Testamentary trusts: what they are and whether you need one

What is a testamentary trust?

A testamentary trust is a trust created by a will. It doesn't exist while you're alive. It starts after your death, when your executor transfers some or all of what you leave into it.

Your will does the job a trust deed does for other trusts. It names the trustee who manages the assets, says who can benefit, and sets the rules: what the money can be used for, when beneficiaries take control and when the trust ends. The ATO describes a testamentary trust as working in a similar way to a discretionary family trust, with the will acting as the deed.

The trust is separate from your estate. Your executor deals with the estate first (probate, debts, tax), then hands the inheritance to the trustee. Often the executor and the trustee are the same people.

How does a testamentary trust work?

Four roles make a testamentary trust work:

• You, the will-maker, set the terms in your will. You can change them whenever you update your will.
• The trustee holds and invests the assets and decides who gets what, within the rules in your will. It can be family members, friends or a trustee company.
• The appointor can remove and replace the trustee. In a discretionary trust this is where the real control sits.
• The beneficiaries are usually a primary beneficiary (often your child) plus a wider group the trustee may also pay, such as that child's partner, children and siblings.

Discretionary and protective trusts

Most testamentary trusts for children are discretionary. No beneficiary is entitled to anything until the trustee decides to pay them. That flexibility is what makes the tax and protection benefits possible.

A protective trust is built for a beneficiary who shouldn't control the money at all, for example because of a disability, an addiction or a gambling problem. The beneficiary is never a trustee and can't demand payments. For a family member with a severe disability, a special disability trust can also protect their pension.

Many trusts for children let each child take over as trustee and appointor of their own trust once they reach an age set in the will. They then run it themselves, and keep the tax and protection benefits for as long as the trust lasts.

What are the tax benefits of a testamentary trust?

The best-known benefit concerns children under 18. Normally, unearned income a child receives, such as a trust distribution, is taxed at special higher rates under Division 6AA of the Income Tax Assessment Act 1936. The ATO says these rules exist to discourage adults from diverting income to their children.

At the 2025-26 rates, a resident child pays nothing on the first A$416 of that income. Once it passes A$1,307, the whole amount is taxed at 45%.

Income from a testamentary trust is treated differently. Under section 102AG it is excepted trust income, so it's taxed at ordinary adult rates. A resident child whose only income is excepted income pays no tax on the first A$18,200 (as at October 2026).

In practice, a trustee can spread income across several children or grandchildren each year, each using their own tax-free threshold. Over the years a family's children are young, that can add up.

The 2019 change: only assets from your estate count

The concession now applies only to income from assets that came to the trust from your estate, plus what those assets are later turned into and income reinvested from them. This integrity rule, in section 102AG(2AA), applies to assets acquired by or transferred to the trustee on or after 1 July 2019.

So if a grandparent later adds money to the trust, or a family trust makes a distribution to it, the income from that money is taxed at the minors' rates. The ATO's own example: if the trustee sells a rental property that came from the estate and buys shares, the share income still counts. Trustees need records that keep estate assets separate from anything added later.

Other tax points

• The trust lodges its own tax return every year it exists, separate from the estate's.
• Adult beneficiaries pay tax on what they receive at their own rates, so the trustee can direct income to family members on lower incomes.
• If the will allows it, the trustee can pass capital gains and franked dividends to particular beneficiaries.
• Special capital gains tax rules apply to assets passing from an estate. The ATO recommends specialist advice before assets are sold or passed on.

How does a testamentary trust protect an inheritance?

In a discretionary trust the trustee owns the assets and no beneficiary is entitled to anything until the trustee decides. That makes the inheritance harder for a beneficiary's creditors, a trustee in bankruptcy or a former partner to reach. Moneysmart notes that a trust can protect assets from divorce settlements and bankruptcy proceedings.

