Testamentary Trusts: Building a Will That Protects Your Beneficiaries

When most people think about making a Will, they imagine a straightforward document that says who gets what when they die. For many Australians, that basic Will is all that is needed. But for others — particularly those with significant assets, complex family structures, or vulnerable beneficiaries — a Will that simply transfers wealth outright may not be the wisest choice.

A testamentary trust is a powerful estate planning tool that allows you to build protection, flexibility, and tax efficiency directly into your Will. This article explains what a testamentary trust is, how it works, who benefits from one, and why it may be worth serious consideration in your own estate planning.

What Is a Testamentary Trust?

A testamentary trust is a trust that is created by your Will and comes into existence only upon your death. Unlike an inter vivos (living) trust, which is established and operates during your lifetime, a testamentary trust has no legal existence until after you have died and your Will has been admitted to Probate.

Once established, the testamentary trust holds assets on behalf of your beneficiaries. A trustee — appointed in your Will — manages those assets and distributes income and capital to the beneficiaries in accordance with the terms you have set. The trust may last for a fixed period or until a specified event, such as a beneficiary reaching a certain age.

South Australia’s general law of trusts, together with the relevant provisions of the Succession Act 2023 (SA), provides the legal framework within which testamentary trusts operate. The trust itself is also subject to Commonwealth income tax legislation, which is a significant source of its planning advantages.

Why Consider a Testamentary Trust?

There are four principal reasons why a testamentary trust may be superior to a straightforward distribution under a Will: asset protection, tax efficiency, care for vulnerable beneficiaries, and flexibility in distribution.

Asset Protection

When you leave an asset outright to a beneficiary, that asset immediately becomes their personal property. It is therefore exposed to any future claims against them — from creditors if they become bankrupt, from an estranged spouse in the event of a relationship breakdown, or from plaintiffs in civil litigation. A significant inheritance left to a beneficiary at a vulnerable point in their life can be lost in its entirety.

A testamentary trust changes this dynamic. Because the assets are held by the trust — not by the beneficiary personally — they are generally better protected from the beneficiary’s creditors and from claims in family law proceedings. The beneficiary enjoys the economic benefit of the assets without owning them outright. This distinction can be of profound practical importance.

A beneficiary who receives their inheritance through a testamentary trust may retain far more of that wealth over time than one who receives it outright — particularly where the beneficiary faces significant personal or financial risks.

Tax Efficiency for Families with Children

One of the most compelling advantages of a testamentary trust is its treatment under Australian income tax law. Income distributed from a testamentary trust to minor beneficiaries (children under 18) is taxed at ordinary adult tax rates, rather than at the penalty rates that apply to unearned income received by minors from other sources.

This means that in a family with minor children, income from a testamentary trust can be distributed in a tax-efficient manner that substantially reduces the family’s overall tax burden. Depending on the size of the estate and the number of beneficiaries, the tax savings over the life of the trust can be substantial — sometimes far exceeding the cost of establishing and maintaining the structure.

It should be noted that this tax treatment applies specifically to income from testamentary trusts. It does not apply to income from discretionary (family) trusts established during the settlor’s lifetime, which is a frequently misunderstood distinction.

Protecting Vulnerable Beneficiaries

Some beneficiaries are not well placed to manage a large inheritance. This may be because they are young, because they have a disability or mental health condition, because they have a history of financial mismanagement, or because they are in a relationship that gives cause for concern. Leaving a significant sum directly to such a person may do them more harm than good.

A testamentary trust allows you to build in safeguards. You can specify that the trustee must apply capital and income for the benefit of the beneficiary, with the trustee exercising discretion as to the timing and amount of distributions. You can require that capital distributions beyond a certain threshold require the consent of multiple trustees, or that a professional trustee be appointed. You can provide for a special disability trust structure if the beneficiary has a severe disability.

Consider: A testamentary trust for a beneficiary with a disability can be structured to preserve their eligibility for certain Centrelink payments and the National Disability Insurance Scheme (NDIS) by ensuring they do not hold assets above the relevant thresholds personally. Specialist advice is essential in this area.

Flexibility Across Generations

A well-drafted testamentary trust gives the trustee discretion to distribute income and capital among a defined class of beneficiaries, which typically includes the primary beneficiary and their descendants. This flexibility allows the trustee to respond to the changing circumstances of the family over time — directing more income to a beneficiary in financial need in one year, and more to another in a different year.

It also allows for efficient planning across generations. Income that is not needed by one generation can be accumulated within the trust and distributed to grandchildren or great-grandchildren in a more tax-effective manner than would be possible under a series of outright gifts.

