What is a Testamentary Trust
A Testamentary Trust (TT) is a discretionary trust that comes into existence on your death under the terms of your Will. Income, capital gains and capital can be distributed to a wide class of beneficiaries (typically your spouse, children, grandchildren, related trusts, companies and charities) at the discretion of the Trustee.
Because the Trustee can choose which beneficiaries receive income and capital, a Testamentary Trust gives the family enduring flexibility to manage tax, protect inherited wealth, and preserve capital across generations: outcomes a direct gift simply cannot achieve.
Tax management & income splitting
- Income splitting: trust income can be streamed to multiple adult beneficiaries on lower marginal rates, delivering savings of up to around 15% against the top marginal rate (currently 45%).
- CGT streaming. A specifically entitled beneficiary can be streamed capital gains separately from income, using each beneficiary’s own CGT discount, capital losses and marginal rate, a powerful tool when selling appreciated estate assets such as shares, managed funds or investment property.
- Capital distributions to beneficiaries are generally not subject to income tax, and CGT roll-over relief continues to apply on the distribution of inherited assets.
Five reasons why a Testamentary Trust makes sense
- Tax management
Income and capital gains can be streamed to beneficiaries on lower marginal rates, splitting investment income across the family and delivering meaningful savings against the top marginal rate.
- Asset protection
Trust assets are owned by the Trustee, not the beneficiary, so they are generally insulated from creditors, trustees in bankruptcy and judgment debt holders.
- Family law protection
Trust assets are far less likely to be treated as property of a beneficiary in a family law property settlement on relationship breakdown.
- Investment & business vehicle
An ongoing vehicle to hold and grow a share portfolio, managed funds, investment property and operating businesses, one consolidated structure for decades.
- Intergenerational bloodline
Preserves wealth within the bloodline for up to 80 years. Children, grandchildren and future descendants benefit; in-laws and former partners can be excluded.
Advantages and disadvantages
|
Advantages of a Testamentary Trust |
Disadvantages / considerations |
|---|---|
|
Asset protection from creditors, bankruptcy and family-law claims affecting a beneficiary. |
More complex than a direct gift: additional drafting cost and ongoing governance (situation dependant). |
|
Income and CGT streaming: up to 15% saving v top rate, plus each beneficiary’s own CGT discount streaming. |
Income and CGT streaming: up to 15% saving v top rate, plus each beneficiary’s own CGT discount streaming. |
|
Ongoing investment & business vehicle, and intergenerational bloodline vehicle for up to 80 years (in-laws can be excluded). |
Annual trustee compliance: separate TFN, tax return and accounts, modest ongoing administration is required. |
|
Protection of vulnerable beneficiaries (minors, disability, addiction, spendthrift). |
Trustee’s investment decisions can be challenged by dissatisfied beneficiaries in certain circumstances. |
|
Flexible tax management: Trustee chooses each year how to distribute income and capital gains across beneficiaries. |
A Testamentary Trust should be tailored to the client’s circumstances and reviewed if laws, family or assets change materially. |
Where to from here
A Testamentary Trust continues to deliver materially better outcomes than a direct gift across all five pillars set out above. Tax rules affecting trusts may evolve over time, but each of these five reasons (tax management, asset protection, family-law protection, an ongoing investment & business vehicle, and intergenerational bloodline preservation) stands on its own merits and remains a compelling reason to incorporate Testamentary Trust provisions in your Will. As experienced testamentary trust lawyers in Melbourne we recommend clients give careful consideration to Wills incorporating Testamentary Trust provisions.
