Testamentary Trusts Explained: How to Protect Your Children's Inheritance

You've worked hard for everything you have. The thought of it one day reaching your children — providing them with opportunity, security, and a head start in life — is one of the most motivating parts of estate planning.

But what if the inheritance arrives at the wrong time? What if your child is 18 and not yet equipped to manage a significant sum? What if they're in a rocky relationship and the inheritance becomes matrimonial property in a future divorce? What if they face unexpected financial difficulties and the money becomes accessible to creditors?

These aren't hypothetical fears — they're real risks that families across Australia face every year. And one of the most effective tools available to protect against them is the testamentary trust.

What Is a Testamentary Trust?

A testamentary trust is a trust created by your Will, which comes into effect upon your death. Unlike a family trust set up during your lifetime, a testamentary trust is embedded in your estate plan and only activates when it's needed.

Under a testamentary trust, instead of leaving assets directly to your beneficiaries, you leave them into a trust — managed by a trustee — for the benefit of your chosen beneficiaries. That trustee (often your spouse, an adult child, or a professional) manages the assets according to the rules you set out in your Will.

The trust can run for many years — even decades — providing ongoing protection and flexibility long after your death.

Why Would You Use a Testamentary Trust Instead of a Direct Bequest?

A direct bequest — simply leaving money or assets to a named beneficiary in your Will — is straightforward and suits many situations. But it has limitations. Once the money is received, the beneficiary owns it outright. It becomes their asset. And with that comes exposure to all the risks that come with ownership.

A testamentary trust provides a layer of protection that a direct bequest cannot. Here's how:

• Protection from relationship breakdown: Assets held in a testamentary trust are generally not considered matrimonial property for the purposes of a family law property settlement. This means if your child divorces, the trust assets may be protected from their former partner's claims.
• Protection from creditors: If your child faces financial difficulties — business failure, bankruptcy, or personal debt — trust assets may be shielded from their creditors in ways that directly-owned assets are not.
• Protection for young or vulnerable beneficiaries: You can set the terms under which distributions are made. Rather than handing an 18-year-old a large inheritance all at once, the trustee can release funds at specific ages or milestones.
• Tax advantages: Income generated within a testamentary trust from assets of the deceased estate can be distributed among multiple beneficiaries — including minor children. Under section 102AG of the Income Tax Assessment Act 1936 (Cth), minor children taxed on this "excepted trust income" are taxed at adult marginal rates rather than the top marginal rate that normally applies to minors receiving investment income. This can result in substantial tax savings over the life of the trust.

Are Testamentary Trusts Still Worth It After the 2026 Budget Changes?

In May 2026, the Government announced a new 30% minimum tax on discretionary trusts, due to start 1 July 2028. That announcement caused real concern for families who'd built testamentary trusts into their Wills specifically for the tax and asset-protection benefits described above.

Within weeks, the Government revised its position. Income from testamentary discretionary trusts established for genuine estate planning purposes — asset protection and family succession, rather than broader tax structuring — is now proposed to remain exempt from the new minimum tax, provided that income comes from assets of the deceased estate. This mirrors the existing "genuine testamentary purposes" test already applied under section 102AG for the excepted trust income rules described above.

In short: a properly drafted testamentary trust, used for the reasons families actually use them — protecting children, blended families and vulnerable beneficiaries — remains, on the current proposal, one of the most effective structures available in Australian estate planning. We'd stop short of calling any structure "guaranteed" — this is proposed legislation, and the fine print matters, particularly around what counts as a "genuine" purpose. If your Will already contains a testamentary trust, or you're weighing one up, it's worth a conversation with your estate planning lawyer to make sure your structure fits the proposed rules. For the full detail on the Budget changes, see our EOFY Estate Planning 2026 update.

Who Controls the Trust?

You — through your Will — determine the structure and rules of the trust. You appoint a trustee (or trustees) who will manage the trust assets after your death. You can set out:

• Who the beneficiaries are (your children, their children, your spouse)
• What the trustee can invest in
• When and how distributions can be made
• What happens to the trust when it ends (usually when the youngest beneficiary reaches a specified age)
• Whether beneficiaries can request income, or whether the trustee has discretion

Your Will becomes the trust deed — so the drafting of your Will is critically important. A poorly drafted testamentary trust can cause exactly the kinds of disputes and complications it was designed to prevent.

