Why Testamentary Trusts Are a Smart Estate Planning Tool in Australia
Benefits of a Testamentary Trust in Australia
Estate planning goes beyond just transferring your assets. It aims to safeguard your family members financially, legally, and emotionally.
A testamentary trust provides a reliable method to accomplish this.
This estate planning instrument, established through your will, allows you to have control over the management and distribution of assets after you die.
Let's examine how testamentary trusts function and why they can be so advantageous in Australia.
What Is a Testamentary Trust and How Does It Work?
A testamentary trust is a form of discretionary trust that your will creates. It takes effect after you pass away.
Rather than transferring assets to beneficiaries, the trust holds and manages the assets through a trustee. This arrangement offers long-term asset protection, flexible tax planning options, and reassurance.
Learn more: What is a testamentary trust?
At Direct Lawyers, we’ve helped many Queensland families structure testamentary trusts that align with their objectives and also protect their trust beneficiaries.
Key Benefits of a Testamentary Trust in Australia
1. Solid Asset Protection
Assets in a testamentary trust don't belong to the beneficiaries. This means creditors, family law property settlements, and even bankruptcy proceedings can't touch them. These trusts can shield your estate from being split up in divorce or disappearing if a beneficiary faces money troubles.
Example: Consider Maggie, whose son Archie receives a $500,000 inheritance through a testamentary trust. Two years later, Archie's business fails, leaving him with significant debt. Since the inheritance is in a trust and not given to Archie directly, creditors cannot reach these funds. This protects the family wealth, even though Archie has financial problems.
2. Tax Advantages and Effectiveness
A well-structured testamentary trust offers significant tax benefits:
Income distributed to children under 18 is taxed at regular adult marginal tax rates.
Trustees can distribute income across beneficiaries to minimise tax liabilities.
Capital gains tax discounts apply to assets held in the trust for more than 12 months.
This level of tax effectiveness is one of the most sought-after benefits of a testamentary trust.
Example: The Jones family has a testamentary trust with four beneficiaries. The trust earns $80,000 in income for the year. Instead of one beneficiary receiving the entire amount and paying tax at the higher marginal rate of 37%, the trustee distributes $20,000 to each beneficiary. Each beneficiary pays tax at lower marginal rates, potentially saving the family over $10,000 in tax compared to a direct inheritance."
3. Supporting Vulnerable or Young Beneficiaries
Testamentary trusts are used to manage assets for beneficiaries who are too young or not in a position to handle a lump sum inheritance. This can include individuals with intellectual disabilities or addiction issues. The trust ensures assets are used appropriately over time.
Case study: Noah has a son with an intellectual disability who receives disability support payments. By establishing a testamentary trust, Noah ensures his son's inheritance won't affect his eligibility for government support. The trustee can then supplement their care needs by providing funds for specialised therapies, equipment, and quality-of-life improvements that are not covered by the NDIS.
4. Control and Flexibility of Testamentary Trusts
Testamentary trusts give the will-maker power to make rules about how assets are shared. You might decide to keep assets in the trust until your child reaches 25 or hits a monetary goal. The trustee can also adjust how much is given out based on what's happening in the beneficiary's life, ensuring it stays useful for a long time.
Example: Emma establishes a testamentary trust for her grandchildren's education. The trust specifies that funds can be accessed for university tuition and related expenses, with additional distributions permitted upon graduation. When her grandson decides to pursue an expensive medical degree, the trustee is able to provide the necessary financial support for his extended education, as Emma had intended."
Testamentary Trusts vs Other Types of Trust
When you compare them to family or inter vivos trusts (which you set up while you're still alive), testamentary trusts have some clear plus points:
They help kids and young adults pay less tax.
They do a better job of keeping assets in a dead person's estate safe from a legal standpoint.
The law doesn't consider the trust's assets as part of what a beneficiary owns personally, which reduces risk if there's a court case or a split-up.
Who Should Consider a Testamentary Trust?
We recommend testamentary trusts for:
Families with young children
Individuals with high-value assets or businesses
Beneficiaries facing family law concerns or financial instability
Those wanting to reduce tax and manage distributions long-term
By setting up a testamentary trust, you’re not only protecting your assets, you’re protecting the people you leave them to.
Speak to a Specialist Will and Estate Lawyer
At Direct Lawyers, we understand estate planning isn’t one-size-fits-all. Our founder, Dion McCurdy, is a solicitor of the Supreme Court of Queensland with over a decade of experience in estate planning, testamentary trusts, and deceased estates.
He has helped families structure their wills to maximise protection and make sure wishes are honoured.
Whether you’re looking into a testamentary trust or ready to set one up, we’re here to guide you. Book your free consultation with Direct Lawyers today and get peace of mind for tomorrow.
