If you have a will, some super, a few ETFs, maybe a home, and people you care about, you’ve probably asked yourself a pretty big question: if something happened to me, what actually happens to my money? That’s where testamentary trusts come into the conversation.
In plain English, a testamentary trust is a trust created by your will. It starts operating after you die, and it can hold estate assets and have someone manage them for the people you’ve chosen. You don’t “set up” one while alive the way you might open a family trust — it’s written into your will and only comes into effect once the will is carried out.
For some families that extra structure is useful; for others it just adds complexity they don’t need. Here’s how it works, where it helps, what happens with shares and ETFs, and why super needs special care.
What is a testamentary trust?
A will is the instruction manual; a testamentary trust is one of the structures that manual can create after death. When the will-maker dies, the estate is dealt with according to the will, and if it includes a testamentary trust, some estate assets can be transferred into that trust for nominated beneficiaries.
The will-maker decides what happens to their estate. The executor carries out the will — collecting assets, paying debts, administering the estate. The trustee manages the trust once it exists, distributing income or capital per the will. The beneficiary receives income, capital, or both. One person can be both executor and trustee, but the jobs differ: one administers the estate, the other manages the trust.
How it works in practice
- A person dies with a valid will.
- The executor administers the estate — identifying and valuing assets, settling debts.
- Relevant estate assets are transferred into the testamentary trust the will creates.
- The trustee manages those assets for the beneficiaries according to the will.
If it’s a discretionary testamentary trust, the trustee has flexibility over how income or capital is split among a class of beneficiaries — useful when circumstances shift over time. One child might be studying, another working, another still young; a discretionary trust can flex distributions to fit that rather than forcing a fixed, equal split.
Why people use them
- More control after death. A simple gift (“I leave my assets equally to my children”) is blunt. A testamentary trust can set rules around when assets are accessed, who manages them, and how income is used — useful if beneficiaries are young, inexperienced, or in difficult circumstances.
- Protecting vulnerable beneficiaries. Handing a portfolio directly to young children isn’t practical. A trust lets a nominated trustee manage the assets until they’re older, using income or capital for their benefit meanwhile. It can also matter where a beneficiary has a disability, struggles with money, or is in a risky relationship or business — structure doesn’t guarantee protection, but it can help.
- Flexible income distribution. If the trust holds shares, ETFs, or property, the trustee can split income between beneficiaries within the trust terms, giving families practical flexibility over time.
- Possible asset protection. Assets held in trust may be treated differently from assets a beneficiary owns outright, though this depends heavily on the will’s wording and circumstances — it gets legally complex fast.
- Possible tax advantages for children. Income to minor beneficiaries can sometimes be taxed under more favourable rules than the penalty rates that usually apply to unearned income for minors — not automatic, not unlimited, and dependent on current law and the family’s circumstances.
The tax angle for children
Minors normally face high tax on “unearned” income like investment income, unless an exception applies — and testamentary trust income can sometimes qualify. That’s why these trusts get considered by families with kids or grandkids. But that doesn’t mean all trust income is tax-free, that children automatically pay less, or that CGT disappears — outcomes depend on the trust’s terms, the income’s nature, and how the estate is administered. For minor beneficiaries specifically, take it to both an estate planning solicitor and a licensed tax professional.
What assets can go in
Estate assets — things the deceased owned that form part of the estate: shares and ETFs held personally, bank accounts, managed funds, investment property, cash, personal belongings. If these pass through the estate under the will, they can be directed into the trust.
Non-estate assets often sit outside it — superannuation (in many cases), jointly owned property passing by survivorship, jointly held accounts, and anything already owned by a family trust or company. If an asset isn’t part of your estate, your will may not control it the way you expect. Shares or ETFs held in your own name, though, can often go into a testamentary trust rather than being gifted outright, letting the portfolio stay invested and keep generating income for beneficiaries.
Shares, ETFs, and inherited portfolios
A testamentary trust may hold listed shares, ETFs, cash, and managed investments, distributing any income to beneficiaries per the trust terms. But a trust doesn’t magically erase tax — cost base and CGT can still apply to inherited shares or ETFs. (“Cost base” is the tax value used to calculate a gain or loss on sale.)
