be too young to manage a large sum. A trust helps make sure the inheritance is used wisely. This can be especially helpful for vulnerable beneficiaries, minor children, or a person living with disability or special needs.

“Instead of leaving $300,000 directly to her 19-year-old son, Sarah’s Will creates a testamentary trust. The money is invested, and the trustee pays for rent, education, and living costs until he’s older.” 

#2: Tax planning and tax advantages 

In our country, income earned by children under 18 is usually taxed at very high tax rates. However, income earned through testamentary trusts in Australia may, in some cases, be taxed at adult rates rather than penalty rates. 

Income paid to children from a testamentary trust can be taxed at the same rates as income from other sources. This can result in significant tax savings for families.

A trustee can also decide who receives income each year, helping to spread income among family members in a tax-effective way. This may create tax advantages for beneficiaries with lower marginal tax rates or lower incomes, making testamentary trusts useful as both tax and estate planning tools.

#3: Asset protection

Assets held in a testamentary trust are generally better protected from creditors if a beneficiary goes bankrupt or is sued. This can be useful if a beneficiary runs a business or works in a high-risk profession. Because the trust assets are not always held in the beneficiary’s own name, this structure may offer stronger asset protection than a direct inheritance.

#4: Protection in divorce

If a beneficiary goes through a divorce, assets held in a testamentary trust are usually less likely to be treated as personal property, reducing the risk of them being split with an ex-partner. This can also be relevant in family law disputes where protecting estate assets is a priority.

#5: Supporting vulnerable beneficiaries

Testamentary trusts are commonly used for beneficiaries with disabilities or special needs, as they provide long-term financial support while maintaining control over how funds are spent. A protective trust approach may also be appropriate where a beneficiary has substance abuse issues, trouble managing money, or other financial circumstances that increase risk.

Pros: the advantages of testamentary trusts

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Tax efficiency

One of the biggest benefits is tax flexibility. Income can be distributed in a way that minimises overall tax for the family, including lower tax rates for children. For many families, these tax benefits are one of the biggest advantages of a testamentary trust structure.

Long-lasting and intergenerational

A testamentary trust can last for up to 80 years in Australia. This means your assets can benefit not just your children, but also your grandchildren and even great-grandchildren, allowing future generations to receive income or capital in ways that suit their circumstances, for example, funding education, buying a first home, or supporting a family member with special needs.

Greater control

You can set rules about how and when beneficiaries receive money. This helps ensure your assets are used in line with your values and intentions. You may also be able to nominate a primary beneficiary, define potential beneficiaries, or require distributions to be delayed until a specified age.

Asset protection

Assets are owned by the trust, not the beneficiaries. This provides protection against bankruptcy, lawsuits, and, in some cases, family law claims.

Centrelink considerations

Because trust assets are not always treated as personal assets or income, beneficiaries may still qualify for government benefits while receiving trust distributions.

One of the best structures in Australia

Because of its combination of tax efficiency, asset protection, and long-term control, a testamentary trust can be one of the best estate planning structures available in Australia. It’s highly regarded by financial advisers, accountants and estate planners for families who want to protect and grow their wealth responsibly. 

In some cases, separate testamentary trusts may be created for different family members, depending on the testator’s wishes and the overall trust structure set out in the Will.

Cons: the disadvantages of testamentary trusts

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Higher costs

Creating a testamentary trust requires a well-drafted Will, which can be more expensive than a basic Will. Ongoing costs may include accounting fees, tax returns, and legal advice, so careful consideration is required. There may also be costs for annual tax returns, record-keeping, and ongoing advice from lawyers or accountants.

More complexity

Testamentary trusts are more complex to understand and manage. Trustees must keep records, lodge tax returns, and follow strict legal rules.

Delayed access to inheritance

It can take months for the estate to be finalised and the trust to be set up. Beneficiaries may not receive funds straight away.

Trustee responsibility

The success of a testamentary trust depends heavily on the trustee. A poor or unprepared trustee can cause stress, conflict, or financial problems for beneficiaries.

“A poorly chosen trustee fails to keep records or communicate clearly, causing conflict between siblings. Choosing the right trustee is just as important as the trust itself.”

Who should consider a testamentary trust?

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A testamentary trust may be suitable if you:

• Have young children or grandchildren
• Want to protect assets from creditors or divorce
• Have beneficiaries who may struggle with managing money
• Want flexibility and potential tax savings
• Have vulnerable beneficiaries or family members with special needs
• Want more control over distributing assets
• Need stronger asset protection because of complex financial circumstances

However, if your estate is simple and you are comfortable leaving assets directly to beneficiaries, a testamentary trust may not be necessary.

Protect your legacy with the right estate plan

A testamentary trust can be a powerful estate planning tool, offering tax benefits, asset protection, and greater control over how wealth is passed on. However, it also comes with higher costs and complexity.

The right choice depends on your personal situation, the size of your estate, and your family’s needs. Getting professional advice can help you decide whether a testamentary trust is the right fit for your circumstances and the people you want to protect.

If you want confidence that your estate plan reflects your wishes and supports your family well into the future, contact Elliot Watson Financial Planning. Our team can help you understand your options and work with you and your legal advisers to put the right strategy in place.

Article by Jose Hernandez – Senior Financial Adviser

Disclaimer:

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.