If you have a will, some super, a few ETFs, maybe a home and people you want to look after, you’ve probably wondered what would happen to your money if something happened to you.
That’s where testamentary trusts come in.
Put simply, a testamentary trust is a trust created by your will and only comes into effect after you die. It can hold assets from your estate and appoint someone to manage them on behalf of the people you’ve chosen.
For some families, that extra structure can provide flexibility, control and even tax advantages. For others, the additional cost and administration may outweigh the benefits.
Here’s how testamentary trusts work, who they’re designed for, what assets can go into them and why your super deserves special attention.
What is a testamentary trust?
You’re probably familiar with the concept of a will. It sets out what you want to happen to your assets after you die. In many cases, those assets are distributed directly to your beneficiaries.
A testamentary trust, however, adds another layer. Instead of passing certain assets directly to your beneficiaries, your will creates a trust that can hold and manage those assets on their behalf after your death.
A few different people are involved in making this happen:
- The will-maker decides whether a testamentary trust should be created and sets the rules for how it operates
- The executor administers the estate and transfers any relevant assets into the trust
- From there, the trustee manages the trust for the beneficiaries according to the terms of the will. In some cases, the same person can act as both executor and trustee
Some testamentary trusts are discretionary, giving the trustee flexibility to distribute income or capital between beneficiaries according to the rules in your will.
Testamentary trust, family trust or a simple will?
It’s easy to confuse these different estate planning structures, but they serve different purposes.
| Option | Best suited to |
| Simple will | Straightforward estates where assets pass directly to adult beneficiaries. |
| Testamentary trust | Providing ongoing management, flexibility and, in some cases, tax advantages after death. |
| Family trust | Managing and investing family assets during your lifetime. |
| Direct gifting | Simple estates where ongoing control isn’t needed |
Why people use testamentary trusts
In practice, testamentary trusts are often considered by families with young children, investment portfolios or more complex family circumstances, but they’re not reserved for the very wealthy. Here’s why some people use them.
More control over how assets are managed
Leaving assets directly to your beneficiaries is the simplest option. But it also means they generally receive those assets outright, with no say over how they’re managed after you’re gone.
A testamentary trust gives you a little more control, as you can set rules for how and when assets are managed or distributed. That can be particularly useful if beneficiaries are children, have a disability, struggle to manage money or may be vulnerable because of illness, addiction or relationship breakdown.
Flexibility as life changes
Life rarely goes exactly to plan. If the testamentary trust is discretionary, the trustee can decide how income or capital is distributed between beneficiaries within the rules you’ve set out in your will.
That flexibility can be helpful as circumstances change. One child might still be at university, another may have started working, while a younger grandchild isn’t ready to receive a large inheritance.
Potential tax benefits – especially for children
A testamentary trust can also offer tax advantages in some situations. For example, income from investments held in the trust – such as shares or an investment property – may be distributed between beneficiaries in a tax-effective way, depending on the trust’s terms and each beneficiary’s circumstances.
One of the best-known benefits relates to children. Eligible income distributed through a testamentary trust may be taxed differently from investment income a child receives directly, which is one reason families with young children often consider these trusts.
The rules are complex and don’t apply in every situation, so it’s important to get advice from both an estate planning solicitor and a licensed tax professional.
Asset protection
Testamentary trusts can also help protect assets in some situations – for example, where a beneficiary is vulnerable to financial exploitation, relationship breakdown or bankruptcy. Exactly how much protection is available depends on the trust’s terms and the beneficiary’s circumstances.
Two hypothetical examples
Renee, 36, a nurse, has one daughter aged 6, $70,000 in ETFs and $25,000 in savings. Her concern isn’t tax, but control: she wants her daughter looked after without the money handed over too early. A testamentary trust could let a nominated adult manage the assets until a chosen age or milestone.
Karen, 72, has two adult sons. One manages his finances confidently, while the other lives with a disability and relies on support services. Rather than leaving both sons identical lump-sum inheritances, Karen’s will establishes a testamentary trust so the trustee can manage assets and make distributions in line with each son’s different needs.
Which assets can go into a testamentary trust?
Not everything you own can automatically be placed into a testamentary trust. Generally, only assets that form part of your estate can be directed into the trust through your will.
Assets that can often go into a testamentary trust include:
- Shares and ETFs held in your own name
- Bank accounts
- Managed funds
- Investment properties
- Cash
- Personal belongings
Assets that often sit outside your estate include:
- Superannuation (in many cases)
- Jointly owned property that passes to the surviving owner
- Joint bank accounts
- Assets already owned by a family trust or company
If an asset doesn’t form part of your estate, your will may not control what happens to it.
Can shares, ETFs and inherited portfolios stay invested?
If you’ve built an investment portfolio over the years, you may not want it sold as soon as you die.
A testamentary trust can allow assets like shares, ETFs, managed funds and cash to remain invested after your death, with a trustee managing the portfolio on behalf of your beneficiaries according to the terms of your will. That can provide ongoing income for beneficiaries while allowing the investments to stay invested for the long term, rather than being sold or distributed immediately.
It’s worth remembering, though, that a testamentary trust doesn’t remove tax altogether. Depending on the assets involved and what happens to them over time, tax may still apply. If your estate includes a substantial investment portfolio, it’s worth getting legal and tax advice as part of your estate planning.
Hypothetical example
Mia, 41, a teacher, and James, 43, an engineer, own a mortgage-free home, a $180,000 ETF portfolio and $30,000 in cash. They have two children aged 8 and 11.
Rather than leaving the investments directly to their children, their wills establish testamentary trusts. If they both died unexpectedly, the ETFs and cash could be transferred into the trusts, allowing the portfolio to remain invested while the trustee uses income or capital to support the children as they grow up.
Why super deserves special attention
One of the biggest estate planning misconceptions is that your will automatically controls your super. In many cases, it doesn’t.
That’s because your super is usually dealt with separately from the rest of your estate. When you die, your super fund looks at your beneficiary nomination, the fund’s rules and who is legally eligible to receive your death benefit before deciding where your super is paid.
Your will only comes into play if your super is paid to your legal personal representative (your estate). If that happens, your will can then direct those benefits into a testamentary trust.
If your estate plan includes a testamentary trust, it’s worth checking that your super beneficiary nominations align with your will. Otherwise, you could end up with one document saying one thing and your super being paid somewhere else.
When might a testamentary trust be unnecessary?
A testamentary trust isn’t automatically the best choice. If your estate is relatively straightforward, your beneficiaries are financially capable adults and you don’t need ongoing control over how assets are managed, a simple will may be all you need.
Testamentary trusts also come with trade-offs. Drafting costs are generally higher than a simple will, the trust may need its own tax returns and ongoing administration, and acting as trustee is a genuine legal responsibility.
Is a testamentary trust right for you?
A testamentary trust may be worth exploring if you:
- Have beneficiaries who are children, financially vulnerable or likely to need ongoing support
- Have a blended family or more complex family circumstances
- Want greater control over how inherited assets are managed
- Have investments you’d prefer to remain invested after you’re gone
If your estate is relatively straightforward, however, a simple will may be all you need.
Planning ahead
A will is only one part of a good estate plan. The goal is to make sure your assets end up where you want them, in the way you intend.
For some families, a testamentary trust can provide valuable flexibility, ongoing management, asset protection and potential tax advantages – particularly where beneficiaries are children, have a disability or may need ongoing financial support. For others, the additional cost and administration may outweigh the benefits.
The key is making sure your will, your super nominations and the way your assets are owned all work together.
If you’re unsure whether a testamentary trust is appropriate, an estate planning solicitor can help you understand the options and draft a will that matches your goals.
