When we sit down with you to discuss your Estate Plan, we don’t just talk to you about who receives your assets, but also how and when they receive them.
For many families, a testamentary trust offers one of the most effective ways to protect wealth and ensure long-term security for future generations.
Testamentary trusts (also known as testamentary discretionary trusts) have become a cornerstone of modern estate planning, particularly for parents who want to protect their children’s inheritance, manage tax outcomes and safeguard assets from relationship breakdowns or unforeseen life events.
At Preshute Legal, we regularly advise clients on whether a testamentary trust should form part of their Will. For many, it’s one of the most powerful tools available to preserve and protect what they’ve worked hard to build.
What is a testamentary trust?
A testamentary trust is a trust established under your Will that only comes into effect after your death. Unlike family or discretionary trusts created during your lifetime, a testamentary trust is activated as part of your Estate Plan and is governed by the instructions set out in your Will.
The terms of your Will set out how the trust operates, who controls it, who benefits from it and when and how assets are distributed
In simple terms, a trust separates control of assets from benefit. The person who has control of the trust assets is called the ‘trustee’. This means that the assets are held by the trustee on behalf of your beneficiaries, rather than those assets being given to the beneficiaries outright. Because the assets are owned by the trust – not the beneficiaries personally – they can be significantly better protected.
Why do people choose testamentary trusts?
While testamentary trusts offer a range of advantages, one of the key reasons families choose them is enhanced asset protection, including protection from:
- Bankruptcy
(e.g. if your spouse or adult children are company directors or in high-risk occupations, the inheritance is less exposed to creditors); - Divorce
(e.g. if your spouse re-partners then separates after your death, or your child separates from their spouse, the inheritance is less exposed in family law disputes); and - Beneficiaries with poor financial management or who are otherwise vulnerable
(e.g. if you’re worried a child may not handle an inheritance wisely or is at risk of financial coercion, a testamentary trust can allow someone else to manage the funds on their behalf until they reach a certain age or level of maturity).
There may also be important tax advantages to using testamentary trusts, as income distributed to minor beneficiaries from a testamentary trust can be taxed more favourably than income received outside a trust (beneficiaries under 18 are treated like adults for tax purposes, which means they can receive about $22,000 tax free each year under current tax laws). This favourable tax treatment is only available to testamentary trusts established under a Will and does not apply to ordinary family or discretionary trusts.
Is a testamentary trust right for you?
A testamentary trust isn’t just for very wealthy families. Many everyday families who want greater control, protection and flexibility in their Estate Plan can benefit in the right circumstances.
Having said that, there does need to be a certain level of assets that is available to justify the structure. As a guide, we generally say a testamentary trust is usually most cost-effective where it holds investible assets of around $500,000 or more, though this depends on individual circumstances.
To recap the above, a testamentary trust may be worth considering if you:
- Have minor or vulnerable children;
- Want to protect assets from future relationship breakdowns or bankruptcy (of either your spouse or your adult children);
- Are concerned about how an inheritance might be managed; and/or
- Want to create a lasting, structured legacy that can survive for generations (because the rule against perpetuities has been abolished in South Australia, there is no strict legal time limit for a trust to vest or end).
Every family is different, and the right structure depends on your goals, assets and personal circumstances.
If you’re reviewing your Will or looking at preparing your Estate Plan for the first time, now is the perfect time to explore whether a testamentary trust could work for you.
Book a free chat with us today to discuss whether a testamentary trust might be right for you. We are experienced Wills and Estate Planning lawyers based in Prospect and work with families across Adelaide to help you design an Estate Plan that reflects your values and gives you confidence about the future.