Testamentary Trusts in Australia: Do You Need One in Your Will?
General information, not legal advice.
On this page
- What Is a Testamentary Trust?
- Why Use a Testamentary Trust?
- Tax Benefits Explained
- Asset Protection Benefits
- Control Over Distribution
- When Do You Need a Testamentary Trust?
- Types of Testamentary Trusts
- Costs of Testamentary Trusts
- Choosing a Trustee
- Setting Up a Testamentary Trust
- Testamentary Trust vs Other Options
- State-Specific Considerations
- Legislation and Official Resources
- Related Guides
- Is a Testamentary Trust Right for You?
Quick answer
A testamentary trust is created by your will and comes into existence when you die, holding and managing assets for your beneficiaries according to terms you set. It offers three main benefits: tax savings, asset protection, and control over how inheritance is distributed.
- Tax savings: Income from inherited assets distributed to minor children is taxed at adult marginal rates (tax-free up to $18,200) instead of penalty rates.
- Asset protection: Inheritance is held in trust, harder for a beneficiary's creditors, bankruptcy, or divorce to reach.
- Control: You set vesting ages and trustee discretion to decide when and how beneficiaries receive their inheritance.
- Most valuable for: Families with minor children or larger estates, where tax savings can exceed the added cost.
A testamentary trust is one of the most powerful estate planning tools available to Australian families. This guide explains what they are, when you need one, and how they can protect your beneficiaries and save significant tax.
What Is a Testamentary Trust?
A testamentary trust is a trust established by your will that comes into existence when you die. Key characteristics:
| Feature | Testamentary Trust |
|---|---|
| Created by | Your will |
| When established | Upon your death (after probate) |
| Managed by | Trustee you appoint |
| Beneficiaries | People you specify |
| Duration | Until you specify (often 18-80 years) |
| Assets held | Your estate assets |
Simple Definition: Instead of giving assets directly to beneficiaries, you give them to a trust, which holds and manages the assets for the beneficiaries' benefit according to rules you set.
Why Use a Testamentary Trust?
Three Main Benefits
| Benefit | How It Works | Who Benefits |
|---|---|---|
| Tax savings | Minor beneficiaries taxed at adult rates | Families with children |
| Asset protection | Assets protected from creditors, divorce | All beneficiaries |
| Control | You decide when/how assets distributed | Young beneficiaries, vulnerable beneficiaries |
Tax Benefits Explained
Key point
Income distributed to minor children through a testamentary trust, from assets that came from the estate, is taxed at adult marginal rates, so each child can receive up to $18,200 tax-free instead of facing penalty rates that start at $416.
The Minor Beneficiary Advantage
Normally, income earned by minors from unearned sources is taxed at penalty rates:
| Income | Normal Tax for Minors |
|---|---|
| $0 - $416 | 0% |
| $417 - $1,307 | 66% |
| $1,308+ | 45% |
But income a testamentary trust earns from assets transferred from the deceased estate (and accumulations of them) is taxed at adult marginal rates (s102AG Income Tax Assessment Act 1936). Assets added to the trust from other sources later do not get this treatment. Resident rates for 2024-25 and 2025-26:
| Income | Testamentary Trust Rate |
|---|---|
| $0 - $18,200 | 0% |
| $18,201 - $45,000 | 16% |
| $45,001 - $135,000 | 30% |
Worked Example: The Tax Savings
A hypothetical example, using simplified figures: a family has 3 children (ages 8, 12, 15), and the inherited assets produce $60,000 a year in investment income.
| Scenario | Tax Paid |
|---|---|
| Without testamentary trust (income to one adult) | ~$10,000 (including Medicare levy) |
| With testamentary trust (split among 3 children) | ~$0 |
| Annual saving | ~$10,000 |
The saving repeats each year until the youngest turns 18. Actual results depend on the income, the tax rates at the time, and each child's other income.
