What is a testamentary trust?
A testamentary trust is a trust that activates on your death, created by your will. It unlocks tax benefits and asset protection that a straight gift can't.
A testamentary trust is a trust established by a will that activates on the testator's death. Rather than gifting assets directly to beneficiaries, assets are held in trust by a trustee who manages distributions – often with significant tax and asset protection advantages.
How it differs from a regular will
A regular will makes direct gifts: ‘I leave $500,000 to my son’. On death, the $500,000 becomes the son's personal asset. A testamentary trust will instead says: ‘I leave $500,000 on trust for my son, with my widow as trustee’. The money is held by the trust, not owned by the son directly.
Key benefits
Tax: income distributed to minor beneficiaries through a testamentary trust is taxed at adult marginal rates, not penalty rates. Asset protection: inheritance held in trust can be shielded from the beneficiary's divorce, bankruptcy, or personal creditors. Control: the trustee can manage distributions over time rather than handing over a lump sum.
Types of testamentary trusts
Discretionary: the trustee has broad discretion over distributions. Fixed: specific shares go to specific beneficiaries at defined times. Protective: includes explicit provisions to shield vulnerable beneficiaries. Each type suits different families and circumstances.
When it's worth setting up
Testamentary trusts add to the cost of drafting (typically $1,000-$2,500 extra) and to the complexity of administration. They're worth it for: young beneficiaries, substantial inheritances, beneficiaries with vulnerability (addiction, disability, unstable marriage), or estates where tax optimisation matters.
Summary
A testamentary trust is a trust that activates on your death, created by your will. It unlocks tax benefits and asset protection that a straight gift can't.
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
- Benefits of a testamentary trust for Australian families
- Testamentary trust vs family trust
- Testamentary trusts service
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.