A testamentary trust is a trust that only comes into existence on your death — created inside your will, with no tax or legal effect during your lifetime. For the right family it is one of the most under-used structures in Australian estate planning. For the wrong family, it adds compliance cost without producing the tax or protection outcomes that justify it. The decision is more nuanced than “should I have one or not.”

This guide from Trinity Accounting Practice walks through what a testamentary trust will is, the genuine tax and protection benefits it can deliver, when it works well, and when it adds cost without benefit. As always, the legal drafting must be done by a qualified lawyer — Trinity coordinates with your solicitor on the tax-and-structure side of the decision.

What a testamentary trust will is — and what it is not

A simple will is a distribution document. The assets flow directly from your estate to the named beneficiaries, who from that moment own them outright on their own balance sheet. Income from inherited assets is taxed at each beneficiary’s marginal rate. Exposure to creditors, relationship breakdowns and bankruptcy risk transfers with the asset.

A testamentary trust will reroutes that distribution. Rather than passing assets directly to a beneficiary, the will establishes a trust on your death and the trustee holds the assets for the benefit of the named beneficiaries. Income and capital can be distributed flexibly across the beneficiary group from year to year, and the assets sit one legal step removed from any individual beneficiary’s personal balance sheet.

The trust springs into existence the moment you die. Before then, the will is dormant — drafted, signed, witnessed, but inoperative — and you can revise or revoke it at any time. Importantly, a testamentary trust is not the same thing as a “family trust” or any other inter-vivos discretionary trust set up during your lifetime. The structures look similar in mechanics, but the tax treatment of minor beneficiaries is substantially different, and that difference is where most of the value sits.

The two genuine benefits — tax and protection

1. The minor income concession

This is the headline tax benefit and the one most commonly cited. Income distributed by a normal family discretionary trust to a child under 18 is taxed at penalty rates — the top marginal rate after the first $416. The penalty rates make distributions to children largely useless for tax planning under a normal family trust.

Income distributed by a testamentary discretionary trust to a minor is taxed at ordinary adult marginal rates, with the full tax-free threshold available. The first roughly $20,000 of income per minor beneficiary per year is effectively tax-free. For families with several grandchildren and a sizeable estate generating investment income, the difference can be tens of thousands of dollars a year in tax saved.

This concession is specific to trusts created by a will. It is not available to discretionary trusts created during your lifetime.

2. Asset protection across multiple risks

A testamentary trust separates the beneficial ownership from the legal ownership. Three protections flow from this:

Relationship breakdown. Assets held in a testamentary trust for a beneficiary are not automatically treated as part of that beneficiary’s matrimonial property in the event of a divorce. Whether they are ultimately drawn into the property pool depends on the circumstances, but the starting position is materially stronger than a direct inheritance.
Bankruptcy. If a direct beneficiary is later declared bankrupt, an asset received from a traditional will is generally swept into the bankruptcy and available to creditors. An asset still held inside a testamentary trust — where the trustee has not yet vested it onto the beneficiary personally — is not part of the bankrupt’s pool, because the legal owner is the trustee, not the bankrupt beneficiary.
Vulnerable beneficiaries. Where a beneficiary has an intellectual or psychological impairment, addiction issues, or is otherwise at risk of being financially exploited, the testamentary trust keeps the assets in responsible trustee hands while still providing income and capital for the beneficiary’s benefit.

When a testamentary trust genuinely makes sense

The case for a testamentary trust is strongest where one or more of the following applies:

You have minor children or grandchildren who would benefit from income distributions taxed at adult rates.
One or more of your adult children is in a marriage where you would prefer the inheritance to sit outside the matrimonial property pool.
A beneficiary is in a high-risk profession (medical, legal, construction, company directorship) where bankruptcy risk is non-trivial.
A beneficiary has special needs, addiction issues, or is otherwise at risk of poor financial decisions.
The estate is large enough that the income generated from inherited assets is material — typically $500,000+ in income-generating assets.
You want the flexibility to stream income and capital differently between beneficiaries based on their circumstances after your death.

