Drafting a testamentary trust within a will
A testamentary trust provides tax effectiveness (minors taxed at adult rates on excepted trust income), asset protection from beneficiary creditors or relationship breakdowns, and structured distribution for vulnerable or spendthrift beneficiaries.
This is an 8-step workflow for drafting a testamentary trust within a will, using the excepted trust income regime under s 102AG of ITAA 1936 and providing asset protection.
Before you start
- Client instructions on assets, family structure, and objectives
- Financial adviser input on tax position
- Decision on whether a single discretionary trust or multiple sub-trusts is appropriate
- Existing will to be updated or new instructions for a fresh will
The workflow
Choose the trust structure
Decide between a single discretionary testamentary trust, multiple sub-trusts (one per primary beneficiary), or a capital-protected trust. Structure drives tax and protection outcomes.
Draft primary and secondary beneficiaries
Define the primary beneficiary (usually a child) and secondary beneficiaries (the primary's spouse, descendants, siblings). Avoid overly broad classes that dilute control.
Appoint trustees and appointors
Trustees manage. Appointors have power to remove and replace trustees. Consider whether the primary beneficiary should be trustee, appointor, or both.
Draft for s 102AG excepted trust income
Ensure the trust satisfies the s 102AG test so minor beneficiaries are taxed at adult rates on distributions from inherited capital. Avoid tainting with new property.
Address capital gains and CGT events
Address the CGT rollover on death (Division 128 ITAA 1997), the 50% discount accessibility within the trust, and treatment of pre-CGT assets.
Draft asset protection features
Include broad discretion, no fixed entitlements, spendthrift-style provisions, and anti-creditor protections. Consider relationship property breakdown risks.
Integrate with superannuation
Super proceeds do not pass via the will unless the binding nomination is to the LPR. Coordinate binding death benefit nominations with the testamentary trust design.
Execute and brief the client
Execute the will with the testamentary trust provisions. Brief the client and intended trustees on how the trust will operate and the ongoing compliance (TFN, tax returns).
What you will have at the end
A will incorporating a testamentary trust that gives tax flexibility, asset protection, and structured distribution while respecting the testator's intentions.
Common issues
- Tainting the trust with post-death contributions, losing s 102AG treatment
- Nominating the same person as trustee, appointor, and primary beneficiary — removing protection value
- Drafting class of beneficiaries so broadly that intended control is lost
- Super binding nominations not coordinated with the trust
- Inadequate explanation to executors/trustees on operational compliance
Run this workflow on a real matter
Quillio drafts testamentary trust wills with the s 102AG excepted trust income regime preserved and coordinates with super binding nomination review. See /practice-areas/wills-estates-lawyers.
This workflow is a general guide. Testamentary trusts have ongoing tax and accounting costs — they are not appropriate for every estate.
Try this workflow with Quillio.
Quillio can run this workflow on a real matter, with citations to current AU authority on every step. The free trial requires no credit card.
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