Australia: What is a testamentary trust?

What is a Testamentary Trust?


A will is the only way in which you can determine what happens with your assets after you die.

The person you nominate to make these decisions for you after your death is usually called the executor and often the trustee of your estate because their role is to hold and distribute the estate assets as trustee for the beneficiaries of your estate.

A trust set up by a will is known as a "testamentary trust" and therefore does not come into existence until the death of the will-maker (usually called "the testator"). It can be discretionary, non-discretionary ("fixed") or a combination of the two ("hybrid") as in the case of trusts set up during one's lifetime (called "family trusts" or "inter vivos trusts").

Like family trusts, a trustee of a testamentary trust can be given broad discretion to distribute assets and income in the estate among different beneficiaries in a way that provides significant taxation and asset protection benefits.

Income tax advantages

The main advantage with testamentary trusts arises because minor beneficiaries (ie beneficiaries who are under 18) are taxed at normal adult rates on excepted trust income that has been distributed to them, which means that they are not taxed at penalty rates, and therefore receive the benefit of the progressive taxation rates, including the tax-free threshold. Depending on the circumstances of the willmaker (also called "the testator") and the beneficiaries, and the tax rates and the law that applies at the relevant time, the tax benefits derived from testamentary trusts can be quite significant.

Other taxation advantages

As is the case with family trusts, testamentary trusts can provide other tax-related benefits to certain beneficiaries.

For example, testamentary trusts can be used to stream different types of income, such as franked dividends (where a company chooses to pay tax on the dividend received by a shareholder) paid to different beneficiaries, which can help reduce the overall liability of such beneficiaries.

Distributions of income from a testamentary trust to:

  1. adult beneficiaries whose marginal rates are low (eg a stay at home spouse or adult child) helps to split income and reduce the overall liability for tax of the household;
  2. tax-exempt beneficiaries (such as some charities) also will help reduce the overall tax burden.

Asset protection strategies

As with other trust structures, the trustee of a testamentary trust does not own the estate assets but control them on behalf of the beneficiaries of the trust. Similarly, the beneficiaries of the trust neither own, nor do they have control over the assets of a testamentary trust.

Therefore testamentary trusts afford some protection to beneficiaries of estate assets. For example, if a beneficiary becomes bankrupt, and they have a trustee in bankruptcy appointed for them, generally speaking any interest they may have in a testamentary trust is protected, provided it is clear that they do not have any real control over the trust assets and for example the terms of the trust are such as to enable distributions of income and capital that do not get caught by claims from trustees in bankruptcy.

Protection in the event of separation

If you are a beneficiary of a testamentary trust, the Family Courts will generally not treat your interest in that trust as an asset of the relationship or marriage but may well treat it as a financial resource which will have less of an adverse impact on your overall settlement.

The Family Law Courts often treat a person's interest in a family trust as an asset of the relationship or marriage, or at the very least a financial resource, but are less likely to treat an interest in a testamentary trust in the same way, however as recent Family Court cases show, the Family Courts have broad powers to determine what is and what is not an asset or a financial resource of a relationship or marriage, which means that each case is treated differently on its merits and each testamentary trust must therefore be set up carefully to avoid or minimise risk of claims in this regard.

Protecting estate assets for and from beneficiaries

If a beneficiary of a testamentary trust has a problem such as drug or gambling addiction, the trustee of the trust is able to protect assets of the trust from being wasted by that beneficiary, and at the same time help safe-guard the future interests of that beneficiary. Such trusts are often termed "protective trusts".

Possible disadvantages of having a testamentary trust

The first thing to be aware of when considering establishing a testamentary trust is that there is an initial higher cost in terms of drafting a will with testamentary trust provisions in it.

Then when a testamentary trust is in operation, after the death of the testator, there will be operating and administrative costs that would not apply in the case of a normal estate without testamentary trust provisions.

For example, taxation returns must be lodged for each testamentary trust and it is usual for separate accounts to be maintained. In these circumstances, given the extra work involved, it is common for trustees to charge a commission in the administration of testamentary trusts.

In all cases where cost is a factor, the testator and his or her advisers need to look at the size and nature of the estate, the number and personal circumstances of the beneficiaries of the estate, what risks are involved relative to these two factors, before being able to determine what is the right vehicle from a cost-benefit point of view.


One size does not fit all when it comes to wills and especially testamentary trusts. Whether or not a testamentary trust is to be considered will depend on your estate, your beneficiaries and what you want to achieve from the structure you want to set up.

Because you will be gone before the testamentary trust commences operation, you need to have both certainty of outcome and flexibility to deal with different domestic and financial contingencies.

This is where the drafting capabilities and knowledge of legal experts skilled in this area is critically important.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions