A testamentary trust can shield inheritances from divorce, creditors and spendthrift beneficiaries. Here is how they work and when to use one.
A testamentary trust is a trust established by the terms of your Will that only comes into effect after you pass away. Unlike a simple outright gift, it gives your beneficiaries the benefit of your assets while keeping legal control with an appointed trustee. For Australian families, that distinction can be the difference between wealth that lasts a generation and wealth that is quietly eroded within a few years of being received.
The mechanics are straightforward in principle but powerful in practice. When your Will is probated, the executor transfers the relevant assets to the trustee of the testamentary trust rather than directly to the beneficiary. The trustee then holds those assets on trust, administering and distributing them in accordance with the instructions you have left in your Will and the trust deed. Because the beneficiary does not personally own the assets, a number of risks that would otherwise attach to outright ownership are sidestepped.
The first and often most discussed advantage is protection from a beneficiary's creditors. Assets held in a properly structured testamentary trust are generally not available to satisfy a beneficiary's personal debts. If a beneficiary were to face bankruptcy or a large civil claim, the trust assets sit outside their personal estate and are not divisible among their creditors. This is one of the reasons testamentary trusts are frequently recommended where a beneficiary runs a business, works in a high-risk profession, or carries significant personal liability exposure.
“A second advantage is shelter from family law property settlements. If a beneficiary's marriage or de facto relationship breaks down, the trust structure can make it more difficult for a former spouse to claim a share of the inheritance in a property adjustment. The Family Court does have broad powers — including the ability to set aside transactions that have the effect of defeating claims under section 79 or 90SM of the Family Law Act — so the protection is not absolute. However, a trust established independently of the relationship, under a Will drafted before the marriage breakdown, is generally far harder to penetrate than an outright gift sitting in the beneficiary's name.
Testamentary trusts also offer meaningful tax advantages that can be worth tens of thousands of dollars each year. Under the excepted trust income rules in section 102AG of the Income Tax Assessment Act 1936, income that a trust derives from the assets of the deceased estate can be distributed to minor beneficiaries and taxed at ordinary adult rates. That means a minor beneficiary can access the full adult tax-free threshold — $18,200 for the 2025-26 financial year — rather than the punitive top marginal rate that applies to most investment income of children under 18 under the 'kiddie tax' rules.
There is an important nuance that was tightened by the 2019 reforms. Since 1 July 2019, this concession has been limited to income derived from assets that are related to the deceased estate — broadly, assets that came from the estate or were acquired with estate assets. Income generated from assets injected into the trust after the estate has been administered, or from unrelated business or investment activities, may not qualify for the excepted income treatment. Getting this distinction right in the structure of your estate is critical, and it is one of the reasons professional advice is so valuable.
Beyond tax and asset protection, a testamentary trust gives you a mechanism to manage how and when beneficiaries receive their inheritance. You can appoint trustees to make distributions at their discretion, which is useful where a beneficiary is young, financially inexperienced, or vulnerable to pressure. You can also build in protective conditions — for example, requiring a certain age before a beneficiary can call for control of their share, or restricting distributions where a beneficiary has a gambling or substance issue.
Not every family needs a testamentary trust. They add complexity and ongoing cost — a trustee must administer the trust, keep accounts, lodge tax returns, and exercise discretion. For a modest estate with adult, financially secure beneficiaries and no complicating factors, an outright gift may be simpler and more appropriate. We typically recommend testamentary trusts where there are significant assets, blended families, beneficiaries with disabilities or vulnerabilities, children in high-risk professions or marriages under strain, or a desire to protect wealth across multiple generations.
The choice of trustee is also a decision that deserves careful thought. A trustee holds significant power over how the trust is administered and when distributions are made. You can appoint a family member, a professional trustee company, or a combination. Some families prefer an independent professional trustee to avoid family friction; others prefer a trusted family member with a clear letter of wishes guiding their discretion. Each option has trade-offs in cost, continuity and family harmony that should be weighed against your specific circumstances.
As SAPEPAA-accredited advisers, we work alongside Abbott & Mourly Lawyers to structure testamentary and family protection trusts that are legally robust, tax-effective and tailored to your family's circumstances. Our role is to understand the full picture — your assets, your family, your goals and your risks — and translate that into an estate plan that will do what you intend, when the time comes.
If you would like to understand whether a testamentary trust is right for your family, the best next step is a Discovery Call. We will walk through your situation, explain the costs and benefits in plain language, and help you decide with confidence. Book your complimentary consultation today.
