Understanding the Key Differences Between Testamentary and Discretionary Trusts
Estate planning can be complex, especially when deciding how to best protect your assets for future generations. Two common tools in Australia are testamentary trusts and discretionary trusts—similar in name but different in purpose.
This blog explores the difference between a testamentary trust and a discretionary trust, how each functions, when they are commonly used, and the benefits of choosing one over the other. We’ll also share real-world examples and explain why working with experienced Testamentary Trust Lawyers can make a big difference.
What is a testamentary trust?
A testamentary trust is created in your Will and only takes effect after your death. Instead of passing assets directly to beneficiaries, they’re held in trust and managed by a trustee on their behalf.
The key difference between a will and a testamentary trust is that a Will makes direct gifts to beneficiaries, while a testamentary trust creates a legal structure that controls how and when those gifts are distributed—offering more protection and flexibility.
The trustee may be a beneficiary of the trust if they are an adult. Otherwise, the trustee may be another trusted person.
This allows greater control over how and when assets are distributed—for example, delaying access until a child reaches a certain age or protecting assets from creditors or relationship breakdowns.
Benefits of a testamentary trust
The benefits of a testamentary trust include:
Tax minimisation, particularly for minor beneficiaries who can be taxed at adult rates
Asset protection from creditors, bankruptcy, or divorce
Long-term financial control to safeguard vulnerable or young beneficiaries
Flexibility to adapt to changing family circumstances
If your estate is worth protecting, a testamentary trust can be one of the most powerful legal tools at your disposal.
What is a discretionary trust?
A discretionary trust, or family trust, is set up during your lifetime and managed by a trustee who decides how income and capital are distributed among beneficiaries.
Beneficiaries don’t have fixed entitlements, making this structure ideal for flexible asset management and tax planning. It’s commonly used by business owners, investors, and families, but unlike a testamentary trust, it must be actively established and managed while you're alive.
Testamentary discretionary trust: best of both worlds?
Here’s where the terms can get confusing. You might hear people refer to a testamentary discretionary trust or discretionary testamentary trust—but what does that actually mean?
In essence, this is a testamentary trust with discretionary powers. It's established via a Will (so it’s still testamentary), but it gives the trustee discretion to distribute assets among a class of beneficiaries—just like a discretionary trust.
Why it matters:
This hybrid approach allows the estate to benefit from the tax advantages and asset protection of a testamentary trust while retaining the flexibility of a discretionary trust. It benefits complex family dynamics, such as blended families or vulnerable beneficiaries.
Key differences between a testamentary trust and a discretionary trust
Understanding the difference between a testamentary and discretionary trust helps clarify when each is most appropriate.
| Aspect | Testamentary Trust | Discretionary Trust |
| When It's Created | Via a Will, after the death of the testator | During the lifetime of the settlor |
| Activation | Only takes effect upon death | Active as soon as it’s established |
| Control Over Distributions | Can be fixed or discretionary (depending on the trust deed) | The trustee has complete discretion over who gets what |
| Tax Treatment | Minor beneficiaries taxed as adults (advantageous) | Minor beneficiaries are taxed at penalty rates |
| Asset Protection | Strong protection for vulnerable beneficiaries | Useful for business and wealth protection |
| Legal Setup | Part of your estate planning and Will | Requires separate trust deed and ongoing compliance |
If you're unsure which trust suits your needs, speaking to Testamentary Trust Lawyers can help you assess your estate's complexity, beneficiaries’ needs, and long-term goals.
Examples of a testamentary trust and discretionary trust
To better understand how each trust works in real life, here are practical examples of a testamentary and discretionary trust, showing how each might be used depending on family or financial goals.
Testamentary trust example – young children inheriting wealth
When Sarah, a single mum, passes away, her Will creates a testamentary trust for her two young children. A trustee manages the funds, covering their education and living costs while preserving the capital until they age. The trust also provides tax benefits, with income taxed at adult rates. When Sarah’s children are old enough, they are appointed as trustees and have full control over their inheritance.
Discretionary trust example – family business asset protection
A business owner, Mark, sets up a discretionary trust to manage his business and investment income. His spouse and three adult children are beneficiaries, and the trustee distributes income to minimise tax. The trust also protects assets from creditors or family law claims if any child faces financial issues or divorce.
When to consider each type of trust
You should consider a testamentary trust if:
You want to control how your estate is distributed after your death
Your beneficiaries are minors, vulnerable, or face potential legal/financial risks
You want to take advantage of tax concessions for children
You're concerned about the long-term management of your estate
You might prefer a discretionary trust if:
You want a flexible, tax-effective way to distribute income during your lifetime
You’re running a business or managing investments
You want to protect assets from legal claims or family law disputes
Many people use both structures—creating a discretionary trust during their life and including testamentary trusts in their Will. It’s not always either/or, and Testamentary Trust Lawyers can help you build a balanced estate plan.
Choosing the right trust for your estate plan
Deciding between a Testamentary Trust and a Discretionary Trust can significantly impact how your assets are managed and protected.
A Testamentary Trust is ideal for controlling distributions after death, protecting vulnerable beneficiaries, and gaining tax advantages—especially for minors.
A Discretionary Trust is useful for managing wealth during your lifetime, offering flexibility, asset protection, and strategic tax planning.
The right choice depends on your personal and financial goals. That’s why tailored legal advice is key.
Talk to Direct Lawyers today on 07 3703 1888. Our estate planning experts will help you choose the best structure to protect your assets, support your family, and secure your legacy.