Testamentary trusts in Queensland: are they worth it?

How a testamentary trust works

Your will sets up the trust and names the trustee — very often the adult beneficiary themselves — and the class of beneficiaries, typically that person, their spouse, their children and related entities. Nothing happens while you are alive. On your death, the executor administers the estate and transfers the relevant assets into the trust rather than to the beneficiary personally.

From then on the trustee decides each year who receives income and capital from within the beneficiary class. That discretion is where both the tax advantage and the asset protection come from.

The tax advantage — the excepted trust income rule

Income distributed to a minor from an ordinary family trust is taxed at penalty rates that begin at a few hundred dollars. Income distributed to a minor from a testamentary trust is 'excepted trust income' and is taxed at ordinary adult marginal rates, which means it attracts the full tax-free threshold.

For a beneficiary with young children, that can be several thousand dollars of tax-free income per child each year, indefinitely, on the inherited capital. Over the life of a trust that is a substantial sum, and it is the single most common reason a testamentary trust is worth setting up.

Integrity rules introduced in 2019 confine the concession to income from assets that came from the estate — you cannot inject unrelated assets into the trust to soak up the benefit. The trust must be properly administered and the estate assets identifiable.

Asset protection — the reason most clients ask

Assets held in a testamentary trust are not owned by the beneficiary personally. That matters in three situations that come up constantly:

• Relationship breakdown — trust assets are not automatically property of the marriage, though the Family Court can still treat a trust the beneficiary controls as a financial resource or, in some cases, as property; control and history of distributions matter
• Bankruptcy — an inheritance received outright vests in the trustee in bankruptcy; assets in a properly structured trust generally do not, which is why the structure matters for beneficiaries in business or professional practice
• Vulnerability — a beneficiary with an addiction, a disability, an intellectual impairment or simply no financial judgement can be provided for without ever holding the capital, with an independent trustee making the decisions

When a testamentary trust is worth it

As a rough guide, the structure earns its keep where one or more of the following apply:

• The estate is substantial enough to generate meaningful investment income — the tax benefit scales with the income, not the sentiment
• A beneficiary has, or will have, minor children
• A beneficiary runs a business, is a company director, or works in a profession exposed to claims
• A beneficiary's relationship is unstable, or you want the inheritance to stay in the bloodline
• A beneficiary has a disability, an addiction or a history of poor financial decisions
• You are leaving a blended family and want to provide for a spouse for life with the capital passing to your own children

When it is not worth it

A modest estate that will be spent within a year or two on a mortgage does not justify a trust. Neither does a plan where every beneficiary is a financially settled adult with no children, no exposure and no intention of leaving the money invested.

Be honest about the running costs. Each trust needs its own tax file number, an annual tax return, financial statements and annual distribution resolutions before 30 June. Budget for accounting fees every year for as long as the trust runs. If nobody in the family will keep up with the resolutions, the structure will be administered badly and the concessions can be lost.

Optional or mandatory?

Most well-drafted Queensland wills make the testamentary trust optional. The beneficiary is given a period after death — often within a set number of months — to elect whether to take their share outright or through the trust, with the trust as the default.

That flexibility is valuable, because circumstances at your death may be nothing like circumstances today. Mandatory trusts are reserved for situations where the very point is to keep control away from the beneficiary — vulnerability, addiction, or a blended family where the capital must pass on.

Choosing the trustee and drafting the controls

Where the purpose is tax and asset protection, the beneficiary is usually their own trustee — they control their inheritance while holding it in a protective structure. Where the purpose is to protect a beneficiary from themselves, the trustee must be someone else, with a mechanism for replacing them and a clear line of succession.

• Name the appointor — the person who can hire and fire the trustee; this is where real control sits
• Define the beneficiary class carefully: too narrow defeats the tax planning, too broad creates duty and family provision arguments
• Deal with succession on the beneficiary's death — does the trust continue for their children, or vest?
• Set the vesting date; Queensland's rule against perpetuities limits the maximum term
• Address who pays the trust's costs, and whether the trustee may borrow, invest in business or hold the family home

How it fits with the rest of your estate plan

Superannuation and life insurance often make up the bulk of an estate and do not automatically pass under your will. Directing super to the estate through a binding death benefit nomination so it can flow into the trust needs care — the tax treatment for adult, non-dependent children differs sharply.

Assets held in a family trust or a company are not yours to give in your will either; what passes is control. A testamentary trust is one part of a plan that also has to deal with super, jointly held property, business succession and your enduring power of attorney.

Testamentary trust questions we are asked in Queensland