The benefits of a testamentary trust

16 January 2024

What is a testamentary trust?

A testamentary trust is a trust that is established under a person’s Will after they die. It operates similar to a family or discretionary trust however the terms of the trust are set out in the person’s Will and must be included at the time the Will is prepared.

What are the main benefits of a testamentary trust?

  1. Asset protection

The assets of the testamentary trust are not held beneficially for any one individual (ie the beneficiary). Therefore, the testamentary trust provides some protection from creditors, particularly where a beneficiary later becomes bankrupt. It can also provide additional protection for beneficiaries that are engaged in high risk occupations, are company directors or business owners.

  1. Tax

Testamentary trusts provide income tax benefits particularly where beneficiaries are under 18 years of age as the trustees have discretionary powers to stream or split income amongst the beneficiaries. This is important because under a testamentary trust minors are treated as adult taxpayers and therefore entitled to the adult tax-free threshold (currently $18,200).

  1. Matrimonial breakdown

The testamentary trust provides some protection for the Willmaker’s children if they are involved in matrimonial breakdown with property disputes, provided the control of the testamentary trust is appropriately dealt with.

  1. Age

Testamentary trusts offer advantages where the primary beneficiary is a minor or has poor decision making capabilities (such as a spendthrift) by giving the trustees the ability to oversee the control and disbursement of income and/or assets of the testamentary trust until the beneficiary reaches a predetermined age or longer. The Willmaker has the ability to set the parameters at the time of making the Will.

What does this mean for you?

If you have beneficiaries that are children, beneficiaries in potentially high risk occupations, beneficiaries who have children, you consider protection from matrimonial breakdown a worthwhile consideration, and/or have beneficiaries that may or do require assistance in decision making around inheritance then it is worthwhile considering whether testamentary trust/s under your Will are appropriate.

For further information about testamentary trusts, please contact Cath Champion at Mahoneys’ or call us on (07) 3007 3777.