A Beginner’s Guide to Testamentary Trusts

Sparing a moment to think about what life will be like when you're gone isn’t easy. It’s pretty tough to consider how your family will continue to be looked after and how your assets will be treated following your death. But implementing a clear and powerful estate plan ensures that your wishes will be honoured and your loved ones will be cared for when you’re no longer around.

You may already be familiar with  the benefits of a Will , but have you considered a Testamentary Trust? If you think Testamentary Trusts are only for complex estates or the very wealthy, they’re not – so read on!

What is a Testamentary Trust?

A Testamentary Trust is an estate planning tool that is set up through your Will and only comes into effect once you’ve passed away. It’s basically a discretionary trust or trusts contained in your Will to which your residue assets are distributed. A Testamentary Trust can continue to operate for up to 80 years after your death, meaning that you can continue to provide for your family for generations and years to come.

Through a Testamentary Trust, like other discretionary trusts, your assets are instead passed onto a named Trustee rather than your beneficiaries directly receiving assets and money. Your chosen Trustee will then control and manage your assets and distribute them accordingly among your beneficiaries. Testamentary Trusts hand over the reins to those you trust the most, so your loved ones are looked after exactly as you intended.

A common misconception is that Testamentary Trusts are only suitable for high-net-worth individuals and those entangled in complex financial situations. There are many benefits to a Testamentary Trust, including tax advantages, asset protection and peace of mind – so in reality, a Testamentary Trust is a useful tool for everyone to consider.

Now that you know what a Testamentary Trust is, you might be wondering how it stacks up against a family trust.

Testamentary Trust vs Family Trust: What's the Difference?

It's easy to get testamentary trusts confused with family or discretionary trusts , but they work quite differently. A family trust is set up during your lifetime and starts operating as soon as it's established, giving you ongoing flexibility to adjust it as your circumstances change. A testamentary trust, by contrast, only comes into existence after you pass away and is entirely set out in your Will.

The tax treatment for minors is a key difference too. Distributions to children under 18 from a testamentary trust are taxed at ordinary adult rates, while the same distribution from a family trust would usually attract penalty tax rates. This is one of the most valuable features of a testamentary trust for families with young beneficiaries.

Are Testamentary Trusts Affected by the New Trust Tax Rules?

If you've seen headlines about a new 30% minimum tax on trusts, you might be wondering if it affects your estate plan. The good news is, on 18 June 2026, the Federal Government confirmed that income from testamentary trusts set up for genuine testamentary purposes will be exempt from these new rules.

This new minimum tax is aimed at discretionary trusts set up during someone's lifetime, not trusts created through a Will after death. The Government also reaffirmed that there’s no inheritance tax or death duty in Australia, and these measures are designed to keep it that way.

There is one detail worth knowing: for testamentary trusts established on or after 1 July 2028, the exemption will only apply where the trust can benefit individuals and tax-exempt entities. This makes how your Will defines your beneficiaries an important drafting consideration.

Keep in mind this reform is still progressing through Parliament, so the fine print may change. If you already have a testamentary trust in place, or you're planning your Will now, it's worth having a conversation with your advisor to make sure your structure is set up well for the road ahead.

How is a Testamentary Trust Managed?

Once a Testamentary Trust is established, your Trustee(s) have ultimate control over the trust and all the assets it includes. Your chosen Appointor(s) will also be able to remove, replace and nominate additional trustees to help manage the trust. Because of the power involved in managing a Testamentary Trust, it’s important that you select an individual or individuals to act as Appointors who you believe will continue to make decisions that accurately reflect your wishes when you’re no longer here.

Unfortunately, a Testamentary Trust is not a set-and-forget solution. Once the trust comes into existence, there are fees and costs that are involved in order to successfully maintain the structure of the trust. These include costs associated with creating and lodging tax returns for the trust, and the costs in preparing financial statements for the trust or trusts. The costs incurred will vary depending on the value of the assets held within the Testamentary Trust.

Tax Advantages of a Testamentary Trust

One of the biggest advantages to a Testamentary Trust is that your Trustee has full control over any income, capital gains and other trust assets, and can decide how they are invested and/or distributed among your family and beneficiaries each year. Your Trustee also has the freedom to decide which of your beneficiaries receive the income, meaning that they can make distributions from the trust while taking full advantage of the beneficiaries with the most attractive marginal tax rates.

Beneficiaries who are receiving distributions from a Testamentary Trust under the age of 18 are exempt from the standard penalty rates that would usually apply to minors receiving income from a family trust. Instead, if an individual under the age of 18 were to receive income from a Testamentary Trust, they would be taxed at the ordinary marginal rates and would be able to take advantage of the low-income tax offset and the tax-free threshold.

