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Estate Planning & Testamentary Trust Asset Flow Diagram (click here to download)
Understanding Testamentary Trusts
A testamentary trust (being a specialised type of ‘discretionary/family trust’ – see more below) is created through your Will and only activates upon your death, holding assets for beneficiaries under specified terms.
They are a vey powerful tool in estate planning; especially in modern estate planning where it can address family dynamics, protect vulnerable heirs, and optimise tax outcomes.
For clients, incorporating a testamentary trust in your Will, this means your estate isn’t distributed outright yet prudently managed by a trustee(s), potentially reducing risks and enhancing control.
Such testamentary trusts are also sometimes colloquially referred to as ‘bloodline trusts‘ or ‘3-generation trusts’ in estate planning. Yet they’re are all the same thing; namely a properly constructed, bespoke testamentary trust(s) contained within your Will.
The main differences between each types of testamentary trust is with the ‘bloodline’ variety, it is actually quite narrow and only flows straight down through the those estate planning clients as parents (i.e. the Will Makers) direct lineal descendants, e.g. to children, grandchildren and so forth.
Although, and it is definitely one main queries/biggest concerns for clients undertaking their estate planning is to ensure that,
Although, equally important, as discussed further in this article, if a beneficiary adult child of the Will Maker (i.e. the primary beneficiary of their testamentary trust) wants to be able to tax-effectively distribute income and/or capital and does continue to remain in a ongoing, satisfactory domestic/spousal relationship (and as is often the fortunately case may be, for the rest of their lifetime, then but also narrowly drafting a mere ‘bloodline trust’, may prohibit the ability of that primary beneficiary to tax-effectively distribute income and/or capital to their adult spouse. Which may be over many years and therefore could result in loss of large amounts of potential tax savings in that beneficiary child’s testamentary trust family group.
Conversely, if that spouse becomes an ‘outlaw’ (i.e. they are divorced or legally separated) ,then owing to the discretionary nature of the testamentary trust, then:
Hence, extensive flexibility of a well-drafted, bespoke testamentary trust.
Finally, with a ‘3 generation (testamentary) trust’: again all well-drafted Wills with testamentary trusts, or even those without, should provide that, after the immediate intending bequeath to your if a nominated beneficiary e.g. an adult child, if they tragically predecease their Will Maker-parent, yet leave a child or children (i.e., grandchildren of the Will Maker), then that bequeathed portion of their residual estate (via the testamentary trust) will be held on trust for those grandchildren. I.e. the grandchildren’s testamentary trust for the deceased adult child of the the Will Maker.
Of course it could go further than that and down to great grandchildren etc. Hence the 3 generations.
In any event, unless drafted otherwise, all testamentary trust last 80 years from the date of death of the Will Maker and also contain a broader class of ‘general beneficiaries’ which again do includes great grandchildren, and in fact go out ‘sideways’ if ever the primary beneficiary parties wishes discretionarily distribute to say their siblings, cousins, nieces, nephews, corporate deficiencies (i.e a ‘bucket company’), other eligible trusts etc. Again this is very similar to the flexibility (hence ‘discretion) of a contemporary (lifetime-created) discretionary/family trust.
Testamentary trusts share similarities with family (discretionary) trusts, such as trustee discretion in distributions and potential tax benefits. However, they differ in setup—testamentary trusts only arise from a Will post-death, while family trusts are established during your lifetime.
Pros of testamentary trusts include no upfront costs and favourable tax treatment for minors; cons may involve some higher administration fees and less immediate control.
We recommend them for families with minors or at-risk beneficiaries, yet consult also consult your accounting, tax and financial advisors for specific, tailored advice.
For those starting estate planning, a testamentary trust offers peace of mind by protecting assets and minimising tax, ideal if you have young children or complex family situations. Start by reviewing your Will with our estate planning team to integrate one.
Estate planning in Australia, involves careful consideration of tools that ensure your assets are protected, distributed efficiently, and taxed optimally after your passing. Among these, testamentary trusts stand out as a versatile mechanism incorporated into Wills.
This comprehensive article aims to provide clients, accountants, and financial advisors with a detailed yet accessible overview, highlighting practical benefits, comparisons to other trusts, pros and cons, and recommendations.
By exploring testamentary trusts in depth, we demonstrate a nuanced understanding of how they integrate into broader estate strategies, emphasising asset protection, distribution flexibility, and tax minimisation—while noting their unique advantages for minor beneficiaries.
A testamentary trust is a type of trust established by a person’s Will, which only comes into effect upon their death. Unlike outright bequests where assets are transferred directly to beneficiaries, a testamentary trust holds and manages those assets according to the terms set out in the Will. The trustee—often a family member, professional advisor, or trust company—oversees distributions of income and capital to beneficiaries over time.
In Western Australia, testamentary trusts are governed by state laws under the Trustees Act 1962 (WA) and federal tax regulations administered by the ATO. They can be discretionary (giving trustees flexibility in distributions) or fixed (with predetermined shares). This tool is particularly relevant given the region’s growing wealth from mining, property, and business sectors, where protecting intergenerational transfers is key.
