What Is a Testamentary Trust and Should I Use One?
Written by Michelle Gold and Hayleigh Bombinski
A testamentary trust is a separate legal entity capable of owning assets and holding inheritances on behalf of beneficiaries, rather than beneficiaries receiving their entitlements outright. This can be particularly important where a beneficiary is, or may become, vulnerable to claims against their property. A testamentary trust can assist in protecting assets where a beneficiary has creditor issues, is involved in professional negligence litigation, or is experiencing a relationship breakdown.
In addition to asset protection, testamentary trusts can provide significant tax advantages. The primary beneficiary of the trust is usually the intended recipient of the inheritance, however the terms of the trust can also nominate a broader class of potential beneficiaries. These potential beneficiaries may benefit from the trust at the discretion of the trustee. This discretionary structure allows income generated from the trust to be distributed in a more tax‑effective manner.
To minimise tax, income from the trust can be split and streamed to beneficiaries who have lower marginal tax rates. This flexibility can make a material difference to the overall tax paid on investment income generated by estate assets.
Further tax advantages may arise where income is distributed to minor beneficiaries, such as children or grandchildren. Ordinarily, income distributed to minors from trusts is taxed at punitive rates. However, this does not apply to testamentary trusts established under a Will, creating an opportunity for substantial tax savings.
Including a discretionary testamentary trust in your Will provides long‑term flexibility and allows beneficiaries to make decisions that best suit their individual circumstances. If a testamentary trust is not incorporated into your Will, these asset‑protection and tax‑planning benefits are generally not available to your beneficiaries.
The terms of a testamentary trust are contained in your Will. However, the trust does not come into effect until after your death.
Michelle Gold is a Partner at Terracon Legal with extensive experience in estate planning, deceased estates, and estate disputes. She has practised almost exclusively in wills and estates since commencing her legal career in 2000 and advises on complex testamentary trust structures, estate litigation, and succession planning for high‑value and complicated estates. Michelle is consistently recognised by Doyle’s Guide as a leading wills and estates and succession planning lawyer in Canberra.
Hayleigh Bombinski is an Associate in Terracon Legal’s Wills and Estates team. She brings a strong foundation in corporate and commercial law to her estate planning practice and advises on testamentary trust wills, probate, and estate administration. Hayleigh works closely with clients to deliver practical, tailored estate planning solutions that address both asset protection and tax considerations.
For more information about how testamentary trusts could be used to benefit your estate planning, please get in touch with the team atestates@terraconlegal.com.au