Testamentary Trust Wills: The New Standard

A standard Will is the most common type of Will, however the Testamentary Trust Will is fast increasing in popularity as people seek the asset protection and tax advantages it offers. So, what are they and what are the differences?

Standard Will

A standard Will or “simple” Will may have complicated provisions but will normally include an absolute gift to Beneficiaries. This means that the Beneficiaries receive their share of the estate in their personal names and capacities.

While a standard Will is cheaper to execute, it does not provide tax effectiveness or asset protection. Once the inheritance has been received by the Beneficiary, any income they make from it would be taxable at the Beneficiary’s marginal tax rate. It may even potentially cause the Beneficiary to move to a higher tax rate.

Also, an inheritance received absolutely by the Beneficiary is available for payment of any Divorce Settlement and payment of the Beneficiary’s debts.

Testamentary Trust

A Testamentary Trust is a Trust that is established by a Will with the terms of the Trust set out in the Will document. The Trust comes into effect on the death of the Testator, once the estate has been administered.

In NSW, the rule against perpetuities operates such that the maximum lifetime for a Testamentary Trust is 80 years. Once 80 years has passed, anything remaining in the Trust must be distributed and the Trust wound up.

You should consider a Testamentary Trust where:

  1. The Beneficiaries will inherit an amount that is likely to generate income;
  2. Income on the inheritance is likely to force the Beneficiaries into a higher tax bracket;
  3. The Beneficiaries are in need of or would benefit from asset protection; or
  4. The inheritance will be vulnerable to mismanagement by the Beneficiaries or to third parties such as creditors or ex-spouses.

Empower and protect your loved ones with a Will creating a Discretionary Testamentary Trust.

Basic Discretionary Testamentary Trust Will

Establish a Discretionary Trust funded by your Estate Assets for each beneficiary that both protects inheritances from creditors and relationship breakdowns and creates flexibility for tax planning and management.

$1,045 incl. GST

What are the components of a Testamentary Trust?


  • The Trustee may be a person, persons, or a company.
  • The Trustee holds the Trust property for the benefit of the Beneficiaries.
  • The Trustee manages the Trust property in accordance with the terms of the Will and with laws regulating Trusts.
  • Under a discretionary Trust, the Trustee determines when to make distributions to the Beneficiaries and the amount.

Primary Beneficiary

  • The Primary Beneficiary is the person or persons first in line to receive benefits from the Trust.
  • This will be the person who would have received the gift outright under a standard Will.
  • The Primary Beneficiary is not the legal owner of the Trust property but receives the benefit subject to the discretion of the Trustee.

Trust Property

  • Trust property will be the inheritance received from the deceased estate, as well as any interest or income derived from the estate assets.

Potential Beneficiary

  • A Potential Beneficiary is a person who may be eligible to receive a distribution from the Trust.
  • This normally be a spouse, child, grandchild, sibling, parent or relation of the Primary Beneficiary.


  • The Appointor holds the power to remove the Trustee of a Trust and appoint a new Trustee. The Appointor may be able to appoint themself as Trustee.
  • This power gives the Appointor indirect, yet ultimate control of the Trust.


  • This person can hold veto power in relation to certain decisions of the Trustee. For example, the Will may specify that the Trustee must have the Protector’s consent to make a distribution of capital or to wind up the Trust.
  • Where the Primary Beneficiary is under the preservation age or lacks capacity, the Protector will normally be the Beneficiary’s Guardian or Attorney.

Benefits of a Testamentary Trust

There are two primary benefits of including a Testamentary Trust in your Will:

  1. Tax effectiveness, and
  2. Asset protection

Tax effectiveness

Undistributed net income of a Trust will be taxed at the highest marginal tax rate (currently 45%), but it is the way in which the income is taxed in the hands of the Beneficiary that demonstrates the tax effectiveness of the Trust structure.

Through the Trust structure, the Trustee is able to distribute net income of the Trust to minor Beneficiaries and Beneficiaries who have lower taxable incomes.
For a distribution to a minor Beneficiary from a Testamentary Trust, the first $18,200 will be tax-free (2015/2016 tax-free threshold). If the low income tax offset applies, this tax-free amount increases to $20,452.


