What is a testamentary trust?

How it actually works

Your will does two jobs. It appoints an executor to collect your assets and pay your debts, and it says who gets what. A will with a testamentary trust adds a third layer: rather than transferring a beneficiary's share into their personal bank account, the executor transfers it into a trust set up by the terms of the will itself.

Each beneficiary can have their own trust, or the estate can run as a single trust. In most family wills the adult child is appointed as trustee of their own trust, so they control the money in practice. What changes is the legal ownership — the assets are owned by them as trustee, not personally.

• The trustee controls and invests the assets, and decides who receives income each year
• The beneficiary class is usually the child, their spouse, their children and related entities
• The appointor — the person who can hire and fire the trustee — is the real seat of control
• The trust can run for up to 80 years in Queensland, or be wound up at any time before that

The tax reason people set them up

This is the main driver. Income distributed from a testamentary trust to a beneficiary's minor children is taxed at ordinary adult marginal rates, with the full tax-free threshold, rather than the penalty rates that normally apply to children receiving trust income.

In practice that means an inheritance that produces investment income can be split across a family. If a child inherits and the money earns income each year, the trustee can distribute some of that income to each grandchild, up to the tax-free threshold each, instead of it all being taxed at the parent's top marginal rate.

There are limits. Anti-avoidance rules confine the concession to income generated by assets that actually came from the estate — you cannot pour unrelated money into the trust and get the same treatment.

The asset protection reason

Money a beneficiary owns personally is exposed to their personal risks. Money held in a properly structured testamentary trust generally is not owned by them personally, which can matter in three situations:

• Family law — an inheritance held in trust is treated differently from one sitting in a joint account, though a court can still take it into account
• Bankruptcy and creditors — relevant if a child runs a business, gives personal guarantees, or works in a high-risk profession
• Vulnerability — a beneficiary with a disability, an addiction, or poor financial judgment can be provided for without being handed a lump sum

What it does not do

A testamentary trust does not stop your will being challenged. A family provision application under the Succession Act 1981 (Qld) can still be brought by an eligible person, and the court can order provision out of the estate regardless of the trust structure.

It also does not avoid transfer duty or capital gains tax on the underlying assets forever — it defers and redirects rather than erases. And it does not run itself: the trust is a separate entity that needs a tax file number, an annual tax return and trustee resolutions before 30 June each year, which typically costs a few hundred to a couple of thousand dollars a year in accounting fees.

Who it is worth it for, and who it is not

It is usually worth it where the inheritance is large enough to produce meaningful income, where a beneficiary has young children, or where there is a real risk from a business, a shaky relationship or a vulnerable beneficiary.

It is usually not worth it where the estate is a home and a modest amount of super going to financially settled adults who will spend it, because the annual compliance cost outweighs the benefit. We will tell you if that is your situation and draft a straightforward will instead.

What we charge

A will containing a testamentary trust starts at $2,200 including GST at Coastside Law, quoted and confirmed before we start. Complex estates — blended families, business, company or trust interests, self managed super funds, rural land or overseas assets — are quoted individually.

We are on the Sunshine Coast at Golden Beach and on the Redcliffe Peninsula at Scarborough, and we act across Queensland. Call 0488 340 853 to talk it through.

Testamentary trusts — common questions