Understanding Testamentary Trusts : How They Work and Their Benefits

Estate planning is one of the most important steps you can take to secure your family's future. While a standard Will is a fundamental starting point, for many people, a more sophisticated tool can provide far greater protection and flexibility: the testamentary trust.
At Hammond Nguyen Turnbull, we specialise in helping our clients navigate the complexities of estate planning. We find that many people are unaware of the significant advantages a testamentary trust can offer. This article will break down what a testamentary trust is, how it works, and the powerful benefits it can provide for your loved ones.
What is a Testamentary Trust?
Simply put, a testamentary trust is a trust that is created by your Will and only comes into effect after you pass away. Instead of your assets passing directly to your beneficiaries, they are held in a trust structure and managed by a person you appoint, known as the trustee. The trustee then manages and distributes the assets to the beneficiaries according to the rules and wishes you've set out in your Will.
How Does a Testamentary Trust Work in NSW?
The process might sound complex, but it can be understood in a few key stages:
- Creation in the Will: Your solicitor drafts your Will to include specific clauses that establish one or more testamentary trusts. You will outline who the beneficiaries are, who will act as the trustee, and the terms under which the trust will be managed.
- Activation Upon Death: The trust does not exist while you are alive. It is only activated upon your death.
- Transfer of Assets: Your assets (such as property, shares, or cash) are transferred from your estate into the trust, rather than directly to the individual beneficiaries.
- Management by the Trustee: The trustee you appointed—often a trusted family member, a professional advisor, or a combination—takes legal control of the trust's assets. Their job is to manage these assets and make distributions to the beneficiaries in accordance with the terms of your Will.
The Key Benefits of a Testamentary Trust
Establishing a testamentary trust offers powerful advantages that a simple Will cannot. The main benefits fall into three major categories: asset protection, tax effectiveness, and control.
1. Superior Asset Protection
This is one of the most compelling reasons to create a testamentary trust. Because the assets are owned by the trust and not the beneficiary personally, they are generally protected from claims against that beneficiary. This can be crucial in several situations:
- Bankruptcy: If a beneficiary faces bankruptcy, the assets held in the trust are typically shielded from creditors.
- Family Law Disputes: In the unfortunate event of a beneficiary's divorce or separation, a well-drafted testamentary trust can protect their inheritance from being included in the pool of assets to be divided in a family law property settlement. Note that this does not stop the asset from being considered a financial resource however, it does reduce the split.
- Creditors or Legal Claims: If a beneficiary is sued, the inheritance held within the trust is generally safe.
2. Significant Tax Advantages
A testamentary trust can be a highly effective vehicle for tax planning. Income generated by the trust's assets (such as rent from a property or dividends from shares) can be distributed among a group of beneficiaries (e.g., your child, their spouse, and their children) in the most tax-efficient way.
The most significant advantage relates to beneficiaries under 18. Normally, income distributed to minors is taxed at very high penalty rates. However, income distributed from a testamentary trust is a key exception. Beneficiaries under 18 are taxed at normal adult marginal tax rates, which includes a tax-free threshold (currently $18,200). This allows for significant tax savings and can provide substantial funds for a child's education and upbringing.
3. Protecting Vulnerable Beneficiaries and Maintaining Control
A testamentary trust allows you to provide for your loved ones while ensuring the inheritance is managed responsibly. This is particularly useful for:
- Minor Children: It ensures their inheritance is managed for them until they reach an age where they are financially mature.
- Beneficiaries with Disabilities: A trust can provide for their needs without affecting their eligibility for a disability support pension.
- Beneficiaries with Addiction or Financial Issues: You can set rules for how and when funds are distributed, ensuring the inheritance is used for their long-term benefit and not squandered.
This structure gives you peace of mind that your hard-earned assets will be used as you intended, providing lasting security for your family.
Is a Testamentary Trust Right for You?
While incredibly beneficial, a testamentary trust is not necessary for every situation. You should consider it if:
- You have a significant asset base you wish to protect.
- Your beneficiaries are young, or you are concerned about their financial management skills.
- You want to provide maximum flexibility and tax effectiveness for your beneficiaries.
- One of your beneficiaries is in a high-risk profession or business.
Secure Your Legacy with Expert Advice
A testamentary trust is a sophisticated estate planning tool that offers unmatched asset protection, tax benefits, and control. By planning today, you can provide a more secure and prosperous future for the people you care about most.
The rules governing Wills and trusts can be complex. It is essential to seek professional guidance to ensure your Will is drafted correctly to achieve your specific goals.
If you would like to discuss whether a testamentary trust is the right choice for your estate plan, contact the experienced team at Hammond Nguyen Turnbull today. We are here to provide clear, strategic advice to help you protect your assets and your family.

Senior Solicitor
Email: kristen@hntlegal.com.au









