Thinking about what happens to your assets after you are gone is rarely comfortable, but it is one of the most caring things you can do for the people you love. Good estate planning makes sure your wishes are followed, your family is provided for, and as little as possible is lost to tax or dispute. At the heart of many well-built estate plans sits a testamentary trust, and understanding how one works can change how much your family keeps.
This guide explains what an estate trust is, how a testamentary trust protects your family, the tax advantages on offer, and the responsibilities involved. The legal documents themselves are drafted by estate lawyers, while the tax side is where we come in, so think of this as the accountant’s view of getting it right.
What Is A Testamentary Trust?
A trust is a legal relationship between a trustee, who holds and manages assets, and the beneficiaries, who benefit from them. In some family trusts the trustee and a beneficiary can even be the same person, though that is less common in estate planning. A testamentary trust is simply a trust created by your will that only comes into effect upon the testator’s death. Until then, it sits dormant inside your will, doing nothing.
When the time comes, the trust is established as part of estate administration, and the trustee takes control of the trust assets for the benefit of the people you have named. Because it is a legal arrangement set out in a legal document, the terms can be as flexible or as tightly controlled as you wish, which is exactly what makes it so useful.
How A Testamentary Trust Works
The mechanics are straightforward once you see them. You make a valid will that includes the trust, name a trustee you believe will act in everyone’s best interests, and set out who the beneficiaries are and how trust income and capital should flow to them. Once the trust set up is complete, it simply waits inside your will.
On your death, your estate is administered, and rather than handing assets directly to beneficiaries, the chosen assets are held in the trust. The trustee then manages the trust property and distributes income generated to beneficiaries in a tax effective manner, often over many years. A testamentary discretionary trust gives the trustee discretion over who receives income and how much, which is where much of the flexibility and benefit lives.
The Benefits Of A Testamentary Trust
There are several benefits to building a testamentary trust into your estate plan, and they go well beyond tax. Here are the ones that matter most to families.
Tax Advantages For Beneficiaries
This is the standout. Income distributed to minor beneficiaries from a testamentary trust is taxed at normal adult rates, not the punitive rates that usually apply to children. In practice, that means infant beneficiaries can receive up to $18,200 tax free each year, the same as any adult. For a family with young children, splitting income this way can save thousands annually, year after year.
Asset Protection For Your Family
A properly structured trust can protect assets from creditors, litigants, and even family law claims. If a beneficiary later divorces or runs into financial trouble, assets held in the trust are far harder for others to reach than money handed over directly. That protection of an inheritance against relationship breakdowns and disputes is one of the most valuable, and most overlooked, reasons to use one.
Care For Vulnerable Beneficiaries
Not everyone can manage a sudden inheritance. A testamentary trust lets you provide for vulnerable beneficiaries, such as a child with special needs or someone who struggles with money, by keeping assets under a trustee’s careful control and releasing them in line with that person’s best interests rather than all at once.
Testamentary Trust Versus Family Trust
People often confuse the two, so it helps to be clear. A family trust, also called a discretionary trust or an inter vivos trust, is a living trust established during a person’s lifetime, mainly for tax planning and asset protection. It can exist for up to 80 years and allows tax-effective distribution of income among family members while it runs.
A testamentary trust, by contrast, is created after death through your will and focuses on managing your legacy. A family trust protects assets from personal creditors and keeps assets out of probate during your lifetime, while an estate trust focuses on the deceased estate and protecting inheritances. Many families use both at different stages, and the right mix depends entirely on your family circumstances.
The Role And Duties Of The Trustee
Choosing the right trustee is one of the most important decisions you will make, because a great deal rests on their judgement. The trustee holds real power, and with it, real responsibility.
A trustee must act in the best interests of the beneficiaries at all times, manage the trust assets prudently, and balance the short and long-term interests of everyone involved. On the practical side, they must keep accurate records of trust transactions, lodge tax returns for the trust each year, and meet the trust’s compliance and reporting requirements. It is a genuine job, and many people appoint a professional adviser to help the trustee carry it out properly.
Tax And Compliance For Estate Trusts
Here is where our work as accountants matters most. For tax purposes, a trust is a separate legal entity, and it must lodge its own tax return each year. Unlike individuals, trusts do not generally qualify for the tax free threshold, and income retained inside a trust rather than distributed can be taxed at the maximum personal tax rates. That is why distributing trust income thoughtfully each year is so important.
