A testamentary trust is a trust your will creates when you die, so a trustee holds the inheritance rather than the beneficiary receiving it outright. Properly drafted, it generally keeps the money outside a bankrupt beneficiary's personal estate, is a shield, not a fortress, on relationship breakdown, and lets children under 18 receive income from inherited assets taxed at ordinary adult rates. Not everyone needs one, and we say so.
In this article
What is a testamentary trust?
A testamentary trust is simply a trust created by your will, coming into existence when you die. Instead of your estate passing directly to a beneficiary, it passes to a trustee, often the beneficiary themselves, who holds and manages it for a group of potential beneficiaries, typically that person, their spouse, children and grandchildren. The most common form is discretionary: the trustee decides each year how income and capital are applied within the family group. Your primary beneficiary can usually control the trust, benefit from it, and still enjoy its protections. A testamentary trust is created by a will made under the Wills Act 1997 (Vic).
Protection from life's reversals
The core appeal is that assets held in a properly drafted testamentary trust are owned by the trustee, not by your beneficiary personally. That distinction matters when trouble arrives:
- Bankruptcy and business risk. If your adult child runs a business or gives personal guarantees, an inheritance received outright is exposed to their creditors. Held in a discretionary testamentary trust, it generally sits outside their personal estate.
- Relationship breakdown. An inheritance received outright joins the property pool on separation. Trust assets are treated with more nuance: the family courts can still take a trust into account, particularly where the beneficiary controls it, so a trust is a shield rather than a fortress. Since the June 2025 property reforms the courts' approach remains case by case; see our note on the 2025 family law changes.
- Vulnerable beneficiaries. For a child with disability, addiction or exposure to financial exploitation, a trust puts a steady hand between the money and the risk. In some cases a special disability trust or a protective structure with an independent trustee is the better design.
Worried that a child's business debts, a relationship breakdown or vulnerability to exploitation could put what you leave them at risk? Call (03) 9125 8355 or send an enquiry.
How does a testamentary trust reduce tax?
Here is the feature that surprises people. Minors who receive distributions from an ordinary family trust are taxed at penalty rates above a tiny threshold. But income from a testamentary trust is excepted: children under 18 are taxed at ordinary adult rates, with the tax-free threshold. Generally, the concession applies only to income from assets that came to the trust from the deceased estate, and from what those assets earn or are reinvested into. Money added to the trust from other sources does not usually qualify. For a family where an inheritance produces investment income while children are young, to pay school fees for instance, the difference can amount to thousands of dollars a year, entirely legitimately. It is one of the few concessions in the tax system reserved for wills.
In May 2026 the Australian Government announced a proposed minimum tax on the income of discretionary trusts, to start from 1 July 2028. The Government has since said that deceased estates and discretionary testamentary trusts established for genuine testamentary purposes would be excluded from that tax, for income from assets that came from the deceased estate. The proposal is not yet law and its final form may change, so anyone weighing the tax treatment of a testamentary trust should take current advice. The Australian Taxation Office website sets out how deceased estates and testamentary trusts are taxed today.
Blended families
Testamentary trusts also solve a structural problem no outright gift can: providing for a current partner while ultimately preserving capital for your own children. A trust can give your partner an income or a home for life, with the capital passing to your children afterwards. Compared with hoping a surviving partner's new will "does the right thing", a trust replaces hope with structure. It also reduces the pressure that so often produces estate disputes in blended families.
What does a testamentary trust cost?
A will containing testamentary trusts costs more to prepare than a simple will, because the drafting is more complex, and a trust that is activated has modest ongoing costs: a tax file number, annual returns, trustee record-keeping. Two design points keep this proportionate. First, trusts can be optional: your executor or beneficiary decides after your death whether to use the trust or take the gift outright, judged against circumstances at the time. Second, thresholds can be set so small inheritances pass outright and only substantial ones are held on trust.
Who should say no
Honest advice: not everyone needs one. If your estate is modest, your beneficiaries are financially stable adults, and no one faces creditor or relationship risk, a well-drafted simple will may serve perfectly. We tell clients so. The point of the exercise is a will matched to your family's actual risks, not the most elaborate document we can sell.
Getting the trustee right
A trust is only as good as its trustee. Most clients appoint the primary beneficiary as their own trustee, preserving independence and control; where protection is the point, for a vulnerable beneficiary or a spendthrift risk, an independent or joint trustee is wiser. The will should also deal with successor trustees and, in larger structures, an appointor who can replace a trustee. These are the details that make a trust work for thirty years rather than three.
How a trust runs, year to year
In practice a testamentary trust is unremarkable to operate. The trustee opens a bank account for the trust, invests the inheritance, and each year decides, usually with an accountant, how the income is distributed among the family group before 30 June. Records are kept, a tax return is lodged, and the beneficiaries receive statements. For a straightforward investment portfolio this is a few hours of administration a year. The structure only feels complicated in the abstract; run properly, it feels like a family investment account with better armour.
Three questions clients always ask
Can my child collapse the trust and take the money?
If they control the trust as trustee, generally yes: most testamentary trusts are designed for flexibility, not imprisonment. Where you want genuine restraint, the design changes: an independent trustee, staged capital access, or both.
Does the trust protect against every family court claim?
No. Courts can treat a trust a beneficiary controls as their financial resource, and in some cases as property. The protection is real but relative, stronger where control is shared or independent.
What happens when the trust ends?
Trusts must vest within the legal maximum period; in Victoria that horizon comfortably covers grandchildren. On vesting, the capital is distributed and any tax consequences are managed with advice at the time.
Next steps
Bring us a picture of what you own and who you want protected, and we will tell you whether testamentary trusts earn their place in your will, with a fixed fee confirmed in writing before we start: from $1,650 for one person and from $3,025 for a couple, including GST, as our fixed fees page explains. Read about making a valid will, or explore our wills and estates services.
Wondering whether a testamentary trust belongs in your will? We will tell you plainly if it does not. Call (03) 9125 8355 or send an enquiry.
Sources: Income Tax Assessment Act 1936 (Cth), Division 6AA of Part III, section 102AG; Wills Act 1997 (Vic), sections 4 and 7; Perpetuities and Accumulations Act 1968 (Vic), section 5.
This guide reflects the law applying in Victoria as at September 2026. It is general information only, not legal advice, and does not take your circumstances into account.
