If you’re thinking about how to protect your family’s inheritance, you may have come across the term “testamentary trust.” This type of trust is a common feature in estate planning, particularly for families who want greater control over how assets are managed and distributed after death. Understanding how a testamentary trust works, and whether it suits your circumstances, is an important step in creating a Will that reflects your wishes.
What Is a Testamentary Trust?
A testamentary trust is a trust that comes into existence upon a person’s death under the terms of their Will. Rather than passing assets directly to beneficiaries in their personal names, the Will appoints a trustee (an individual or a corporate trustee) to hold and manage the inheritance for the benefit of nominated beneficiaries. The trustee exercises discretion in accordance with the Will’s terms, deciding how and when to distribute income or capital, and for what purposes.
This structure is frequently used to protect inheritances, manage timing and conditions of access, and provide tax flexibility. It is particularly useful where beneficiaries are young, vulnerable, financially inexperienced, or exposed to business and creditor risk.
How a Testamentary Trust Differs from a Simple Will
A simple Will directs that assets be distributed outright to beneficiaries once probate and estate administration are complete, conferring immediate personal ownership. By contrast, a Will incorporating a testamentary trust directs that the inheritance be placed into one or more continuing trusts. Legal title resides with the trustee, who administers and applies the assets for the beneficiaries over time.
In practical terms, a simple Will operates on the basis of “give it to them now, in their own name,” while a testamentary trust approach is “have a trustee hold and manage it for them and distribute as appropriate or when conditions are met.”
Key Advantages
The principal advantage is asset protection. Because assets are held in the trust rather than in the beneficiary’s name, there is often greater resilience against claims by creditors or in bankruptcy. While not absolute, this can meaningfully reduce exposure, particularly when paired with careful trustee selection and control settings. The structure also assists in family and relationship breakdown scenarios, although the effectiveness will depend on control and factual circumstances.
Tax flexibility is another significant benefit. Trust income, capital gains, and franking credits can be streamed among beneficiaries to utilise lower marginal tax rates. In Australia, an important feature is that certain income from testamentary trusts distributed to minors is generally taxed at ordinary adult rates rather than the penal minor rates that apply to most other trust income. Over time, this can materially reduce the family group’s overall tax burden.
Disadvantages and Limitations
Complexity and ongoing compliance are the main costs. Drafting a testamentary trust Will is more involved than preparing a simple Will, and the trust will require annual administration, including financial accounts, tax returns, trustee resolutions, and often professional advice. This introduces both time and monetary expense that a simple Will would generally avoid.
A testamentary trust does not bypass probate. The Will must still be proved, and the estate administered before the trust is funded, which can delay the commencement of trust operations and distributions.
Is a Testamentary Trust Right for You?
Whether a testamentary trust is appropriate depends on your individual circumstances, including the nature of your assets, your family situation, and your goals for how your estate should be managed after your death. For some families, the added protection and flexibility justify the additional complexity; for others, a simple Will may be sufficient.
If you would like to discuss whether a testamentary trust should form part of your estate plan, please contact our team to arrange a consultation.
