A testamentary trust is an effective estate planning tool that can provide greater flexibility when it comes to protecting assets and minimising tax when distributing assets to beneficiaries.
Testamentary trusts are trusts that are established through an individual's Will that do not come into effect until the individual has passed away. The trust outlines a structure whereby assets are managed by appointed trustees for the benefits of the beneficiaries nominated in the Will.

BLOG: Testamentary trusts: an overview

There are two types of testamentary trusts:

Discretionary testamentary trusts

Beneficiaries are provided with the option to take part or all of their inheritance via the testamentary trust. The primary beneficiary can remove and appoint the trustee and can appoint themselves to manage their inheritance inside the trust.

Protective testamentary trusts

This trust requires the beneficiary to take their inheritance via the trust without the option to appoint or remove trustees. This may be useful when a beneficiary is not able to manage their inheritance due to age, disability or spending tendencies.

The main benefits of a testamentary trust are the taxation advantages it creates for beneficiaries receiving income earned from the inheritance, and its ability to protect assets.

When a beneficiary accepts their inheritance in their personal name, they are required to pay income tax on income at their personal marginal tax rate. A discretionary trust can provide significant tax advantages, especially where the beneficiary has:

  • a high personal marginal tax rate
  • a partner on a lower income
  • minor children and grandchildren
  • a tax free threshold to $20,542
  • children or grandchildren with no, or lower, taxable income

Assets are protected in a testamentary trust since they cannot be taken out of the trust without the trustee’s discretion to distribute the benefits to the beneficiaries. Beneficiaries do not legally own the assets which protects the assets from other creditors, waste and dissipation by the beneficiary or claims on the beneficiary’s assets in circumstances such as divorce or relationship breakdown.

Testamentary trusts may also protect the inheritance for beneficiaries who operate in a high risk profession where negligence claims are likely.

General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.