When a testamentary trust does not add value

Equally, the case against a testamentary trust is straightforward in some situations:

The estate is modest — the ongoing trustee, accounting and tax-return costs (typically $1,500–$3,000 a year) exceed the tax saving.
The intended beneficiaries are all adult, stable, financially secure, with no minor children of their own.
The assets are mostly the principal residence — which retains the main residence exemption and generates no income.
The bulk of family wealth is already held in an existing family trust (those assets do not pass through your estate at all).
Beneficiaries are uninterested in maintaining a trust structure and would simply wind it up immediately.

The control question — who runs the trust?

One of the most useful features of a testamentary trust is the flexibility you can build into the trustee provisions. You can:

Name an executor of the will as initial trustee.
Allow a spouse or partner to act as trustee for their lifetime.
Specify that beneficiaries can become trustees of their own sub-trust at a specified age.
Set up multiple sub-trusts inside one will, with different trustees for each, suited to the relevant beneficiary’s circumstances.
Build in the power for beneficiaries (once of appropriate age) to wind up the trust if they decide it no longer serves them.

Whoever holds the trustee role runs the trust day-to-day, makes the annual distribution decisions, and ultimately controls whether the trust continues or is wound up. Selecting the initial trustee — and documenting a succession plan as family circumstances change over decades — is one of the most consequential drafting decisions in the will.

How a testamentary trust interacts with super and family trust assets

Two practical caveats most clients do not initially realise:

Existing family trust assets do not pass through your estate. If you already hold most of your wealth in an inter-vivos family discretionary trust, those assets are owned by the trust — not by you personally. They do not enter the testamentary trust and the will has no power over them. Control of the family trust is what you need to deal with separately (typically through the trust deed and successor appointor provisions).
Superannuation is not part of your estate by default. Super passes via a binding death benefit nomination (or trustee discretion in the absence of one). To bring super into the testamentary trust, the nomination needs to be to the legal personal representative (i.e. your estate). This is a coordinated decision with your super fund and SMSF (where relevant) — Trinity often coordinates this alongside your solicitor.

A Trinity insight from 22 years in practice

The most under-used feature of testamentary trusts in our experience is the minor income concession for grandchildren, not children. Where a grandparent’s estate produces material investment income and there are three or four grandchildren under 18, the family can shelter $60,000–$80,000 of income per year at low or zero tax rates — for 18 years per grandchild. Over the life of the trust, that single feature has produced six- and seven-figure tax savings for our clients. The legal cost of setting up the will is a few thousand dollars. The annual compliance cost is a few thousand more. The arithmetic is overwhelmingly in favour of doing it, for the right families.

What this means for you

If you have minor children or grandchildren and a meaningful estate: a testamentary trust is almost certainly worth modelling.
If your adult children are in marriages where matrimonial-property exposure is a concern: the testamentary trust provides a structural buffer that a direct inheritance does not.
If you hold most of your wealth in an existing family trust: the will needs to coordinate with the family trust deed and successor appointor — not just establish a testamentary trust.
If your super balance is material: the binding death benefit nomination needs to align with the will. Get them reviewed together.
If your estate is modest and beneficiaries are all stable adults: a simple will may be the better answer.

How Trinity can help

Trinity Accounting Practice does not draft wills — that is the lawyer’s role, and we coordinate with your existing solicitor or refer you to one we know well. What we do is run the tax-and-structure modelling that should inform the drafting: which beneficiaries, what assets, what trustee structure, and how the will interacts with your existing family trust, SMSF and binding death benefit nominations. Estate planning is one area where coordinated tax-plus-legal advice produces a materially better outcome than either profession working alone.

Book an estate-planning tax review with the Trinity team →

General advice only. This article contains general information current as at May 2026 and does not constitute tax, financial or legal advice. It does not take into account your personal circumstances, objectives or needs. Estate planning involves legal documents that must be drafted by a qualified lawyer. Before acting on any information in this article, you should consider its appropriateness to your situation and seek professional advice from Trinity Accounting Practice or another qualified adviser. Liability limited by a scheme approved under Professional Standards Legislation.