Claudette leaves her estate worth approximately $1,200,000 to her two sons Paul and Phillip. Paul receives his share of the estate outright, whereas Phillip’s share is placed into a Trust of which he is the Primary Beneficiary.

In the first year, each 50% share of the estate generates $40,000 income.

  • Paul’s income is $145,000 per year. The added income puts him at the highest marginal tax rate and he will pay tax of about $18,800.
  • Phillip decides to distribute the Trust income of $40,000 equally between his two children. The low income tax offset in available which results in no tax being payable.

A Testamentary Trust can also offer tax effectiveness in relation to capital gains tax, including the flexibility to determine who real estate is transferred to and receives the CGT rollover, and distributing the assessable gain between Beneficiaries following the sale of property.

Asset Protection

Testamentary Trusts can prevent loss of estate assets due to:

  1. Mismanagement by the Beneficiary, possibly owing to youth, immaturity, disability, or addiction; or
  2. Liability to third parties, such as bankruptcy claims or the claim of an ex-spouse in family law proceedings.

It achieves this by separating ownership of the Trust assets from the Beneficiary: the Beneficiary does not own the asset, the Trust does and it is managed by the Trustee.
One concern may be to protect the inheritance of minors. A Testator may choose the age that they believe a Beneficiary will be mature enough to manage their inheritance. This is referred to as the preservation age. Until the Beneficiary reaches the preservation age, the Trustee will maintain and preserve the inheritance.

This not only protects the inheritance from the Beneficiary’s own mismanagement, but also allows the Testator to determine what happens with the inheritance in the event that the Beneficiary dies.

A Testator may also want to prevent a Beneficiary from losing their inheritance through bankruptcy or divorce.

In relation to bankruptcy, any inheritance a Beneficiary receives outright is available to pay their debts and, if the Beneficiary is bankrupt at the time the estate is administered, must be paid to the Trustee in bankruptcy. However, if the inheritance is held by a Trust of which the debtor or bankrupt person is a Beneficiary, it will normally be protected from creditors. There may be some risk if the bankrupt Beneficiary is also the Trustee or otherwise has control of the Trust. The Testamentary Trust must be carefully drafted to address this risk.

In relation to divorce, the protection offered by a Testamentary Trust is not bullet-proof. The starting point is the argument that the assets do not belong to the spouse, they belong to the Trust, and are therefore not matrimonial property available for distribution between the spouses.

However, the Family Court has strong powers to penetrate the Trust structure, especially if it can be shown that the Beneficiary is also in control of the Trust. This results in a balancing act for the Testator: on one hand is the desire to ensure that the inheritance in available for the benefit of the Primary Beneficiary and usually the offspring of the Primary Beneficiary, and on the other hand, the less control that the Primary Beneficiary has over the assets of the Trust, the more it is protected from family law proceedings.

The degree of control or influence that a spouse has in relation to the Trust will determine whether the assets in the Trust are part of the matrimonial property pool. Other considerations will be the terms of the Trust, the history of Trust distributions, and the creation of the Trust itself.

Optional vs. Mandatory

If tax effectiveness is the primary purpose for setting up a Testamentary Trust, the Will should include a clause that the Trust is optional, giving the Executor the discretion to decide whether the Primary Beneficiary will receive their share of the estate outright or whether a Trust will be established for their benefit. This allows for there to be consideration of the Primary Beneficiary’s financial status at the time of receiving their inheritance.

If the primary reason for establishing a Testamentary Trust is asset protection, it is recommended that the Trust be mandatory, and the Executor will be given no option to distribute the estate to the Primary Beneficiaries directly.

How we can help

We work with clients to determine whether a Testamentary Trust will be suitable for them. We consider the wishes of the clients, their priorities and values, and the circumstances of the Beneficiaries to draft a customised Testamentary Trust Will that offers the client tax effectiveness and asset protection.

Advanced Estate Planning eGuide

Asset protection strategies and tax planning are crucial considerations that are too often overlooked in Estate Planning.

Specialist Will & Estates Lawyers for Sydney and Newcastle

Make a Fresh Start. Contact Us Today

The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.