Context & Problem

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Estate planning isn’t just for the wealthy — it’s for anyone who wants to ensure their assets are passed on smoothly, tax-effectively, and in line with their values.

Without proper planning, assets left in a straightforward Will may:

• Become vulnerable to legal claims (such as divorce or bankruptcy)
• Lose valuable tax advantages
• Be mismanaged or spent unwisely, especially by younger or vulnerable beneficiaries

A testamentary trust addresses these risks by creating a legal structure that manages and protects assets beyond the lifetime of the person who set it up.

Here’s a step-by-step breakdown of how a testamentary trust works in Australia:

1. What Is It?

• A testamentary trust is created by your Will and only comes into effect after your death.
• The trust holds and manages assets for your chosen beneficiaries.

2. Who Controls It?

• The trustee (often the surviving spouse, a trusted family member, or a professional) manages the assets.
• Trustees can appoint accountants or financial planners to help with tax returns and investment advice.

3. Key Benefits:

• Tax Savings: Income distributed to children under 18 is taxed at adult rates (up to $18,200 tax-free as of 2026FY — ATO, updated 1 July 2025), instead of the usual high “penalty” rates for minors.
• Asset Protection: Assets in the trust are shielded from legal challenges, bankruptcy, and family law claims.
• Flexibility: The trustee can decide how and when income or capital is distributed.

4. How It Works in Practice:

• After death, the executor of the Will applies for probate and transfers assets into the trust.
• No stamp duty or capital gains tax applies to this transfer, but owning property in the trust may attract land tax (NSW threshold $1,075,000 at 1.6% = approx. $17,200 as of 2025).
• The trustee then manages and distributes assets according to the terms of the trust as established by the Will.

5. Protecting Vulnerable Beneficiaries:

• Ideal for situations involving:
  • Minor children
  • People with disabilities
  • Beneficiaries at risk of divorce, bankruptcy, or financial mismanagement

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Case Study: Protecting the Next Generation Emma and John have three young children and a family home worth $1.2 million, plus savings and shares. They set up a testamentary trust in their Wills. When John passes away, his share of the assets moves into the trust. Emma, as trustee, controls these assets but they legally belong to the trust — not her personal estate. If Emma later remarries or faces financial hardship, the trust assets are available only for Emma and the children she had with John. As trustee, Emma can distribute income to any of these family members, including the children while still under 18, at adult tax rates. For example, the first $72,800 of taxable income from the trust (4 beneficiaries x $18,200 each) could be distributed to Emma and the children without any tax being incurred. And the children’s income would be controlled by Emma as their parental guardian. When Emma eventually passes, control of the trust passes smoothly to the children, keeping the family wealth intact across generations.