Testamentary trust vs family trust: which is right for you?
Family trusts are created during your lifetime. Testamentary trusts are created by your will. Different tax treatment, different uses.
A family (discretionary) trust is established during your lifetime, usually for asset protection and tax planning during your working years. A testamentary trust is established on your death via your will, and carries specific tax benefits that family trusts don't have – particularly for minor beneficiaries.
Family trust
Created during your lifetime by a trust deed. Often used for asset protection (e.g. separating business risk from family assets), income splitting during working years, and some succession planning. Income is taxable at the trustee's marginal rate or distributed to beneficiaries.
Distributions to minor beneficiaries from a family trust attract penalty tax rates.
Testamentary trust
Created by your will, activating on death. The key tax difference: income distributed to minor beneficiaries is taxed at adult rates (not penalty rates). This makes testamentary trusts particularly valuable for families with young children or grandchildren as ultimate beneficiaries.
When to use each
Use a family trust during your lifetime for business asset protection, income splitting, and some succession work. Use a testamentary trust in your will to shield inheritance, manage distributions to minors, and reduce tax on inherited income.
Many Adelaide families end up with both – a family trust for lifetime operations, and a testamentary trust built into the will.
Overlaps and integration
Your will can direct assets into an existing family trust, or create a new testamentary trust, or both. Coordination matters – a poorly integrated family trust and testamentary trust can waste the benefits of either.
Summary
Family trusts are created during your lifetime. Testamentary trusts are created by your will. Different tax treatment, different uses.
Talk to Sam about your situation
If this article raised questions for your own circumstances, Sam Michele offers free 20-minute initial consultations. Learn more about our testamentary trust work, or book a consultation.
Related reading
Disclaimer: This article is general information only and does not constitute legal advice. Estate planning is deeply personal - every family's circumstances are different. For advice specific to your situation, please contact Rosewood Succession Solicitors.