How Income Splitting Works
| Structure | Tax Result |
|---|---|
| One beneficiary | One tax-free threshold ($18,200) |
| Three beneficiaries | Three thresholds ($54,600 tax-free) |
| Mix of adults and children | Each gets their own threshold |
Asset Protection Benefits
What a Testamentary Trust Protects Against
| Threat | How Trust Protects |
|---|---|
| Beneficiary's divorce | Assets in trust, not beneficiary's name, harder for ex-spouse to claim |
| Beneficiary's bankruptcy | Trustee controls assets, not the bankrupt beneficiary |
| Poor money decisions | Beneficiary can't spend trust capital unwisely |
| Predators and manipulators | Trustee provides oversight on distributions |
| Future lawsuits | Assets held in trust, not personally |
How Strong Is the Protection?
| Scenario | Protection Level |
|---|---|
| Beneficiary's personal debt | Strong, creditors can't easily access trust |
| Beneficiary's divorce | Moderate to strong, depends on involvement |
| Family provision claim | Limited, trust assets may still be claimed |
| Beneficiary's bankruptcy | Strong, if properly structured |
Important: Asset protection is not absolute. Courts can "look through" trusts in some circumstances, particularly if the beneficiary has significant control.
Control Over Distribution
Setting Vesting Ages
Instead of beneficiaries receiving everything at 18, you can specify:
| Option | Structure |
|---|---|
| Single age | Everything at 25 (or any age you choose) |
| Staged | 25% at 21, 50% at 25, remainder at 30 |
| Milestone-based | Portions released on completion of education, steady employment, etc. |
| Lifetime | Never vests, trustee manages forever (special needs) |
Trustee Discretion
You can give trustees power to:
- Make early distributions for specific purposes (education, home deposit)
- Withhold distributions if beneficiary has addiction or financial problems
- Adjust distributions based on beneficiaries' needs
- Invest conservatively or aggressively based on circumstances
When Do You Need a Testamentary Trust?
Key point
A testamentary trust is most valuable for families with minor children or larger estates, where the tax savings can exceed the added setup and ongoing costs.
Strongly Recommended
| Situation | Why |
|---|---|
| Minor children | Tax benefits + protection until mature |
| Larger estate producing significant income | Tax savings may exceed costs |
| Beneficiary with disability | Lifetime management, Centrelink protection |
| Concerns about beneficiary's spouse | Divorce protection |
| Beneficiary with addiction | Controlled distributions |
| Blended family | Protect children from different relationships |
May Be Worth Considering
| Situation | Why |
|---|---|
| Mid-sized estate | Benefits may outweigh costs |
| Adult children who are good with money | Still provides some tax benefits |
| Potential family provision claims | May offer some protection |
Probably Not Needed
| Situation | Why |
|---|---|
| Smaller estate | Administration costs may exceed benefits |
| Simple estate, adult children | Direct inheritance is simpler |
| No tax planning opportunity | Limited income-producing assets |
Types of Testamentary Trusts
Discretionary Testamentary Trust
Most common type. Trustee has discretion over distributions.
| Feature | Detail |
|---|---|
| Flexibility | High, trustee decides who gets what, when |
| Tax planning | Excellent, income can be split among beneficiaries |
| Asset protection | Good, beneficiaries don't "own" assets |
| Complexity | Moderate, requires trustee to make decisions |
Protective Testamentary Trust
Specifically designed for vulnerable beneficiaries.
| Feature | Detail |
|---|---|
| Purpose | Protect beneficiaries with disability, addiction, poor judgment |
| Control | High, trustee has significant control |
| Centrelink | Can be structured to preserve benefits |
| Duration | Often lifetime |
Capital Reserved Trust
Capital preserved, only income distributed.
| Feature | Detail |
|---|---|
| Purpose | Preserve wealth across generations |
| Distribution | Income only, capital stays in trust |
| Best for | Very large estates, generational wealth |
Costs of Testamentary Trusts
Setup Costs
| Component | Typical Cost |
|---|---|
| Will with testamentary trust provisions | $2,000-$5,000 |
| Complex trust structures | $5,000-$10,000+ |
| Simple will (comparison) | $300-$800 |
Ongoing Costs (After Your Death)
| Annual Cost | Amount |
|---|---|
| Trust tax return | $500-$1,500 |
| Trustee administration | $500-$2,000 |
| Professional trustee (if used) | 0.5%-1.5% of assets |
| Investment management | Variable |
Cost-Benefit Analysis
Whether a testamentary trust pays for itself depends on how much income the inherited assets produce, how many beneficiaries can share it, and the ongoing costs of running the trust. For a smaller estate the costs can outweigh the savings; for an estate that produces significant income for minor children, the savings can be larger than the costs. A solicitor or tax adviser can work through the numbers for your situation.
