A testamentary trust is a trust created by your will.
It holds some or all of your estate for your beneficiaries, under rules you set.
It may suit families with young children, beneficiaries who cannot manage money, and people who want ongoing control after death.
What a trust is
In a trust, one person holds assets for the benefit of another.
The person who holds and manages the assets is the trustee.
The people who benefit are the beneficiaries.
The assets can include property, cash and shares.
How a testamentary trust works
Your will sets out the trust and its terms.
The trust is separate from the rest of your estate.
Your will names who will be the trustee.
It may also name an appointor, which is the person who can change the trustee.
The trust holds the assets your will directs into it.
The trustee then manages them and pays income or capital to the beneficiaries under the terms of the will.
Who a testamentary trust may suit
The NSW Government lists common reasons for a trust in a will.
- Ongoing support for children and young adults, where you do not want them to receive everything at 18. You can set a later age, such as 25.
- Support for a beneficiary who cannot manage their own money.
- Support for a beneficiary who could be financially exploited.
- Support for a person with a disability, including a special disability trust.
- More tax effective estate planning.
- Gifts to a charity over time.
How income paid to children is taxed
Income paid to people under 18 is usually taxed at higher rates.
The ATO treats some income as excepted income, which is taxed at ordinary adult rates.
Income of a testamentary trust that comes from the property of the deceased estate is excepted income.
This includes property bought with the proceeds of estate assets, such as shares bought after an estate property is sold.
Income from assets added to the trust on or after 1 July 2019 that are unrelated to the deceased estate is not excepted income.
Where a trust holds both kinds of assets, only the income from estate property is excepted.
Tax advice should be obtained for each estate and each trust.
Choosing the trustee
The trustee controls the trust assets.
The trustee must be trustworthy and able to manage every part of the trust.
The trustee may need to work closely with family members and share tax and financial information.
You can name more than one trustee, and you can name a replacement.
Where people get caught
Choosing a trustee who does not get on with the family
The trust works best where the trustee and the family can cooperate.
Adding unrelated assets to the trust later.
Income from unrelated assets added on or after 1 July 2019 does not receive adult tax rates for minors.
Using a simple will where a trust is needed.
A child may receive their whole share at 18 if the will does not say otherwise.
Not saying who replaces the trustee.
If the trustee dies or cannot act, the will should say who takes over.
Expecting the trust to cover assets outside the estate.
Some assets, such as property held as joint tenants, pass outside the will. Superannuation and life insurance depend on the fund or policy terms.
A testamentary trust adds terms, a trustee and ongoing tax returns
It is not needed in every will.
Whether it suits you depends on your family, your assets and how you want them held after your death.
Common questions
When does a testamentary trust start?
It is set out in your will, so it can only operate after your death, once your estate is being administered.
Do I need a testamentary trust if my children are adults?
Not always. A trust may still suit adult beneficiaries who cannot manage money or could be exploited. Advice depends on your family.
Does a testamentary trust need its own tax return?
A trust that earns income generally has tax obligations. The ATO publishes guidance, and an accountant should be involved.
Ask whether a trust in your will suits your family. Call (02) 8062 6300.
This article is general information only. It is not legal advice for your situation.