Testamentary trusts: protecting an inheritance in Victoria

A simple will hands each beneficiary their inheritance outright. A will with a testamentary trust hands it to them inside a protective structure — one that can shelter the money from bankruptcy and relationship breakdown, and dramatically reduce tax where young children are involved. Here is how these trusts work, and how to tell whether one belongs in your will.

What a testamentary trust is

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.

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.

The tax advantage for families with children

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. For a family where an inheritance produces investment income while children are young — 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.

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 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 it costs, and what it costs later

A will containing testamentary trusts costs more to prepare than a simple will — the drafting is genuinely 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 — a vulnerable beneficiary, 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 actually 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 quoted before we start. Read about making a valid will, or explore our wills and estates services.

This guide reflects the law applying in Victoria as at July 2026. It is general information only, not legal advice, and does not take your circumstances into account.