A testamentary trust can protect and manage an inheritance, but it is not right for every estate. We explain when one may be worthwhile, the potential tax and asset protection benefits, and the limitations.
Testamentary trusts are often promoted as a way to protect an inheritance, reduce tax and give beneficiaries greater flexibility.
They can do all of those things in the right circumstances.
But not every will needs a testamentary trust.
Whether one is worthwhile depends on what you own, who you want to benefit, their circumstances and what you are trying to protect against.
A testamentary trust can be useful if you want to leave assets to children, protect a vulnerable beneficiary, provide greater flexibility around an inheritance or manage risks affecting a beneficiary.
There can also be tax advantages, particularly where income from inherited assets may be distributed to children under 18.
But a testamentary trust adds complexity, administration and ongoing costs. It does not provide absolute protection from creditors, family law claims or Family Provision claims.
For a straightforward estate passing to financially capable adult beneficiaries, a simple will may be all that is required.
A testamentary trust is a trust created by a will.
Unlike a family trust established during your lifetime, a testamentary trust does not start operating when you sign your will.
It comes into existence after your death when assets from your estate are transferred into the trust.
Instead of a beneficiary receiving their inheritance outright, some or all of their inheritance can be held in the trust.
A trustee controls and administers the trust assets for the beneficiaries in accordance with the terms of the will.
For example, instead of leaving $500,000 directly to your daughter, your will could provide for her inheritance to be held in a testamentary trust established for her and other nominated beneficiaries.
Whether that produces a worthwhile benefit depends on her circumstances and what the inheritance consists of.
There is no single reason.
Different families use testamentary trusts for different purposes.
The main reasons usually involve:
The important question is not whether testamentary trusts are generally a good idea.
It is whether one solves a problem that actually exists in your estate plan.
They can be.
Leaving a substantial inheritance directly to a young child creates obvious practical problems. A child cannot simply take control of significant property and manage it themselves.
A testamentary trust allows the will to nominate a trustee to manage the inheritance for the benefit of the child.
The will can set out how the trustee can use the money and assets for matters such as the child's education, health, maintenance and general benefit.
It can also provide for the trust to continue beyond the child's 18th birthday.
That may be appropriate where a parent or grandparent does not want a young beneficiary to receive complete control of a substantial inheritance as soon as they become an adult.
The appropriate age and structure will depend on the beneficiary and the estate.
There can be.
One of the better-known advantages concerns distributions of certain income from a deceased estate through a testamentary trust to beneficiaries under 18.
Ordinarily, special tax rates can apply to income distributed from a trust to a minor.
However, income that qualifies as excepted trust income can receive more favourable tax treatment, with the minor generally able to access ordinary individual tax rates.
This can make a testamentary trust attractive where the estate includes income-producing assets such as investments or investment property and there are children among the potential beneficiaries.
The tax treatment is subject to specific rules.
Changes to the tax legislation have also limited the circumstances in which income generated from assets subsequently introduced into a testamentary trust can obtain the same concessional treatment.
A testamentary trust should therefore not be established on the assumption that all income distributed to children will automatically receive favourable tax treatment.
Tax advice may be appropriate where tax planning is a significant reason for establishing the trust.
It can provide a degree of asset protection, but it should not be described as absolute.
If an inheritance is paid directly to a beneficiary, the inherited assets become that person's assets.
That can expose the inheritance to risks affecting the beneficiary personally.
A properly structured discretionary testamentary trust can place some separation between the beneficiary and the ownership of the inherited assets.
This may be particularly relevant where a beneficiary:
The effectiveness of that protection depends on the structure, the beneficiary's control over the trust and the particular circumstances.
A testamentary trust should not be treated as a guaranteed way of putting assets beyond the reach of creditors.
This is one of the most common reasons parents ask us about testamentary trusts.
The answer requires some care.
A testamentary trust may provide a level of protection or separation that would not exist if an inheritance were simply paid to the beneficiary personally.
But putting an inheritance into a testamentary trust does not guarantee that it will be ignored in a future family law property settlement.
The Family Court can examine the reality of the trust arrangement.
Relevant considerations can include the beneficiary's interest in the trust, the level of control they exercise, the identity of the trustee, the class of beneficiaries, the history of distributions and the practical availability of trust assets or income.
Depending on those circumstances, the trust may be relevant as property, a financial resource or otherwise relevant to the parties' financial circumstances.
