Testamentary Trusts: are you thinking ahead for your family?

Testamentary Trusts: are you thinking ahead for your family?

Every parent should be reading this FULL STOP!

This month we spoke to Tara Lucke who is a Principal from Nexus Law Group and she shares with us the importance of having the provision for a Testamentary Trust should the unthinkable happen.

This is what she had to say:

Testamentary trusts are one of my absolutely favourite estate planning tools. You’d be crazy not to use one!

I like to think of them as the superhero of estate planning because they will save your family tax after you die, save your inheritance from divorce and bankruptcy risks and save young children from wasting their inheritance.

What’s not to love?

Here’s the low down of what you need to know about testamentary trusts:

  • Testamentary trusts should save your family tax after you die
  • Testamentary trusts should protect your inheritance from divorce and bankruptcy risks
  • Testamentary trusts are not just for complex situations or the super rich
  • You only get one chance to access the fantastic estate planning benefits of a testamentary trust – it MUST be in your will when you die
  • Testamentary trusts are not administratively burdensome – any extra compliance should be far outweighed by the tax savings
  • Testamentary trusts only start working if you die – the benefits don’t start until you die but neither do the (minor) compliance requirements
  • When in doubt, use a testamentary trust


The phrases ‘testamentary trust’, ‘testamentary discretionary trust’, TT, TDT…. are all just ‘lawyer speak’ for a trust set up in a will that starts when the willmaker dies. It sounds kind of complicated, but they are essentially the same as a family trust (more technically known as a discretionary trust). The only real difference is a testamentary trust is established by a person’s will and remains dormant, ready to start only when a person dies.


Trusts work by separating control of the assets held in the trust from the benefit. The person who has control of the trust assets is the Trustee. The Trustee is the legal holder of the assets and is responsible for the day to day management of the trust and the due administration of the trust.

An effective testamentary trust should have many people who can potentially benefit from the assets in the trust (the technical term for these people are Beneficiaries) and each beneficiary’s entitlement should be at the complete discretion of the Trustee.

This discretionary nature of the trust is what makes the trust so powerful for asset protection. Because none of the beneficiaries own the trust assets and their only right is to be considered by the trustee, it is very difficult for someone to argue that the underlying assets of the trust belong to any one of the beneficiaries.

A trustee can also be one of the beneficiaries of the trust, and if that is the case, then the trust assets will ‘look and feel’ more like that person’s assets because they are in control and can choose themselves or their family members to benefit from the trust. If you are simply a beneficiary without being a trustee, then your entitlements in the trust are at the trustee’s behest.

Testamentary trusts offer fantastic tax flexibility. In fact, this is the only environment where you can get such great tax treatment, and it’s only because someone had to die for the trust to start (currently, the government does not recognise dying as a tax avoidance strategy… at least for now!).

In essence, trusts are ‘flow through’ vehicles for tax purposes, which means the income earned each year from investing the trust assets always needs to be distributed out to beneficiaries and each beneficiary gets taxed on the income they received from the trust at their own marginal tax rate. Each year the trustee can choose which of the beneficiaries should receive the income earned from investing the inheritance each year, which allows them to give income to beneficiaries who have lower tax rates.

And testamentary trusts offer an additional benefit which is not available to any other type of trust – beneficiaries under 18 are treated like adults for tax purposes which means they can receive about $22,000 tax free each year (and no, you cannot get these tax free amounts now; unfortunately you do have to die before these tax savings start!).


If you die leaving a spouse and 3 minor children, then roughly the first $66,000 of income earned from investing the inheritance through trust could be tax free and used to pay for the children’s living and education expenses. If you didn’t have a trust, then the surviving spouse would need to pay tax on that income at their marginal tax rate (in addition to any other income from their employment) and then pay for those living and education expenses with after tax income. These tax savings continue generation upon generation so that your children can ultimately then apply tax free amounts to their children.

This article was produced with the assistance from Tara Lucke from Tara Lucke Legal click here if you would like to get in touch with her.

If you would like to know more, talk to Michael Sik at FinPeak Advisers on 0404 446 766 or 02 8003 6865.

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out.

FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Aura Wealth Pty Ltd ABN 34 122 486 935 AFSL No. 458254

No Comments

Post A Comment