A testamentary trust is a trust that is established through a person’s will and only comes into effect after their death. Unlike a standard discretionary family trust, which is created and managed during a person’s lifetime, a testamentary trust is triggered by the administration of an estate. When the will maker passes away, the assets held in their estate can be transferred into the trust and managed by a trustee for the benefit of nominated beneficiaries.
The will sets out the rules governing how the trust operates. These rules determine who can benefit from the trust, how income and capital can be distributed and who has control over the trust’s decisions. This structure allows the will maker to retain a level of influence over how their assets are managed long after they have passed away. This is sometimes referred to in estate planning as “dead hand control”, where the structure created by the will continues to guide how wealth is used by future generations.
One of the key advantages of testamentary trusts is the flexibility they provide in managing inherited assets. Instead of assets passing directly to beneficiaries in their personal names, they are held within the trust and managed strategically over time. Beneficiaries can receive income distributions or access capital when appropriate, but the underlying assets can remain protected within the trust structure.
This flexibility allows families to manage wealth more strategically. For example, trust assets may be used to fund education expenses, support family members through different life stages, assist with property purchases or provide investment capital for business or investment opportunities. Because the trustee controls the distribution of income and capital, the trust can adapt to the changing circumstances of beneficiaries over time.
Tax planning is another major benefit of testamentary trusts. One of the most significant advantages relates to how income distributed to minor beneficiaries is taxed. Under normal trust rules, income distributed to minors from a standard discretionary trust is taxed at punitive rates after a very small threshold. In contrast, income distributed from a testamentary trust is taxed using the standard adult marginal tax rates.
This means that each minor beneficiary can access the full tax-free threshold and lower marginal tax rates. In practice, this allows families to distribute income to children in a much more tax-efficient way. Income generated by investments held within the trust can be split across multiple family members, reducing the overall tax burden compared with holding assets in a single individual’s name.
Capital gains tax treatment also provides important advantages. Assets owned by a deceased person can generally pass through their estate into a testamentary trust without triggering an immediate capital gains tax event. This means that beneficiaries are not forced to realise a capital gain simply because the assets have been transferred. The capital gain is typically deferred until the asset is eventually sold, allowing the trustee to manage the timing of that event and distribute the gain across multiple beneficiaries if appropriate.
Asset protection is another significant reason why testamentary trusts are widely used in estate planning. Because the trust owns the assets rather than the individual beneficiary, those assets are generally better protected in situations such as bankruptcy, litigation or relationship breakdown. If a beneficiary experiences financial difficulty or legal claims, assets held within the trust are often shielded from being treated as their personal property.
This protection can be particularly important when considering the long-term realities of family life. Divorce, financial stress, business risks and legal disputes can all impact individuals over time. Testamentary trusts can help ensure that wealth built up over a lifetime is not unintentionally lost due to these events.
Testamentary trusts are also commonly used to protect beneficiaries who may be vulnerable or financially inexperienced. For example, if a beneficiary is young, has an addiction, experiences health issues or struggles with financial management, the trust structure can ensure they still benefit from the estate without having direct control over large sums of money. An independent trustee can be appointed to oversee decisions and ensure the funds are used responsibly.
Another important benefit is the longevity of testamentary trusts. In many Australian jurisdictions, trusts can last for many decades and in some cases up to 80 or even 125 years depending on the state legislation. This allows the trust to operate across multiple generations, with assets continuing to accumulate and compound over time.
This long-term structure allows families to think about wealth not just in terms of the next generation but also grandchildren and beyond. Rather than distributing assets outright and allowing them to potentially be dissipated, testamentary trusts allow wealth to remain consolidated within a structured vehicle that can continue growing.
Despite their many advantages, testamentary trusts do involve additional legal and administrative complexity. They must be properly established through a professionally drafted will, and once they become active the trustee will generally need to manage accounting, tax returns and compliance obligations each year. Depending on the complexity of the trust and the assets involved, this can create ongoing administrative costs.
For this reason, testamentary trusts are most commonly recommended for estates where the potential tax savings, asset protection benefits and long-term wealth planning advantages outweigh the ongoing costs. Many estate planning professionals now suggest that estates of around $1 million or more should at least consider the use of testamentary trusts, although in many cases even smaller estates may benefit depending on family circumstances.
Another important consideration is ensuring that assets are correctly structured to flow into the testamentary trust. For example, superannuation death benefit nominations need to be carefully structured if the intention is for super assets to pass through the estate and into the trust rather than being paid directly to beneficiaries. These types of technical considerations highlight the importance of coordinated advice between financial advisers, accountants and estate planning lawyers.
As Australian families accumulate more wealth through property ownership, superannuation and investments, effective estate planning is becoming increasingly important. Testamentary trusts provide a powerful tool for protecting that wealth, managing taxation outcomes and creating a structured financial legacy that can benefit multiple generations.
If you think a testamentary trust may be appropriate for your circumstances, Cadre Capital Partners can assist you through the process. We work closely with specialist estate planning lawyers and tax advisers to ensure your wealth is structured effectively, your estate planning objectives are achieved and your family’s financial future is protected. Please contact Cadre Capital Partners if you would like to discuss whether a testamentary trust may form part of your broader estate planning strategy.