A Will leaves assets. A testamentary trust protects them.
A standard Will transfers assets directly to the people you name. That transfer is straightforward, but it is also final. Once your chosen person receives their inheritance, it is theirs to keep, spend, lose in a relationship breakdown, or have claimed by creditors.
A testamentary trust Will does something different. Instead of passing assets directly to a beneficiary, it passes them into a trust created by your Will, managed by a trustee you appoint, for the benefit of the people you choose. The assets remain protected while still benefiting your family.
This is not a structure reserved for large or complex estates. It is a considered choice available to any Will maker who wants more than a direct transfer.
What a testamentary trust is
A testamentary trust is a discretionary trust created within your Will. It does not exist during your lifetime. It comes into existence on your death, at which point the trustee you have named takes control of the assets that flow into it.
A testamentary trust is similar in structure to a family trust, with one critical difference: a family trust is created and operates during your lifetime, giving you direct control. A testamentary trust is controlled entirely by the provisions you set out in your Will, which is why those provisions must be carefully and precisely drafted.
Only assets held in your sole name can form part of a testamentary trust. Assets held as joint tenants, superannuation, and family trust assets sit outside your estate entirely and cannot flow into a testamentary trust without specific planning. Our team reviews all of this as part of your estate planning conversation.
What a testamentary trust protects against
Relationship breakdown
A common concern among Will makers is that an inheritance may end up benefiting a child’s former spouse or partner in a separation. Assets received as a direct gift and used during a relationship can be difficult to isolate from Family Court proceedings.
Where assets are held in a testamentary trust rather than given as a direct gift, the trustee retains control over distributions. This can reduce the exposure of your inheritance to a separating couple’s property settlement, though the extent of that protection will depend on the specific circumstances.
Bankruptcy and creditor claims
For beneficiaries in professions that carry personal liability risk, including medical practitioners, lawyers, accountants, and sole traders, a direct inheritance can be vulnerable to creditor claims. A trustee of a testamentary trust determines who receives income and capital, and can withhold distributions from a bankrupt beneficiary entirely.
Incapacity or dependency
Where a beneficiary has an intellectual disability, or suffers from a significant drug or alcohol dependency, a direct gift may be mismanaged or lost. A testamentary trust keeps your appointed trustee in control of distributions, providing for the beneficiary’s needs without placing the full asset in their hands.
Taxation
One of the most significant advantages of a testamentary trust is the ability to split income across multiple beneficiaries, including minor children, in a way that is not available through direct gifts or family trusts.
Income earned from investments made using estate funds is normally taxed at the beneficiary’s marginal rate. Where the same income is earned within a testamentary trust and distributed across several beneficiaries including minor children, the tax liability can be reduced. That saving applies in every year the investment is maintained.
How testamentary trusts can be structured
There is more than one way to structure a testamentary trust Will, and the right approach depends on your family, your assets, and your intentions.
Single trust with multiple beneficiaries
Your entire estate flows into one trust. The trustee distributes income and capital across all beneficiaries at their discretion. This structure suits estates where the beneficiaries have shared interests and a trustee capable of managing competing needs fairly.
Separate trusts for each principal beneficiary
A more commonly recommended approach. Each principal beneficiary, typically each adult child, receives their share of the estate into a separate trust of which they are the trustee. This gives each beneficiary practical control over their own share while preserving the protective and tax advantages of the trust structure.
What to be aware of
A testamentary trust gives the trustee significant discretion. There is no guarantee as to which beneficiaries will receive what, or how long the trust will operate, unless specific controls are written into the Will. This is why the drafting of a testamentary trust Will requires an experienced estate solicitor, not a standard document.
- The trustee must be someone you trust absolutely to act in the interests of your beneficiaries over potentially many years.
- The trust only covers assets that form part of your estate. Superannuation, jointly held assets, and family trust assets require separate planning to ensure they are directed appropriately.
- There are ongoing administrative obligations for the trustee, including record keeping and tax returns for the trust.
Is a testamentary trust right for you?
Not every estate requires a testamentary trust Will. A direct Will may be entirely appropriate for your circumstances. The right answer depends on your assets, your family structure, and what you want to protect.
Our team will review the full picture with you and give you a clear recommendation, without obligation.
Book a conversation with our team. No obligation. No pressure. Just a clear picture of where you stand and what needs to change.
Not ready to call? Start here.
Download our plain-language guide: Understanding Testamentary Trust Wills. Written for South Australians, not lawyers.