Testamentary Trusts: A smart Estate Planning solution for all Australians

When most people think about estate planning, they picture a simple Will – a document that says who gets what when they’re gone. But there’s another option that can make a world of difference for your family: a Testamentary Trust.

It’s not just for the wealthy or business owners. In fact, it’s one of the most practical, flexible tools available to everyday Australians who want to protect what they’ve worked hard for and make sure it benefits their loved ones for years to come.

What is a Testamentary Trust?

A Testamentary Trust is a trust that’s created inside your Will and only comes into effect after you pass away.

Instead of giving assets directly to your beneficiaries, the trust holds those assets and a trustee manages them on behalf of your nominated beneficiary – often your children, grandchildren, or other loved ones.

Think of it as an invisible protective shield around your estate. The trust can last for decades (up to 80 years) once established, giving your family flexibility, control, and peace of mind long after you’re gone.

Why are everyday families using Testamentary Trusts?

Protecting Your Family’s Inheritance

Life doesn’t always go to plan. Relationships break down, businesses fail, and people face financial hardship. A Testamentary Trust helps shield your family’s inheritance from those risks.

Because the assets are held in the trust, rather than owned outright by the beneficiary, they’re generally protected from creditors, bankruptcy, and even divorce settlements.  There are ways we can structure the control of the trust to ensure these protective measures are maximised.

Comparatively, if an inheritance is paid or transferred to a beneficiary personally (i.e., straight into their preferred bank account), then the funds will be exposed to creditors or through family law proceedings.

That means if your child goes through a tough time, and they have a Testamentary Trust in place, their inheritance is far less likely to be lost in the process. It’s a simple way to make sure your legacy stays in the family.

Tax Benefits That Help Families Keep More

One of the most misunderstood aspects of Testamentary Trusts is their tax advantages.

Income earned by the trust can be distributed among family members in the most tax‑effective way each year. For example, income paid to children under 18 is taxed at normal adult rates – not the high penalty rates that usually apply to minors.

That means that each year minors can receive almost $20,000.00 of trust income tax free, helping families fund education, cover living costs, or invest for the future.

The tax treatment of Testamentary Trusts was recently under doubt following the release of the Australian Government’s most recent Budget.

However, more recent developments have made it clear that discretionary Testamentary Trusts should receive a ‘carve out’ and be excluded from the new proposed 30% minimum tax, which is great news for all those with existing Testamentary Trusts in their Wills, as well as those considering them for the future.

Building Generational Wealth

A Testamentary Trust isn’t just about protecting assets; it’s about building a legacy.

By keeping wealth in the trust, families can grow and preserve it across generations. It helps break cycles of financial disadvantage and gives children and grandchildren a stronger foundation for their own futures.

Trusts can “stand the test of time” because they combine protection, flexibility, and long‑term vision – qualities that make them just as relevant for young families as for retirees.

We generally recommend Testamentary Trusts to clients when it looks like any one beneficiary stands to receive more than $500,000.00 as their inheritance (based off the anticipated net asset position as at the date of receiving instructions).

Whilst $500,000.00 is, in some ways, an arbitrary threshold, it is a good starting point for considering whether Testamentary Trusts are right for your family. Administering a Testamentary Trust involves obtaining a Tax File Number, annual tax returns, trustee meetings, and other compliance costs.

When the trust holds around $500,000.00 or more, the investment income it can generate (ideally 4–6% per year) is usually enough to offset those running costs, meaning the structure pays for itself. Below that level, the administrative burden may outweigh the financial benefit.

Who Should Consider using a Testamentary Trust?

If you own a home, have savings, superannuation, or investments, a Testamentary Trust could be worth exploring.

It’s particularly useful if:

• You want to protect your children’s inheritance from future risks
• You have young or vulnerable beneficiaries
• You want to reduce tax and maximise what your family keeps

In short, it’s a practical estate planning solution for ordinary Australians who want to make sure their hard‑earned assets are used wisely and safely.

A Testamentary Trust isn’t complicated – it’s simply a smarter way to manage what you leave behind.

It offers protection, flexibility, and tax efficiency that a simple Will can’t match. Whether your estate is large or modest, it’s worth asking whether a testamentary trust could help secure your family’s future.

Get in touch

If you would like to discuss your Estate Planning, and whether a Testamentary Trust is the right choice for you (and your beneficiaries), please contact our Wills, Estates & Succession Planning team on (03) 5273 5273.

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