From ATO guidelines, testamentary trusts are treated as “deceased estate trusts” for the first three years after death, transitioning to standard trust rules thereafter. This structure allows for tailored estate planning, addressing issues like blended families, disabilities, or spendthrift heirs.
Testamentary trusts offer multiple advantages, making them a cornerstone of effective estate planning. Below, we delve into their main primary benefits:
2. Asset Protection Testamentary trusts provide a layer of protection for beneficiaries’ inheritances against external threats. For instance, if a beneficiary faces bankruptcy, creditors generally cannot access trust assets, as the beneficiary does not own them outright—the trust does. Similarly, in family law disputes (e.g., divorce), assets in a properly structured testamentary trust may be shielded from property settlements.
This protection is crucial for vulnerable beneficiaries, such as those with addictions or financial inexperience. The Society of Trust and Estate Practitioners (STEP) Australia notes that (discretionary) testamentary trusts enhance this by allowing trustees to withhold distributions if risks arise.
However, protection isn’t absolute; courts can intervene under the Bankruptcy Act 1966 (Cth) or Family Law Act 1975 (Cth) if the trust is deemed a ‘sham’.
In Western Australia, where property values are high, this may helps potentially preserve bequeathed monies family homes or other valuable interests from unforeseen claims against your nominated beneficiaries.
2. Flexibility in Distributing Income and Capital One of the standout features is the discretion afforded to trustees in managing distributions. Unlike a simple Will, which might mandate lump-sum payments, a testamentary trust allows phased releases based on beneficiaries’ needs—e.g., funding education, medical expenses, or living costs. This adaptability is ideal for long-term planning, as trustees can respond to changing circumstances like economic downturns or personal milestones. This flexibility supports multi-generational planning.
For example, capital can be preserved for future needs while income is distributed annually. The ATO’s Trust Taxation Guide underscores that trustees must act in beneficiaries’ best interests, ensuring decisions align with the Will’s intent.
3. Legitimate Tax Minimisation Testamentary trusts enable income splitting among beneficiaries, potentially reducing overall tax liability. Income can be distributed to those in lower tax brackets, and capital gains may benefit from the 50% CGT discount if held long-term.
A key tax perk is the treatment of distributions to minors: under ATO rules (specifically Division 6AA of the Income Tax Assessment Act 1936), income from testamentary trusts to children under 18 is taxed at adult rates (https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/income-you-must-declare/your-income-if-you-are-under-18-years-old), avoiding the punitive penalty rates (up to 66%) applied to other unearned income for minors!
This is a significant draw for families, with underage children (and grandchildren). This could mean substantial savings of your bequeathed estate’s monies, and therefore such could even go a long ways towards a legacy paying for your grandchildren’s school or even university fees! —e.g., distributing $20,000 in income to a minor might incur minimal tax compared to $13,000+ under ‘penalty’ taxation rates.
Comparison to Family or Discretionary Trusts
Testamentary trusts are often likened to family (or discretionary) trusts, but key differences influence their suitability.
Family trusts suit active wealth management, while testamentary ones are better for legacy protection.
Pros and Cons of Testamentary Trusts
To aid decision-making, here’s a balanced assessment:
| Aspect | Pros | Cons |
| Asset Protection | Shields inheritances from creditors, divorce, or poor financial decisions; ideal for at-risk beneficiaries. | Not foolproof—courts may pierce the trust in certain cases; requires careful drafting to avoid challenges. |
| Tax Efficiency | Enables income splitting and favourable rates for minors; potential CGT savings on long-held assets. | Complex tax rules; ATO scrutiny if seen as tax avoidance; annual tax returns add compliance burden. |
| Flexibility | Trustees can adapt distributions to life changes; supports special needs (e.g., disability provisions). | Reduced beneficiary control—trustees decide, potentially leading to disputes; higher ongoing fees (e.g., legal/accounting costs in WA average $1,000–$5,000/year). |
| Setup and Administration | No lifetime costs; integrates seamlessly into Wills. | Post-death administration can be lengthy; may complicate probate in WA if not planned well. |
| Overall Suitability | Enhances intergenerational wealth transfer; peace of mind for families with minors and/or complex dynamics. | Overkill for simple estates; potential for family conflicts if trustees are biased (therefore , choose wisely!). |
For our clients, we recommend incorporating a testamentary trust if your estate exceeds $500,000, involves minors, or includes vulnerable heirs. Start with a Will review by our experienced estate planning lawyers to customise requirements and ensure concerns a properly addressed —e.g., protective provisions under the Family Provision Act 1972 (WA) and/or the Trustees Act 1962 (WA).
Accountants should advise on tax implications, while financial advisors can model scenarios.
Key steps:
Ultimately, testamentary trusts exemplify strategic estate planning, offering robust benefits when aligned with individual circumstances.