A testamentary trust is a trust created inside your Will that only springs into existence when you die. It works much like a discretionary family trust, but its main drawing card is tax: income paid to minor beneficiaries can be taxed at adult marginal rates instead of the punitive rates that normally apply to kids. It can also shield inherited assets from creditors and relationship breakdowns. Whether it suits you depends on your family, your assets and your tax profile, so treat this as a starting point, not personalised advice.
TL;DR:
- A testamentary trust activates only after death and is primarily used to shift minor beneficiaries' income into adult marginal tax rates, saving thousands annually.
- Proper record-keeping of trustee resolutions and distributions is essential to preserve the tax benefits, especially the section 102AG concession.
- Legislation proposals in 2026 may exempt genuine testamentary trusts from a 30% minimum trust tax, but existing structures should be reviewed once final laws are enacted.
- Costs include legal drafting of the trust clauses, annual accounting, and either family or professional trustee fees, with professional trustees offering more independence.
- It is most suitable for estates with minors, blended families, or significant income-generating assets, but less advantageous for simple estates with straightforward beneficiaries.
Table of Contents
- What a testamentary trust is and how it works in Australia
- Key benefits and common uses of a testamentary trust
- How tax rules and the ATO affect a testamentary trust
- Testamentary trust vs family trust: what's actually different
- Costs and administration: what running a testamentary trust actually costs
- Who should consider a testamentary trust, and the drawbacks
- How to include a testamentary trust in your Will: next steps
- Amber Wealth's take on testamentary trusts in practice
- What the conventional advice gets wrong
- Getting your testamentary trust drafted properly
- Sources
- FAQ
What a testamentary trust is and how it works in Australia
A testamentary trust doesn't exist while you're alive. It's written into your Will as a set of instructions, and it only activates once you die and your estate goes through probate. Your executor administers the estate first, paying debts and calling in assets, and once that's done, the nominated assets transfer into the trust and the executor's role effectively hands over to a trustee. That trustee (sometimes the same person, sometimes not) then manages and distributes trust income and capital under the terms you set out in the Will.
Not everything in your estate has to go into the trust. Many Wills give beneficiaries the choice to take their inheritance outright or direct it into the trust structure, which is one of the quieter advantages of the arrangement.
Once running, a testamentary trust carries real ongoing obligations, including:
- Lodging an annual trust tax return with the Australian Taxation Office
- Keeping records of trustee resolutions and distribution decisions
- Tracking capital gains, franking credits and income separately for each beneficiary
Key benefits and common uses of a testamentary trust
The tax treatment for children is the reason most families set one up. Under section 102AG of the Income Tax Assessment Act 1936, income classified as "excepted trust income" and distributed to a minor from a testamentary trust is taxed at ordinary adult marginal rates, sidestepping the high minor tax rates that would otherwise apply to a child earning unearned income outside a trust. For a family with several grandchildren or young kids as beneficiaries, that can mean a meaningfully lower tax bill on investment income each year.
Beyond tax, testamentary trusts are commonly used to:
- Protect an inheritance from a beneficiary's future relationship breakdown or creditor claims, once assets have properly transferred into the trust structure
- Control how and when a vulnerable beneficiary (a young adult, someone with a disability, or someone with poor financial judgement) receives capital
- Set different rules for children from different relationships in a blended family
Pro Tip: If you're planning for grandchildren as well as your own kids, ask your lawyer about a separate testamentary trust for each family branch rather than one shared trust. It keeps tax reporting and distributions cleaner and avoids one branch feeling like it's subsidising another.
How tax rules and the ATO affect a testamentary trust
The excepted trust income concession under section 102AG is the single biggest reason testamentary trusts outperform holding inherited assets in a child's own name. Route that same income through a testamentary trust as excepted trust income, and it's taxed at the minor's ordinary adult marginal rates instead, which for many families can mean thousands of dollars saved each year across several grandchildren.
Capital gains tax and franked dividends also need careful handling. When assets pass from the deceased estate into the trust, there are specific rules about cost bases and how CGT is calculated on eventual disposal, and franking credits attached to shares need to flow through correctly to the beneficiary who is taxed on that income. Get this wrong and the concession can unravel in practice even if the trust deed is sound.
There's also a live policy issue worth knowing about. Proposals floated in 2026 include a 30% minimum tax on discretionary trusts, but the current proposals carve out testamentary trusts established for genuine estate-planning purposes where income comes from the deceased estate itself. That's a helpful signal, but the fine print will matter, and anyone with an existing testamentary trust structure should have it reviewed against the final legislation once it passes rather than assuming it's automatically exempt.
Testamentary trust vs family trust: what's actually different
A family (discretionary) trust is set up while you're alive and can be wound up, amended or wound back at will. A testamentary trust only exists because you've died, and once it's operating, its terms are largely locked in by what your Will says.
That timing difference drives everything else:
- Family trusts suit ongoing wealth management and income splitting during your lifetime
- Testamentary trusts suit protecting and taxing inherited wealth after death, particularly for minors
- Many sophisticated estate plans use both, with a family trust handling lifetime asset ownership and a testamentary trust taking over control once assets pass to the next generation
Costs and administration: what running a testamentary trust actually costs
Setting one up isn't expensive relative to what's at stake. The main cost is legal drafting of the testamentary trust clauses in your Will, which typically costs more than a basic Will but far less than most people expect given the tax savings involved over the years the trust runs.
