What is a testamentary trust in Australia?
A testamentary trust is a discretionary trust that comes into existence on the death of the willmaker (testator). It is created by provisions in the will rather than a separate trust deed. The key advantages are tax — beneficiaries under 18 are taxed at adult marginal rates on trust income under section 102AG of the Income Tax Assessment Act 1936 (Cth) — and asset protection from beneficiaries' creditors and family law claims. Testamentary trust wills typically cost $1,500-$3,500 vs $300-$600 for simple wills.
The section 102AG tax advantage
Section 102AG of the Income Tax Assessment Act 1936 (Cth) treats distributions from testamentary trusts to minor beneficiaries as "excepted trust income" — taxed at adult marginal rates rather than the penalty rates that apply to ordinary minor trust income. For families with children under 18, this can save tens of thousands of dollars per year on investment income from the estate.
Asset protection benefits
Assets in a testamentary trust are held by the trustee, not the beneficiary. This provides protection from: beneficiary's personal creditors (bankruptcy); family law property claims (spouse of a beneficiary generally cannot access trust assets); and the beneficiary's own poor financial decisions. The trustee has discretion to distribute or retain capital and income.
When testamentary trusts make sense
Generally worth considering where: beneficiaries are or may be under 18; a beneficiary has creditor risk (business owner, professional at risk of negligence claims); a beneficiary is in or likely to be in a relationship with family law risk; estate is large enough to generate meaningful trust income ($500,000+ investable assets is a rough guide). For smaller simple estates, a simple will is usually more appropriate.
How I help estate planning firms
I draft testamentary trust wills with appropriate trustee, appointor, and beneficiary structures, including flexibility for the trustee to distribute to "excepted persons" for section 102AG purposes. For firms offering sophisticated estate planning this is a high-value workflow.
Common issues
- Appointor succession is critical — who controls the trustee matters more than who the first trustee is
- Trust set-up costs on death (accountant, bank accounts, etc.) should be budgeted
- Testamentary trusts need annual accounting — ongoing cost typically $1,500-$4,000 per year
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