• Bankruptcy and creditors. If your child runs a business or works in a job where they could be sued, the assets stay with the trustee rather than in their name. Many trusts also stop a beneficiary receiving anything while they're bankrupt.
• Relationship breakdown. The inheritance isn't mixed in with your child's joint assets, and the trust can drop a former partner from the beneficiaries on separation.
• Young or vulnerable beneficiaries. The trustee can pay for school, health and housing while holding back a lump sum until the beneficiary is ready for it.
• Blended families. You can keep each child's share separate, so it ends up with your children and grandchildren rather than a new partner's family.

What are the downsides of a testamentary trust?

• Running costs. The trust needs a tax return every year, proper records and written trustee decisions, so most trustees pay an accountant.
• Trustee duties. Trustees must act in the beneficiaries' best interests, invest carefully, keep accounts and treat beneficiaries fairly. They can be personally liable for a breach of trust.
• Family cooperation. Depending on who is trustee and appointor, family members may need to work closely together and share financial information.
• Small estates. If the inheritance is modest, the yearly costs can outweigh any tax saving. A simple gift held until a set age may do the job.
• It only holds what passes under your will. Jointly owned property usually goes to the surviving owner, family trust assets stay in the family trust, and super goes wherever your fund pays it. See our guide to binding death benefit nominations.

Who should consider a testamentary trust?

A testamentary trust is worth a look if one or more of these applies:

• You have children under 18, or you don't want your children inheriting a lump sum at 18.
• Your estate, including life insurance or super paid to it, would earn meaningful investment income.
• A beneficiary runs a business, works in a profession where they could be sued, or is in a shaky relationship.
• A beneficiary has a disability, an addiction or trouble managing money.
• You're in a blended family and want each child's share kept separate.

If most of what you own is a home held jointly with your partner, plus super paid directly to them, a testamentary trust may do little on the first death. It matters if you both die, or when the second of you dies, which is why couples often include one in both wills.

Testamentary trust vs family trust: what's the difference?

Both are usually discretionary trusts with a trustee, an appointor and a group of beneficiaries. The big differences are when they start and how income paid to children is taxed.

The two often work together. A family trust's assets don't form part of your estate, so your will can't give them away. What your will can do, if the deed allows, is pass control of the family trust: the appointor role and any shares in the trustee company. The Complete Will deals with family trusts as well as testamentary trusts.

How does Willies set up a testamentary trust?

The Willies Complete Will (A$399, or +A$199 for your partner's mirror will) includes testamentary trust terms as a schedule to your will. After you pay, you answer a few extra questions about the trust, and a real person checks your will before it's sent. The terms work like this:

• Who it covers. Each child's or descendant's share of the rest of your estate goes into a trust instead of to them outright, whatever their age. Specific gifts you name are not caught. A family member with a disability is dealt with separately, through a special disability trust or a protective trust.
• One trust each, or one shared. By default each child has their own trust. You can choose one shared trust instead, which splits into separate trusts as each child reaches the control age.
• Trustees. Up to three people you choose (we start with your executors). Two trustees act jointly; three can decide by majority. A company can be appointed later.
• The appointor. The person who can replace trustees: someone you name, or your executors if you leave it blank.
• The control age. You choose 18, 21, 25 or 30. From then your child can make themselves trustee and sole appointor of their own trust. It's postponed while they're bankrupt or lack capacity.
• The beneficiaries. Your child, their partner (never a former partner), their children and descendants, your other children and descendants and their partners, plus companies, trusts and charities connected with them. Anyone bankrupt is excluded while bankrupt, as is anyone you've deliberately left out of your will. By default your own partner isn't included, so a step-parent who becomes trustee can't benefit themselves.
• The tax rules, built in. Amounts set aside for a child under 18 belong to that child, so the income can qualify as excepted trust income. Estate assets are tracked separately from anything added later, as the 2019 rule requires.
• How long it lasts. Each trust must end within 80 years of your death, the perpetuity period the will sets in every state. If your child dies first, their trust carries on for their family.

Your executors are often your trustees too, and our guide to the executor of a will explains that role. If your estate includes a business or overseas assets, or someone is likely to contest your will, a lawyer can help you decide how to structure things.