Done well, an estate trust is a genuinely tax effective way to manage and pass on wealth. Done carelessly, it can cost a family dearly. The rules around tax trusts are detailed and shift with changes to tax law, so this is an area where current, tailored advice pays for itself many times over. We prepare the trust’s annual return, advise on how best to distribute the trust income each year for a strong result, and keep everything compliant as the rules evolve.
A Trust That Continues Beyond The Estate
One of the quiet strengths of a testamentary trust is longevity. The trust continues to operate long after the deceased estate is finalised, sometimes for decades. The trustee is responsible for running it the whole time, distributing assets in accordance with the trust deed and the wishes of the person making the will.
Each year, beneficiaries receive income from the trust, and that income received is taxed in their hands. Because a testamentary discretionary trust lets the trustee stream different amounts to different people, income can flow to other beneficiaries on lower tax rates when it makes sense. Handled well, this gives a family both a smooth transition of wealth and ongoing tax benefits for years to come, rather than a single lump sum and a single tax bill.
Estate Planning Is A Team Effort
The best estate plans are built by a small team working together. Estate lawyers draft the valid will and the trust deed that outlines the terms, the conditions, and the trustee’s powers, all governed by trust law, making sure everything is legally sound. Your accountant handles the tax responsibilities, the trust returns, and the tax implications of how income is distributed.
We always encourage clients to seek professional advice from both, because the legal and tax sides have to fit together. A beautifully drafted trust that ignores the tax consequences, or a clever tax plan with no valid legal foundation, helps no one. Working with the right advisers, under the relevant professional standards legislation, is how you get a plan that actually holds up.
Leaving A Gift To Charity
Estate planning is not only about family. Many people use their will to leave part of their estate to a charitable trust, directing trust income to the charitable causes that mattered to them in life. Set up correctly, a gift like this can be tax effective as well as meaningful, and it is worth raising with your advisers early so it sits neatly alongside the rest of your plan.
Case Study: A Nedlands Family Protects The Next Generation
A Nedlands couple with two young children and a sizeable share portfolio came to us alongside their estate lawyer. They wanted to make sure that if the worst happened, their children were provided for without a large inheritance landing in young hands all at once.
We worked with their lawyer to build a testamentary discretionary trust into their wills. The structure means income generated by their assets can be distributed to the children at adult tax rates, with each child able to receive up to $18,200 tax free, while the capital stays protected inside the trust until they are older. It also shields the inheritance from future relationship breakdowns and other family issues. The parents left with real peace of mind, knowing the plan would look after their family for future generations.
Frequently Asked Questions
These are the questions we hear most about estate trusts. Anything else, just ask.
When Does A Testamentary Trust Start?
A testamentary trust only comes into effect upon the death of the will-maker. Until then it sits inside your will and does nothing. Once you pass away and the estate is administered, the trust is established and the trustee begins managing the assets for your beneficiaries.
Are Testamentary Trusts Worth The Cost?
For many families, yes. The tax advantages for minor beneficiaries alone can save thousands a year, and the asset protection against creditors, divorce, and disputes is valuable on its own. Whether it suits you depends on your assets and family circumstances, which is worth discussing with a professional adviser.
Who Should Be The Trustee?
The trustee should be someone you trust completely to act in the beneficiaries’ best interests, often a spouse, trusted family member, or a professional. Because the role carries real legal and tax responsibilities, many families appoint a professional to assist, especially in the early years.
Is A Testamentary Trust Private?
Yes. Unlike a will, which can become a public record during probate, a trust is generally a private document. That privacy is another reason families value them for managing significant or sensitive inheritances.
Plan Ahead And Protect Your Family
Estate planning is not about expecting the worst. It is about making sure that whatever happens, the people you love are looked after and as little as possible is lost along the way. A well-built testamentary trust can deliver real tax advantages, protect an inheritance for decades, and give you the comfort of knowing your wishes will be honoured.
The tax side of estate planning is where we add the most value, working alongside your estate lawyer to make sure the structure is sound and tax effective. If you are thinking about how to protect your family’s future, our Perth team is here to help. Book a consultation today, and let us help you put a plan in place that lasts. Liability limited by a scheme approved under Professional Standards Legislation.