For example, income distributed to a minor beneficiary can take advantage of the tax-free threshold, meaning up to $18,200 per child, per year can potentially be distributed tax-free. For a family with three children, that could mean up to $54,600 distributed each year without attracting tax.

It’s also important to note that the trustee is not required to pay income tax on any income that is distributed to the beneficiaries unless as a proxy for a minor or where income is accumulated.

Using Testamentary Trusts for Asset Protection

You can provide your chosen beneficiaries with the option to choose whether or not they receive their inheritance directly into their own name. This means that any assets they inherit are protected from any existing (and future) creditors, as the assets are not owned personally by the beneficiary and, therefore, are not included in the beneficiary’s personal estate.

Through establishing a Testamentary Trust in your Will, you ensure that your beneficiaries and their families will continue to benefit from the trust, despite any financial hardships they may experience (such as bankruptcy). The element of asset protection is particularly useful for beneficiaries who you may think are more financially vulnerable, or have faced financial difficulties in the past.

Protecting Assets After a Divorce Through a Testamentary Trust

As a parent, it’s only normal that you want the best for your kids. You may be concerned about what will happen to your child’s inheritance if they were to divorce from their spouse in the future. Would they lose their inheritance? Would it be split between them?

Thankfully, with careful planning, you can minimise the risk of assets held in the trust from being divided on a relationship breakdown. That said, for complete peace of mind a binding financial agreement under the Family Law Act 1975 is recommended.

Is There a Minimum Asset Value for a Testamentary Trust?

A common question we hear is whether a testamentary trust is only worth setting up if you have a large estate. There's no legislated minimum asset value required, but as a general rule of thumb, many estate planning specialists suggest they become most worthwhile once an estate has around $500,000 or more in investible assets. Below that threshold, the ongoing costs of running the trust may outweigh the tax and asset protection benefits.

Every family's situation is different though, and factors like the number of beneficiaries, whether any beneficiaries are minors or vulnerable, and your broader estate planning goals can all shift where that threshold sits for you. It's worth having a conversation with your advisor about whether a testamentary trust makes sense for your specific circumstances.

Frequently Asked Questions About Testamentary Trusts

What is a testamentary trust in Australia?

A testamentary trust in Australia is a highly effective estate planning structure set up within your Will that only comes into existence after you pass away. Instead of giving your assets directly to your beneficiaries in their personal names, they are transferred into a trust managed by a Trustee of your choosing. This keeps the wealth within the family while unlocking significant tax benefits and robust asset protection.

How is a Will with a testamentary trust different from a standard Will?

A standard Will is a simple document that gifts your cash and property directly to your beneficiaries. A Will with a testamentary trust (often referred to as a will and testamentary trust) operates differently by holding those assets within a trust structure. This means your beneficiaries can enjoy and control their inheritance in a protected environment, keeping the wealth safe from external risks like business bankruptcy, lawsuit liabilities, or relationship breakdowns.

How do you set up a testamentary trust?

A testamentary trust is not something you establish during your lifetime; it must be built directly into your Will itself. To set up a testamentary trust, you must work with an experienced estate planning lawyer to draft precise trust clauses, designate your Trustees and Appointors, and carefully define your beneficiary classes to ensure compliance with current Australian tax guidelines.

Can a testamentary trust be contested?

Yes, a Will containing a testamentary trust can be contested in Australia, just like any other Will. Family members or dependants who feel they have not been adequately provided for can lodge a family provision claim. Working with professional estate planning lawyers to draft your Will is the best way to ensure your wishes are legally watertight and minimise the risk of a successful challenge.

Are testamentary trusts affected by the Federal Budget?

Yes, but they emerged in a very strong position. While the Federal Budget proposed a new 30% minimum tax on discretionary trusts from 1 July 2028, the Government confirmed that discretionary testamentary trusts are affected by the budget only if they are not set up for "genuine testamentary purposes." Genuine trusts created under a Will remain exempt from the 30% rate, meaning their highly valuable tax concessions remain fully intact.

Getting Started with a Testamentary Trust

Our Melbourne-based  will lawyers  and financial advisors offer a holistic approach to creating an effective Testamentary Trust. To establish a Testamentary Trust of your own, or to learn more about the process, get in contact with our BlueRock estate planning experts today.

D‍isclaimer: This article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. The information in this article has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regards to these factors before acting, or seek advice before making any financial decisions.