Wills & Estates Lawyers › Testamentary Trusts
Testamentary Trust Lawyers — Asset Protection. Tax Effectiveness. Flexibility for Beneficiaries.
A testamentary trust is established by a will and comes into effect on the testator's death — providing asset protection, significant tax benefits for minor beneficiaries, and long-term control over how estate assets are used. Testamentary trusts are not just for large estates — any family with children, a business, or concern about a beneficiary's financial management can benefit. A lawyer drafts the will and trust structure to achieve the intended outcome.
⚠ A testamentary trust can only be included in a will before death. Once established, the tax advantages for minor beneficiaries (income splitting at adult marginal rates) provide significant ongoing benefits. Get a will with testamentary trust drafted today.
What We Help With
Testamentary trusts — the situations where they are most valuable.
Testamentary Trust for Minor Children
Where a beneficiary is a minor, a testamentary trust allows income from the trust to be distributed to the minor beneficiary (or their siblings) at adult marginal tax rates — rather than at the punitive children's tax rate of 45% that applies to "unearned" income (interest, dividends, trust distributions) received by children. This income-splitting advantage is significant for estates that include substantial investments or rental property.
Asset Protection for Beneficiaries at Risk
Where a beneficiary is at risk of bankruptcy, divorce, or a failed business — or is simply a poor financial manager — a testamentary trust provides protection. Assets held in a testamentary trust are not the beneficiary's personal assets and are generally not available to the beneficiary's creditors. The trustee controls the assets, not the beneficiary personally.
Blended Families — Protecting Children from Prior Relationships
In a blended family, a testamentary trust can be structured to provide for a surviving spouse (access to income and capital for their lifetime) while ensuring that the estate ultimately passes to the testator's children from a prior relationship — rather than to the surviving spouse's new partner or their children. This is one of the most valuable estate planning tools for blended families.
Discretionary Testamentary Trust — Flexible Distribution
A discretionary testamentary trust gives the trustee flexibility to distribute income and capital among a range of beneficiaries — allowing distributions to be tailored each year to the beneficiaries' needs, tax positions, and circumstances. The class of beneficiaries typically includes the primary beneficiary, their spouse, their children, and their descendants — allowing income to be distributed to family members in the lowest tax bracket.
Special Disability Trusts
A special disability trust (SDT) is a specific trust structure — defined by the Social Security Act 1991 — that allows assets to be held for the benefit of a severely disabled beneficiary without affecting the beneficiary's Centrelink entitlements (subject to the SDT concession limits). A lawyer advises on whether the beneficiary qualifies for an SDT and drafts the trust to meet the strict legislative requirements.
Reviewing & Updating Existing Wills to Include Testamentary Trusts
A will that distributes assets outright to beneficiaries can be updated to include testamentary trust provisions — allowing the tax and asset protection advantages to apply to future distributions. A lawyer reviews an existing will and advises on whether testamentary trust provisions should be added and how they should be structured.
What the Law Says
Testamentary trusts — the tax, legal, and asset protection framework.
The income-splitting tax advantage — minor beneficiaries
Income distributed to children from a testamentary trust is taxed at adult marginal tax rates — not at the punitive children's tax rate of 45% (plus Medicare levy) that applies to unearned income received by children from other sources. This allows a trustee to distribute up to $18,200 (the tax-free threshold) per year to each child beneficiary without any income tax — and further amounts at the 19% and 32.5% marginal rates rather than 45%. For an estate with $1 million in investments generating $50,000 per year, the annual tax saving from distributing to two children (compared to outright distribution to the surviving parent) can be $10,000–$15,000.
Asset protection — creditors, divorce, and bankruptcy
Assets held in a testamentary trust are not the beneficial property of a specific beneficiary — they are trust assets controlled by the trustee. In general, a beneficiary's creditors cannot reach trust assets if: the beneficiary is not the sole trustee and sole beneficiary; the trustee has genuine discretion in making distributions; and the trust is not being used as a sham or alter ego of the beneficiary. In practice, courts have recognised the asset protection characteristics of testamentary trusts in bankruptcy and family law property settlement proceedings — providing meaningful protection where the trust is properly structured.
