As it is often said, you should hope for the best but be prepared for the worst.

Preparation is the key to ensuring that your children are protected in the worst of situations. By incorporating a testamentary trust into your will, you can have peace of mind that your children will receive the most favourable advantage from your estate. While incorporation of a trust complicates the process of obtaining a will, the results it brings are worth the complexity.

Below you will find a description of what a testamentary trust is, how it works to protect your children and some issues which arise in the use of testamentary trusts.

What is a testamentary trust?

A testamentary trust is a trust established under a will. A trust is a structure where assets are managed by one person (the trustee) for the benefit of another person (the beneficiary). It does not come into effect until the death of the testator. The testator is the person who makes the will. What makes a testamentary trust unique is that fact that the Trustee has discretion to distribute any capital or income between a group of beneficiaries as stipulated in the will.

How will it protect your children?

A testamentary trust has several potential advantages for your children and protects them from claims against the estate and high taxation burden.

The Trustee can allocate capital and income to any of the nominated beneficiaries in the will allowing the beneficiary flexibility over when and how they take their inheritance. Assets are highly protected by a testamentary trust because the beneficiary do not legally own the assets. This comes in handy in situations such as separation or divorce of a beneficiary. As this money is held in a testamentary trust for the beneficiary, the partner or spouse of the beneficiary will not benefit from the inheritance in the event of separation or divorce. The Family Court cannot order for distribution of assets in the testamentary trust.

With a regular will, your child will usually receive a lump sum inheritance which has potential to affect their eligibility to receive social security payments. If your child is recipient of social security benefits such as youth allowance or disability pension, then a testamentary trust will enable them to continue receiving these payments and any other government assistance that come with them.

If your child has difficulty controlling use of money or has a drug or gambling problem, your testamentary trust can be used to ensure that the assets and income left to them is maintained and controlled.

Testamentary trusts can provide a higher level of control to you with regard to when your child receives particular assets and what they can use them for. For example, you can have your child receive $20,000 on their 21st birthday to be used for travel and then receive the house when they get married.

With a regular will, assets often pass directly to your spouse. If your spouse remarries or has other children, a testamentary trust ensures that your children still benefit from your will.

A testamentary trust can also protect your children from huge taxation payments. The Trustee can distribute taxable income between beneficiaries to spread and alleviate tax burden. For example, one of your beneficiaries may be a low income earner, so the Trustee will allocate them more of the taxable income to take advantage of the lower tax bracket.

With a regular trust, a flat rate of 46.5% taxation applies to all income distributed to children under the age of 18. However, a testamentary trust allows children under the age of 18 to qualify for the adult taxation brackets benefiting from the tax free threshold and lower taxation rates.

Have you ever thought about establishing a testamentary trust for your children? Please share in the comments below.

Please always seek professional advice for your personal situation.


  • this sounds like a great way to ensure that your kids are looked after

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  • Having just been through a bad will experience, I know those you leave in charge, the ones you trusted and loved and thought they loved you. They quickly become untrustworthy and all ‘me me me’ when there’s money involved. So glad my kids are adults and won’t need anyone to look after them when I die

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  • All new to me – thanks for the informative article.

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  • An interesting article and an option for parents to think about.

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  • This article is very interesting.

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  • My parents choose to give a larger sum of money to their children every year. I love it that they give when they’re still alive and in this way avoiding the high tax for them selves and for their children as well. My parents (see picture) are nearly 60 years married and far in their eighties, aren’t they gorgeous ?!

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  • My children are way past this age and they all earn more than me and have more than me in their investments, so I’ll give these tips a miss. I’m hoping they’ll look after me in my old age, haha!

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  • We do have a trust and never heard of this. It’s a great idea and I will look into it. I should probably also do my will. It’s on my to do list I promise :)

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  • I have never heard of that before. that’s wonderful information. Thank you

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  • I’ve never heard of this – thanks for sharing this article!

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  • What an interesting article! I never thought about the taxes. 46.5% is really high!!
    It looks really important to look into a testamentary trust. Thank you for the article!


    • I did similar but invested the money in my name. The accounts are labelled “in trust for”. Yes, I pay tax on the interest…but it is not near as high as that. The account numbers are listed in my will. Unless the tax laws change they will pay tax on the interest they earn on the money when they receive it, not the money itself. However if I pass away and the money is not given them until after the age of 18, the executor has to lodge a tax return. My Grandma didn’t have the money in separate accounts and she stipulated the age of 25 in her will. When she did it the adult age was considered to be 21, not 18. She stipulated the amount each grandchild was to be given. It was the same for each one. No names were listed. The amusing part was the executors had to determine whether any of the Mothers were pregnant when my Grandma died.(none of them were). It caused a few interesting discussions and laughs though. All of the Mothers were in their 40s – 50s.



      • I forgot to state that the funds could be paid to the parents if it was needed for medical or educational purposes. Proof had to given. Not in our case at all, but I heard of one family that tried to claim money from their kids’ inheritance to……wait for it……to buy new curtains. Needless to say they were refused.

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  • I believe I have taken all reasonable legal steps to provide for my child should something happen to me. Great advice in your article.

    Reply

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