The Trustee’s Role and the Importance of Trustee Selection

The success of a testamentary trust depends heavily on the calibre and integrity of its trustee. A trustee has fiduciary duties — they must act in the interests of the beneficiaries, invest prudently, keep proper accounts, and exercise their discretionary powers in good faith. A trustee who fails in these duties can be removed by the Court and may be held personally liable for any loss.

The choice of trustee deserves serious thought. Common options include:

• A trusted family member or friend, who has the advantage of knowing the family’s circumstances intimately but may lack financial expertise or may become caught in family dynamics;
• A professional trustee such as a trustee company, which brings expertise and impartiality but at a cost;
• A combination of both, where a family member and a professional trustee act jointly.

Your Will should also address what happens if your nominated trustee is unable or unwilling to act, and how the trustee may be changed during the life of the trust.

Are There Any Disadvantages?

Testamentary trusts are not costless. There are legal fees involved in drafting a Will that includes testamentary trust provisions, ongoing trustee obligations, accounting and compliance costs, and annual tax return obligations for the trust itself. For smaller estates, these costs may outweigh the benefits.

Additionally, a testamentary trust requires an engaged and responsible trustee. A trustee who is passive, uninformed, or in conflict with the beneficiaries can undermine the purpose of the structure entirely. The trust is only as effective as the person administering it.

The complexity of a trust Will is also greater than a simple Will, which means it is more important — not less — that the document be prepared with precision by an experienced practitioner.

Is a Testamentary Trust Right for You?

A testamentary trust is most likely to be appropriate where one or more of the following applies:

• Your estate has a net value of $500,000 or more;
• You have children or grandchildren who are minors or who are likely to be minors when you die;
• You have a beneficiary who is vulnerable due to disability, financial difficulties, or a troubled relationship;
• You have concerns about a beneficiary’s spouse or partner;
• You are in a blended family with children from a previous relationship;
• You have business interests or investment properties that should be managed, not immediately liquidated;
• You have a high personal exposure to liability and wish to protect your estate for your family.

Even if none of these factors apply strongly, a testamentary trust may still be worth considering. The cost of including testamentary trust provisions in a Will is modest compared to the potential benefit, and many practitioners recommend them as a matter of good practice for estates of any meaningful size.

Conclusion

A testamentary trust is not a device reserved for the very wealthy. It is a practical tool for any person who wants to ensure that their estate benefits their family as fully and safely as possible — across generations, in changing circumstances, and in the face of unexpected challenges.

If you are reviewing your Will or creating one for the first time, we encourage you to ask your estate planning solicitor whether a testamentary trust is appropriate for your situation. The team at Genders and Partners has extensive experience in trust-based estate planning and can advise you on the structure that best fits your family’s needs.

Want to Find Out More?

If you would like further advice about testamentary trusts or any aspect of estate planning in South Australia, our experienced practitioners would be pleased to assist.

When it comes to Wills, Probate, Deceased Estates, asset protection and estate planning in Australia, you can trust the oldest law firm in South Australia – Genders & Partners – to guide you through the tough decisions you must make for your family’s future care and welfare.

If you have any questions or would like further information, or a quick phone call to discuss, book a timeslot for a free 15-minute phone consultation.

We can help you to protect yourself and your family. We look forward to being of service.

More Testamentary Trust and Estate Planning Resources

• FAQs
• Videos – Testamentary Trusts and Estate Planning
• How Estate Planning Trusts Can Protect You and Yours
• The Benefits of a Discretionary Trust in Estate Planning
• Wills and Estate Planning – Articles and Resources

All these and many more estate planning topics are available for discussion with the oldest law firm in South Australia. Visit our articles page to explore our complete library of Wills and estate planning resources.

DISCLAIMER: This article is intended as general information only and does not constitute legal advice. The law relating to testamentary trusts is complex, and individual circumstances vary considerably. You should obtain specific legal advice from a qualified practitioner before taking or refraining from any action. Genders and Partners accepts no liability for reliance on this article without such advice.

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Rod Genders is a senior Australian lawyer specialising in trusts, Wills and estate planning, accident compensation, and probate and deceased estate administration in Adelaide and all over South Australia. His boutique specialist law firm, which was founded on 1848, is one of the oldest and most respected in Australia. Rod is also a prolific author and speaker.  Some of his articles and books on Wills, Probate, Trusts, Estate Planning, Asset Protection and Retirement Planning may be found at www.genders.com.au.

Enjoy this article? Check out the full report containing “A Guide for Beneficiaries of a Deceased Estate in South Australia” from senior Australian lawyer Rod Genders.