Who Can Be Trustee?

The trustee of a testamentary trust carries real responsibilities. They must manage the trust assets prudently, keep records, make distribution decisions, and file tax returns on behalf of the trust.

Common choices include:

• Your surviving spouse: Often the most natural choice for a trust benefiting your children. Your spouse manages the trust for the family's benefit.
• A trusted adult: A sibling, close friend, or professional you trust with financial responsibility.
• A professional trustee: A solicitor, accountant, or corporate trustee company. Particularly useful where family conflict is a concern, or where the estate is large and complex.
• Co-trustees: Two or more trustees acting jointly — providing a safeguard and a balance of power.

You can also include provisions allowing beneficiaries to replace or appoint trustees as they mature — giving them greater control over their own inheritance as they demonstrate the capacity to exercise it responsibly.

Types of Testamentary Trusts

Not all testamentary trusts are the same. The most common structures used in Australian estate planning are:

• Discretionary testamentary trust: The trustee has broad discretion over who receives income and capital distributions from the trust, and when. This offers the most flexibility — particularly for tax planning.
• Protective testamentary trust: Designed specifically to protect a vulnerable beneficiary — someone with a disability, a mental health condition, or an addiction. Structured to ensure the beneficiary is cared for without the inheritance being managed (or mismanaged) by the beneficiary themselves.
• Superannuation proceeds trust: Where your super death benefit is directed into the trust, allowing minor children to receive it at adult marginal tax rates.

How Long Does a Testamentary Trust Last?

A testamentary trust can run for as long as you specify — or for as long as it's legally permitted. This is where it pays to know your state's rules, because they're not the same everywhere:

• In NSW and Victoria, the maximum duration is 80 years (in NSW, under section 7 of the Perpetuities Act 1984).
• In Queensland, trusts created on or after 1 August 2025 can run for up to 125 years, following reforms under the Property Law Act 2023 (Qld).

In practice, many testamentary trusts run until the youngest beneficiary reaches a particular age — 25, 30, or 35 are common benchmarks — at which point the trust assets are distributed and the trust wound up. You can also allow beneficiaries to "call for" their share of the capital at a certain age, or give the trustee discretion to wind up the trust earlier if circumstances change.

Testamentary Trusts and Blended Families

For blended families, testamentary trusts are often an essential part of the estate plan. They allow you to provide for your current spouse while also ensuring that your children from a previous relationship ultimately receive their share of the estate.

A common structure for blended families is to leave assets into a testamentary trust for your surviving spouse's benefit during their lifetime, with the capital passing to your children upon the spouse's death. This is sometimes called a "life interest" arrangement.

Done well, this structure balances the competing needs of all your family members without creating conflict or uncertainty.

Is a Testamentary Trust Right for Your Family?

A testamentary trust isn't for everyone — but it deserves serious consideration if:

• You have minor children (under 18) who would inherit from your estate
• You have adult children in relationships you're not confident about
• You have a child with a disability, addiction, or vulnerability that affects their capacity to manage money
• Your estate is large enough that tax planning on income is worth structuring
• You're in a blended family with competing interests to balance
• You have concerns about a beneficiary's financial management skills
• You want your super death benefit to flow into a protective structure

What Does It Cost to Set Up?

A Will containing a testamentary trust is more complex than a simple Will — and the legal fees reflect that. However, consider the context: the cost of setting up a well-drafted testamentary trust in your Will is typically a fraction of the tax savings, legal disputes, and family conflicts it can prevent.

The ongoing administrative cost (annual trust tax returns, trustee decisions) is also worth factoring in — but again, for families with significant assets to protect, the cost-benefit calculation almost always favours the trust.

Fixed Fee, Transparent Pricing

We know cost is often the first question — and the last thing you want with a legal matter is an open-ended bill. That's why our estate plans, including Wills with testamentary trusts, are offered on a fixed fee basis for both individuals and couples, agreed with you upfront before any work begins. You'll know exactly what your estate plan costs before you commit. See our current estate planning pricing for individuals and couples.

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