Choosing a Trustee
Trustee Options
| Option | Pros | Cons |
|---|---|---|
| Family member | Knows family, no fees | May lack expertise, conflicts |
| Professional trustee company | Expert, impartial | Fees (0.5-1.5%/year) |
| Public Trustee | Government-backed, affordable | Less flexible |
| Combination | Balance expertise and family | Complexity |
Trustee Responsibilities
| Duty | What It Means |
|---|---|
| Act in beneficiaries' interests | Every decision prioritises beneficiaries |
| Invest prudently | Balanced, appropriate investments |
| Keep records | Document all transactions |
| Distribute appropriately | Follow trust terms |
| File tax returns | Annual trust tax return |
Setting Up a Testamentary Trust
Process Overview
- Consult an estate planning lawyer (this is too complex for DIY)
- Discuss your goals (who benefits, when, how)
- Draft the trust provisions in your will
- Choose trustees (and discuss with them)
- Execute the will with proper witnessing
- Review periodically (every 3-5 years)
What to Discuss with Your Lawyer
- Who should be beneficiaries (primary and secondary)
- When should beneficiaries receive capital (vesting ages)
- Who should be trustee (and alternates)
- What powers should trustee have
- How should income be distributed
- What happens if beneficiary dies
Testamentary Trust vs Other Options
| Feature | Testamentary Trust | Direct Gift | Family Trust |
|---|---|---|---|
| Created | At death | At death | During lifetime |
| Minor tax benefits | Yes (adult rates) | No | No |
| Asset protection | Yes | No | Yes |
| Control after death | Yes | No | Depends |
| Setup cost | Higher | Lower | Higher |
| Ongoing costs | Yes | No | Yes |
| Flexibility | High | None | High |
State-Specific Considerations
Testamentary trusts are governed by the will (state law) but taxation is federal. Key points:
| Aspect | Jurisdiction |
|---|---|
| Trust creation | State succession law |
| Trust administration | State trustee law |
| Taxation | Federal (Income Tax Assessment Act) |
| Stamp duty | May apply on certain transfers (varies by state) |
Legislation and Official Resources
Will-making in Australia is governed by each state and territory's own succession legislation. The core statutes include:
- New South Wales: Succession Act 2006 (NSW)
- Victoria: Wills Act 1997 (Vic)
- Queensland: Succession Act 1981 (Qld)
- South Australia: Succession Act 2023 (SA)
- Western Australia: Wills Act 1970 (WA)
- Tasmania: Wills Act 2008 (Tas)
- Australian Capital Territory: Wills Act 1968 (ACT)
- Northern Territory: Wills Act 2000 (NT)
Because requirements differ between states and are amended over time, always confirm the current rules for your state, or seek advice from a qualified legal professional.
Related Guides
- Minor Children and Guardianship in Wills – Trusts for children
- Superannuation and Your Will – Super flowing into trusts
- Blended Family Will Planning – Trusts in complex families
- Disability and Special Needs Will Planning – Protective trusts
- Lawyer Will Cost Australia – Cost of professional will with trust
Is a Testamentary Trust Right for You?
Testamentary trusts offer significant benefits but add complexity and cost. They're most valuable when:
- You have minor children who will inherit significant assets
- Your estate generates ongoing income
- You have concerns about beneficiaries' ability to manage money
- You want to protect inheritance from divorce or creditors
- You have a beneficiary with special needs
For families with minor children who will inherit income-producing assets, the tax savings can outweigh the added cost. A solicitor or tax adviser can tell you whether it is worth it for your estate.
For parents who plan ahead
Protect what you leave your children
WillBuddy can hold a young person's share until an age you pick, and keep the share of anyone who needs help managing money in a protective trust. It doesn't draft a special disability trust or a tax-planning testamentary trust, so for those, see a lawyer. Read every word free, with no card. You pay only if you want to print it.
Start my will freeLast updated 12 June 2026.
This article is general information only and is not legal advice. It is our best interpretation of the law as at 12 June 2026. WillBuddy is not a law firm, and it never replaces advice from a lawyer or solicitor. Laws change and differ between states and territories, so for your own circumstances, please get legal advice.