Treatment depends on when the deceased acquired the asset, whether and when it’s sold, who receives it, and current ATO rules on deceased estates. The structure can help with administration and flexibility, but it doesn’t remove the need for careful tax handling.
Example: Mia, 41, a teacher, and James, 43, an engineer, have a mortgage-free home, $180,000 in ETFs, $30,000 in cash, and two children aged 8 and 11. If both die early, they want the kids provided for without the portfolio being sold off immediately. Their wills set up testamentary trusts for each child, so the ETFs and cash can transfer in, and the trustee manages the portfolio and uses distributions for the kids’ benefit over time — rather than a lump sum handed over outright.
Superannuation needs its own section
Here’s one of the biggest estate planning misunderstandings: your will does not automatically control your super. Super usually sits outside your estate unless it’s paid to your legal personal representative (the executor or administrator). Whether it ends up under your will depends on your fund’s rules, your binding death benefit nomination, the eligible dependants, and the trustee’s decision.
A binding nomination tells your super fund who gets your death benefit, if it’s valid under the fund’s rules. If it names your legal personal representative, the money can flow into your estate and potentially into a testamentary trust — but not automatically. A carefully drafted will doesn’t help much if the nomination behind it is outdated or points elsewhere.
Simple will vs testamentary trust vs family trust vs direct gifting
A simple will is low-cost and low-admin but gives limited control and less flexibility for minors. A testamentary trust will costs more and carries ongoing admin, but offers more control and is often a better fit for shares, ETFs, and minor beneficiaries. A family trust is set up during your lifetime, not by your will, and suits ongoing family investing. Direct gifting is simplest of all — assets pass outright, with no control once they do. A family trust and a testamentary trust aren’t interchangeable.
Downsides
It isn’t a free upgrade: drafting costs more than a simple will, the trust may need its own tax returns and ongoing admin, and being trustee is a real job with legal duties. If the estate is simple, beneficiaries are adults, and there’s nothing unusual going on, a plain will may be enough. Sometimes the simplest plan is the best one.
Two more examples
Renee, 36, a nurse, has one daughter aged 6, $70,000 in ETFs, and $25,000 in savings. Her concern isn’t tax — it’s 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.
Graham and Leanne, 68 and 66, retired, hold $320,000 in shares and ETFs they want to leave to three grandchildren, two still in primary school. Rather than gift the investments outright, a testamentary trust could keep them invested and managed over time for the grandchildren’s benefit.
Myths
Australia doesn’t have inheritance tax in the usual sense — but tax can still arise around super death benefits, trust income, and CGT on inherited assets. Your will doesn’t automatically control your super. A testamentary trust doesn’t avoid all tax. And they’re not just for wealthy families — they can suit ordinary households with kids, a home, super, and a portfolio, though they’re not right for everyone.
Questions to ask yourself
- Do you have minor children or grandchildren to provide for?
- Would you want someone managing inherited money for a period of time?
- Do you hold investments that should stay invested after you’re gone?
- Are there family complexities — a blended family, a vulnerable beneficiary?
- Have you checked which assets are actually in your estate versus outside it?
- Are your super nominations current and aligned with your will?
These won’t tell you what to do — they’ll tell you what to raise with a professional.
Big picture
Estate planning is easy to put off until your finances start feeling real. A few ETFs, some super, maybe a home, maybe kids — and suddenly the question isn’t just how to build wealth, but how it gets handled if life takes an unexpected turn.
A testamentary trust can offer structure, flexibility, and sometimes tax advantages, especially with children involved. But it’s not a default option or a magic fix. What matters is understanding what’s actually in your estate, what sits outside it, and whether your will, super nominations, and investment structure all point the same direction.
Next steps
Review what’s in your estate and how your shares, ETFs, cash, and property are owned. Check your super death benefit nominations. Read Moneysmart’s estate planning basics and ATO guidance on trusts, deceased estates, and CGT. Speak with an estate planning solicitor, and consider licensed tax advice if minor beneficiaries, CGT, or blended family issues are involved. Rules and tax treatment can change, so check current information before acting.
And if part of your estate plan involves keeping a portfolio invested for the people you care about, Pearler makes it easy to build and hold a simple, low-cost share and ETF portfolio for the long term — the kind of holding that’s straightforward to pass on, structure into a trust, or manage on someone else’s behalf down the track.
