Protecting Your Legacy: How Testamentary Trusts can Safeguard Your Children’s Inheritance

You have worked hard all your life.  You have saved, invested and built up assets, and now you are reviewing your Will to decide how best to provide for your loved ones.

For many parents, one of the biggest concerns is how to protect an inheritance from outside influences, especially if a child is in a relationship that feels uncertain or unstable.

So how do you ensure that your legacy stays with your family and does not fall into the hands of people who may not have their best interests at heart?

Case Example: Sandy’s Story

Sandy lives in Bellbrae.  After the passing of her husband, Bob, she now owns their large rural property in her sole name.  The property is worth around $2million and together with shares and term deposits, Sandy’s total estate is valued at approximately $3million.

Sandy has two adult children from her marriage to Bob: Kim and Phillip.

• Kim is in a long term relationship with her partner, Rob.  They have three children.  Sandy enjoys a close and loving relationship with the whole family.
• Phillip has been with his partner, Valerie, for about two years.  Their relationship is rocky.  Sandy has concerns and believes Valerie may be motivated more by financial security that genuine commitment.

Sandy currently has a simple Will in place dividing her estate equally between Kim and Phillip.

However, her lawyer at Coulter Legal has explained that a simple Will may leave Phillip’s inheritance vulnerable, especially if he separates from Valerie and becomes involved in family law proceedings.

To protect both children, Sandy is encouraged to consider adding Testamentary Trusts to her Will.

What is a Testamentary Trust?

A Trust established under a Will is known as a “testamentary trust”.  A Testamentary Trust comes into effect after your death according to the instructions in your Will.  It allows your beneficiaries to receive their inheritance in a structure rather than in their personal name.

Why Consider a Testamentary Trust?

1. Asset Protection

When an inheritance passes into a testamentary Trust, it does not automatically become the personal property of the beneficiary.  This separation can provide a valuable layer of protection.

For Sandy, this means Phillip’s share could be shielded from potential claims if his relationship with Valerie breaks down.

Sandy’s lawyer can help her structure the trust in a way that offers the strongest possible protection for Phillip’s circumstances.

2.Tax Benefits

Testamentary trusts can also be a powerful tool for tax minimisation.

Income earned within the trust can be distributed to beneficiaries who have lower taxable incomes, reducing the overall tax paid.

They are especially beneficial where there are beneficiaries under the age of 18 years.  Income distributed to minors through a Testamentary Trust is taxed at ordinary adult tax rates, including the benefit of the tax free threshold.  This treatment is more favourable that the usual tax rates which apply to minors.

For Sandy, this means Kim can receive her inheritance through a Testamentary Trust and direct income to her children (Sandy’s grandchildren) to support their education, activities or future savings in a tax effective way.

Final Thoughts

Testamentary Trusts are not just for the wealthy; they are a practical and effective tool for everyday families wanting to:

• Protect their children’s inheritance
• Manage tax efficiently
• Ensure their legacy is preserved for future generations.

For further details, please contact Coulter Legal’s Wills, Estates & Succession Planning team on 03 5273 5273 or at info@coulterlegal.com.au. Appointments can be arranged at the Torquay, Geelong, Barwon Heads or Melbourne offices.