Testamentary trust vs. inter vivos (living) trust
A testamentary trust is established by a will and takes effect on death — there is no transfer of assets during the testator's lifetime (and therefore no immediate CGT or stamp duty consequences at the time of establishment). An inter vivos (living) trust is established during the testator's lifetime — potentially giving rise to CGT on the transfer of assets to the trust. The tax-free-threshold income-splitting advantage (taxing trust income to minor beneficiaries at adult rates) is available to testamentary trusts — it is not available to income distributed to minor beneficiaries from ordinary inter vivos discretionary trusts.
The trustee — powers and obligations
The trustee of a testamentary trust holds the trust assets as a fiduciary — with obligations to act in the interests of the beneficiaries as a whole, not to prefer one beneficiary over another (absent express power), and to invest the trust assets prudently. The will (and the incorporated trust deed) defines the trustee's powers — including powers of investment, power to apply capital, power to accumulate income, and power to add or exclude beneficiaries. A well-drafted will and trust deed gives the trustee broad powers appropriate to a modern investment environment while including protections for beneficiaries.
How long does a testamentary trust last?
A testamentary trust can last for up to 80 years in most Australian states (the perpetuity period set by the relevant state's Perpetuities Act or equivalent). In practice, testamentary trusts are typically structured to end: on the death of all primary beneficiaries; when the youngest beneficiary reaches a specified age (e.g., 25 years); or on the occurrence of a specified event. The trust deed defines the vesting date — the date on which the trust assets are distributed outright to the beneficiaries. A lawyer drafts the trust to vest at the appropriate time.
Family provision claims and testamentary trusts
Testamentary trusts do not prevent family provision claims — a court can make a family provision order out of the trust assets if the trust is part of the estate. However, a testamentary trust can reduce the amount available for a successful family provision claimant in some circumstances — particularly where the trust is carefully structured to provide for the primary beneficiaries in a way that the court considers adequate, and where the trust assets are not easily accessible to the claimant. A lawyer advises on estate planning to minimise the risk and quantum of potential family provision claims.
How It Works
One request. A will with testamentary trust provisions.
Tell us your family structure, your assets, and your estate planning goals. A wills and estates lawyer advises on whether a testamentary trust is appropriate and drafts the will with the trust provisions.
Submit Your RequestDescribe your family and estate planning goals
Tell us your family structure (spouse, children, blended family), the broad nature and value of your assets, and your goals — protecting children from a prior relationship, income splitting, protecting a beneficiary from creditors, or long-term control of estate assets.
Advice on trust structure
A wills and estates lawyer (and where necessary, in coordination with your accountant) advises on the appropriate trust structure — discretionary testamentary trust, special disability trust, or life interest trust — and how it interacts with your superannuation death benefit nomination and overall estate plan.
Will with testamentary trust provisions drafted and executed
A lawyer prepares the will incorporating the testamentary trust provisions, explains the contents, oversees execution, and advises on trustee appointment and the ongoing obligations of future trustees.
Common Questions
Testamentary trusts — frequently asked questions.
Do I need a large estate to benefit from a testamentary trust?
No — the tax and asset protection advantages of a testamentary trust are valuable at a wide range of estate sizes. The income-splitting advantage for minor children applies whenever the trust generates investment income (interest, dividends, rental income) — and the savings accumulate over many years. For an estate worth $400,000 producing $20,000 per year in investment income, the annual tax saving from distributing to two children (at nil tax up to the threshold) vs. distributing to a surviving spouse (at their marginal rate) can be significant over a 10–15 year period until the children are adults. A lawyer helps you assess whether the benefits justify the additional cost of testamentary trust drafting in your specific circumstances.
Who should be the trustee of a testamentary trust?
The trustee can be the primary beneficiary (e.g., the surviving spouse), another individual (a sibling, trusted friend, or professional), or a professional trustee company. Where the primary beneficiary is also the trustee, the asset protection advantages are reduced — a creditor or bankruptcy trustee can argue that the sole trustee/beneficiary arrangement means the beneficiary effectively controls the assets. A lawyer advises on trustee selection and structuring to achieve the best balance of control and protection for the primary beneficiary while maintaining the asset protection and tax advantages.
Can the testamentary trust be varied after the testator dies?
The terms of a testamentary trust as set out in the will cannot be varied after the testator's death by the trustee or beneficiaries alone — they are fixed by the will. However, where all beneficiaries are adult, legally competent, and agree, they may in some circumstances be able to collapse (wind up) the trust and distribute the assets outright — under the rule in Saunders v Vautier. In some states, the court has a power to vary the terms of a trust in certain circumstances. A lawyer advises on what variations (if any) are available after the testator's death.