The ongoing side is where families sometimes get caught out. Expect to budget for:
- Annual accounting fees to prepare the trust's tax return and financial statements
- Trustee time or fees, especially if you appoint a professional trustee rather than a family member
- Occasional legal costs if trust terms need interpreting or a dispute arises among beneficiaries
Using a professional trustee (a solicitor, accountant or trustee company) costs more than a family member acting for free, but it buys independence and continuity, particularly useful in blended families where a family trustee might be seen as favouring one side.
Who should consider a testamentary trust, and the drawbacks
A testamentary trust earns its keep when you've got minor children or grandchildren, a blended family with competing interests, a beneficiary who can't be trusted with a lump sum, or an estate large enough that the ongoing income actually matters for tax purposes.
It's not automatically the right call for every estate. Common drawbacks include:
- Added complexity and ongoing accounting costs that outweigh the benefit for smaller, simple estates
- Family friction if beneficiaries disagree with how a trustee exercises discretion
- A gap in protection before assets are even transferred into the trust, since estate assets can still be exposed to claims during probate
If your estate is modest, your children are adults with straightforward finances, and there's no blended-family complexity, a simpler Will may do the job just as well.
How to include a testamentary trust in your Will: next steps
- Work out your objectives first: who you're protecting, and from what (tax, a beneficiary's poor judgement, a family law risk, or all three).
- Choose your trustee and appointor carefully, ideally someone who'll keep proper records and isn't likely to clash with beneficiaries.
- Have a solicitor draft the testamentary trust clauses into your Will and execute it correctly, since a poorly worded clause can undo the tax benefit entirely.
- Talk to your accountant or financial planner about how CGT cost bases, franking credits and distribution strategy will work once the trust is running.
- Check how superannuation death benefit nominations interact with your Will, since super doesn't automatically flow into a testamentary trust unless it's directed there.
- Review the whole structure every few years, especially as beneficiaries turn 18, get married, or your asset base changes.
Amber Wealth's take on testamentary trusts in practice
At Amber Wealth, the testamentary trust conversation comes up most often with clients who have grandchildren, a blended family, or an SMSF and share portfolio generating meaningful annual income. Adam Sobczak has seen the same drafting gap repeatedly: Wills that set up a testamentary trust in name but never get properly coordinated with the trustee's tax reporting, leaving the section 102AG concession at risk. Pairing a solicitor with a financial planner who understands CGT and distribution mechanics tends to close that gap. This is general information, not personal advice, so your own circumstances need a proper look before you act.
What the conventional advice gets wrong
Most articles on testamentary trusts stop at "great for tax, great for protection" and leave it there. The bigger issue in practice is that the tax benefit only holds up if the trustee actually documents distributions properly, and a surprising number don't. A trust deed can be flawless and still fail to deliver the section 102AG concession because nobody kept a record of the trustee resolution explaining why income was distributed the way it was.
The 2026 minimum trust tax proposal is another area where headlines have outrun detail. Genuine testamentary trusts look set to be carved out, but "genuine" is doing a lot of work in that sentence, and anyone relying on an older Will should get it checked once the legislation settles rather than assuming their structure is safe.
If you take one thing from this, it's that a testamentary trust is a governance commitment as much as a legal document. The drafting matters, but so does who you appoint as trustee and whether they'll actually run the paperwork properly for the next twenty or thirty years.
— Adam
Getting your testamentary trust drafted properly
A well drafted testamentary trust only pays off if it's coordinated with the rest of your financial position, your superannuation nominations, your investment structure and your retirement income plan. Amber Wealth's estate planning advice service works alongside your solicitor to make sure the trust clauses in your Will actually align with how your assets are held and taxed, rather than sitting as a separate document nobody's checked against your super or share portfolio.
If you've got young children, grandchildren, a blended family, or a share portfolio and SMSF generating meaningful income each year, it's worth a conversation before your Will gets finalised, not after. Consider speaking with a financial adviser to discuss how a testamentary trust fits your broader estate plan, and how your superannuation and investments work alongside it.
Sources
- Estate planning | Australian Taxation Office
- Testamentary trusts - Public Trustee (SA)
- Family trusts and testamentary trusts are important tools in complex estate and wealth planning | Danaher Moulton
- SMS Magazine — Govt proposes trust tax solution
This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.
FAQ
What are the disadvantages of a testamentary trust in Australia?
The main drawbacks are ongoing accounting and trustee costs, added complexity for smaller estates, and the risk of family disputes over how a trustee exercises discretion.
Why would you set up a testamentary trust?
Most families set one up to access the excepted trust income tax concession for minor beneficiaries under section 102AG and to protect inherited assets from creditors or relationship breakdowns.
How much does a testamentary trust cost in Australia?
Setup involves legal drafting fees for the Will clauses, while ongoing costs include annual accounting for the trust tax return and any trustee fees if you use a professional trustee rather than a family member.
Who pays the tax on a testamentary trust?
The beneficiary who receives the distributed income generally pays tax on it at their own marginal rate, though income kept in the trust or distributed to minors as excepted trust income has its own specific tax treatment.
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This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here. General Advice Warning Disclaimer: The information on this website is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs & financial situation.