The Family Law Act property provisions also changed from 10 June 2025, so estate planning advice that is intended to take account of a beneficiary's potential family law exposure should be considered against the current legislation.
A testamentary trust can be a useful part of that planning.
It should not be sold as a guarantee that an inheritance is “divorce proof”.
A testamentary trust can be particularly useful where giving a beneficiary complete control of an inheritance would not be appropriate.
This can arise where a beneficiary has:
The will can appoint an appropriate trustee and give that trustee powers to manage and distribute funds for the beneficiary.
This can allow the beneficiary to receive the benefit of the inheritance without necessarily receiving unrestricted control of all the assets at once.
For beneficiaries with disabilities, more specialised estate planning may be required. This can include consideration of social security consequences and, in appropriate circumstances, structures such as a Special Disability Trust.
No.
A testamentary trust does not prevent an eligible person from bringing a Family Provision claim under the Succession Act 2006 (NSW).
If an eligible person claims that adequate provision has not been made for their proper maintenance, education and advancement in life, the existence of a testamentary trust does not prevent the Court from considering the claim.
This is important.
A testamentary trust can be useful for managing how an inheritance is held.
It should not be used on the assumption that it makes the estate immune from a Family Provision claim.
If the concern is that someone may challenge or contest the estate, that risk should be considered separately when the will is prepared.
Not automatically.
NSW duty consequences depend on the particular transaction, the property being transferred and the terms of the will and trust.
Transfers made in accordance with a deceased estate can receive concessional treatment in some circumstances, but additional transactions involving trust property may have different consequences.
If real estate is likely to form part of a testamentary trust, the proposed structure should be considered carefully when the will is drafted.
It is much easier to consider those consequences when preparing the estate plan than after the person has died.
The main disadvantage is complexity.
A simple will may allow the executor to administer the estate, distribute the assets and complete the administration.
A testamentary trust can continue for many years after the estate itself has been administered.
Depending on the structure and assets, this may involve:
There can also be practical difficulties if the wrong trustee is appointed.
The benefits need to justify that additional work and expense.
Choosing the trustee is an important part of establishing a testamentary trust.
The trustee may control substantial assets for many years.
They need to understand their responsibilities, act properly and deal fairly with the beneficiaries in accordance with the terms of the trust.
A family member may be appropriate.
In other circumstances, appointing an independent person or professional trustee may provide greater independence and continuity.
The will should also deal with what happens if the original trustee dies, loses capacity, resigns or needs to be replaced.
The choice should not simply default to whoever has been appointed as executor.
The roles are different and may require different skills.
That depends on the terms of the will and the applicable law.
A testamentary trust does not necessarily end when a beneficiary turns 18, 21 or 25.
Some trusts are designed to operate for a shorter period. Others can continue for many years.
The appropriate structure depends on what the trust is intended to achieve.
For a young beneficiary, the objective may be to manage the inheritance until they reach an appropriate age.
For an adult beneficiary, the objective may instead be long-term flexibility, tax planning or asset protection.
The duration should follow the purpose of the trust rather than using an arbitrary age in every will.
Sometimes clearly yes.
Sometimes clearly no.
Consider a substantial estate containing investment property and other income-producing assets, with young beneficiaries and an adult beneficiary who operates a business and has personal creditor exposure.
There may be several reasons to consider testamentary trusts.
Now consider an estate of similar value passing entirely to a financially secure surviving spouse, with financially capable adult children as the alternative beneficiaries.
A complex trust structure may provide much less practical benefit.
The value of the estate is only one consideration.
The more useful questions are:
If there is no identifiable reason for using a testamentary trust, adding one simply because it sounds more sophisticated may achieve very little.
For the right family, however, a well-drafted testamentary trust can provide flexibility that a direct gift under a simple will cannot.
It can be particularly useful for young beneficiaries, vulnerable beneficiaries, families with income-producing assets and beneficiaries exposed to business, creditor or relationship risks.
The starting point should be your family and your assets.
The structure comes after that.
Urban Law Group advises on wills, testamentary trusts and estate planning. We can consider your assets, beneficiaries and the risks you actually want your estate plan to address before recommending whether a testamentary trust is worthwhile.
If you are reviewing your estate plan and would like to speak with one of our experienced lawyers, make an enquiry.