A testamentary trust is a trust set out in a person’s will that only comes into existence after they die. It suits families with minor children, adult children facing asset or relationship risk, blended families, or a beneficiary who can’t manage money on their own.
So, what is it and how does it actually work?
The mechanism is simpler than it sounds. A testamentary trust is created by the will itself. It doesn’t exist while the person is alive, and it only comes into effect on death once the estate is administered.
When comparing a testamentary trust vs family trust, the main distinction comes down to timing. A family trust is created during a person’s life by a trust deed to manage and distribute wealth well before anyone passes away. Conversely, a testamentary trust sleeps until called upon by a will.
Once created, the appointed trustee holds and manages assets from the estate on behalf of named beneficiaries according to the will. The trustee might be a family member, a professional adviser, or both. Beneficiaries don’t receive assets directly. Instead, the trustee controls distributions according to the rules set by the will-maker.
In Western Australia, these structures sit within the broader estate administration process, so probate and executor duties still apply before the trust takes effect. It’s worth factoring succession planning into a will at the same time, since these decisions usually go hand in hand.
The tax rule that isn’t actually a loophole
This is the question most people search for, so let’s state it plainly. Income distributed to a minor beneficiary from a testamentary trust is generally taxed at ordinary adult tax rates rather than standard penalty rates.
Outside a testamentary trust, income paid to a minor from a family trust attracts much higher taxes. The rules were designed specifically to stop parents shifting income to children to lower their tax bills. Because a testamentary trust arises from a death rather than deliberate income splitting, the minor beneficiary tax rules treat it far more favourably. This single distinction is often the primary reason families choose this structure when minor children inherit.
Keeping inheritances safe from exes and creditors
Not every beneficiary is a child. An adult child might be going through a difficult separation, running a high-risk business, or facing creditor exposure. Because a trustee holds the assets rather than the beneficiary directly, it provides a solid buffer between the inheritance and outside legal risks.
The structure doesn’t make an inheritance completely untouchable. However, changing who controls distributions creates a key legal distinction compared to handing over outright ownership.
Navigating the delicate maze of blended families
Blended families face a classic estate puzzle: how to support a current spouse while guaranteeing children from a previous relationship get their share. A testamentary trust allows a spouse to benefit from estate assets during their lifetime. The remaining capital then passes safely to the intended children without risk of being redirected by later wills or new relationships.
Protecting beneficiaries who aren’t great with money
Some beneficiaries – whether due to age, disability, or personal circumstances – aren’t equipped to handle a sudden lump sum. A testamentary trust lets a trustee manage assets and drip-feed distributions over time. It’s one of the most practical ways to protect someone’s long-term interests without handing over total financial control on day one.
Five quick sanity checks before pulling the trigger
- Who are the beneficiaries, and do their circumstances suggest a need for protection or staged access?
- Who is the right trustee, and are they willing to manage ongoing obligations?
- How does the trust interact with existing family trusts or business structures?
- What ongoing administration is required once the trust is established?
- Does the will clearly outline trustee powers and distribution rules?
How Abbotts can help
Abbotts has supported Perth families and business owners with estate and succession planning for more than 35 years. A testamentary trust is just one tool in the toolkit, and the right choice depends entirely on your family’s unique situation.
If you’re updating a will or looking to safeguard an inheritance, chat with an Abbotts adviser to see if a testamentary trust makes sense. We’ll also help align it with any existing family trusts or business structures you already operate.
Frequently asked questions
What is the difference between a testamentary trust and a family trust?
A testamentary trust is created by a will and only takes effect upon death. A family trust is created during a person’s lifetime via a trust deed and operates immediately.
How does a testamentary trust work?
Upon death, the will establishes the trust and appoints a trustee to manage assets and distribute income or capital according to the terms set out in the document.
How are distributions taxed for a minor beneficiary?
Income distributed to a minor from a testamentary trust is generally taxed at standard adult rates, avoiding the heavy penalty tax rates applied to standard trust distributions.
Who should consider a testamentary trust?
Families with minor children, adult children exposed to business or legal risks, blended families, or beneficiaries who need help managing funds.