What Are Testamentary Trusts?

Few estate planning tools are as misunderstood — or as valuable — as the testamentary trust. Many people assume that a Will simply divides assets among beneficiaries in a straightforward fashion. While a basic Will can certainly do that, a testamentary trust offers a far more sophisticated and protective arrangement, capable of shielding your legacy from creditors, relationship breakdowns, poor financial decisions, and excessive taxation.

This article explains what testamentary trusts are, how they work, and when they should be considered as part of your estate plan under the Succession Act 2023 (SA), which governs Wills and estate administration in South Australia from 1 January 2025.

What is a Testamentary Trust?

A testamentary trust is a trust established by a Will. It differs from an inter vivos trust (one created during the testator’s lifetime) in that it only comes into existence upon the death of the Will-maker. The terms of the trust are set out in the Will itself, and the trustee is appointed to hold and manage assets on behalf of the beneficiaries in accordance with those terms.

You can think of a trust as a type of container. Inside the container are the assets to be protected – called the trust fund. Those assets are held in safekeeping for the benefit of one or more people or entities called beneficiaries. The trustee is the person or entity legally responsible for managing those assets in accordance with the trust deed (in this case, the Will).

How Does a Testamentary Trust Work?

When the testator dies, the executor administers the estate in the usual way. However, instead of distributing assets outright to the beneficiaries named in the Will, those assets are transferred into the testamentary trust. The trustee then manages and distributes them according to the conditions specified.

A testamentary trust can hold virtually any asset: real property, bank accounts, shares, superannuation proceeds paid to the estate, business interests, and personal property. The trust may be designed to distribute income regularly, to accumulate capital, or to do both, depending on the Will-maker’s objectives.

Common Uses of Testamentary Trusts

Testamentary trusts are most commonly employed in the following circumstances:

• Minor children: Where a Will-maker wishes to provide for children who are too young to manage a significant inheritance, a testamentary trust allows a trustee to manage the assets until the children reach an appropriate age.
• Spendthrift or vulnerable beneficiaries: A beneficiary who struggles with money management, substance dependency, or mental health challenges may benefit from the discipline imposed by a trust.
• Protection from creditors: Assets held in a properly structured testamentary trust may be protected from the claims of a beneficiary’s creditors, including in the event of bankruptcy.
• Blended families: A surviving spouse can be provided for without disinheriting children from a prior relationship, by carefully structuring a life interest and remainder to different beneficiaries.
• Tax efficiency: Testamentary trusts can provide income-splitting opportunities across family members, potentially reducing the overall tax burden on the estate’s income.

Protection from Relationship Breakdown

One of the most compelling reasons to use a testamentary trust is to protect a beneficiary’s inheritance from the consequences of a relationship breakdown. Assets held in a testamentary trust are generally not treated as property of the beneficiary for the purposes of family law proceedings. This means that if a beneficiary divorces or separates from a partner, the assets in the trust may be quarantined from the relationship property pool, preserving the inheritance for its intended purpose.

South Australia’s Unique Position

South Australia occupies a distinctive position in Australian trust law. It is the only Australian jurisdiction (and one of very few in the world) where the rule against perpetuities has been abolished. This means that a testamentary trust established under a South Australian Will can, in principle, endure for an indefinite period – potentially running for generations – provided the trust continues to serve a legitimate purpose. This flexibility is not available under the laws of other Australian States and Territories.

Should Your Will Include a Testamentary Trust?

Not every Will requires a testamentary trust. For straightforward estates where assets are to be distributed between adult beneficiaries who are financially capable and in stable relationships, a direct bequest may be entirely appropriate.

However, testamentary trusts merit serious consideration where:

• Any beneficiary is a minor or has special needs
• There are concerns about a beneficiary’s financial judgment or lifestyle
• A beneficiary is in a relationship that may be at risk
• Significant assets are involved
• Tax efficiency across multiple generations is a priority
• The testator wishes to provide for a current spouse while ultimately passing assets to children from a prior relationship

The decision whether to include a testamentary trust – and how to structure it – requires careful advice from an experienced estate planning practitioner. Getting the structure right at the outset is critical; an improperly drafted testamentary trust may fail to achieve its intended purpose or may generate disputes among beneficiaries.

Want to Find Out More?

Genders and Partners has extensive experience helping South Australians with testamentary trusts and estate planning. Whether you are making a new Will, reviewing an existing one, or seeking advice on a specific estate planning concern, our specialist team is here 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 to create the best solution for your individual needs.

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 Resources

• Wills and Estate Planning FAQs
• How Estate Planning Trusts Can Protect You and Yours
• The Responsibilities of a Trustee in South Australia
• What Do Trustees of a Deceased Estate Do?
• Estate Planning for Problem Children
• Accommodation After Death: Using a Testamentary Trust for Property

All these and many more testamentary trust topics are available for discussion with the oldest law firm in South Australia.

DISCLAIMER: This article provides general information about testamentary trusts in South Australia and does not constitute legal advice. Laws change; the information herein reflects the Succession Act 2023 (SA) and related legislation as at the date of revision. Readers should seek advice from a qualified South Australian estate planning practitioner in relation to their individual circumstances.