Leave assets on trust, not in one lump sum.
A trust in your will that starts after your death and holds assets for the people you choose.
A testamentary trust is a trust set up by your will.
It does not exist while you are alive. It starts after your death.
A trustee you choose controls the assets for your beneficiaries, under rules you set in the will.
It can suit young children, a beneficiary with a disability, or a beneficiary who needs protection.
How a testamentary trust works
- Your will sets out the terms of the trust.
- After your death, your executor collects the estate and the trust begins.
- Assets are passed to the trustee to hold for the beneficiaries.
- The trustee manages the assets and pays income or capital to the beneficiaries under the trust terms.
- The trust ends at the time, or on the event, set out in the will.
The trustee controls the trust assets. Choose a trustee who is honest and able to manage money, records and tax. The ATO notes a testamentary trust may need its own tax file number and tax returns, separate from the deceased estate.
Who a testamentary trust can suit
- Children and young adults. Assets can be held until a set age, such as 18 or 25, rather than paid at 18.
- A beneficiary with a disability. The trust can provide for ongoing care and needs.
- A beneficiary who cannot manage money or who may be at risk of financial exploitation.
- A family where you want a trustee to manage income and capital over time, rather than leave a single gift.
The trust terms need careful drafting. A trust for a beneficiary with a disability can affect that person's government payments. This needs advice for that beneficiary's situation.
Tax on income paid to children
Division 6AA of Part III of the Income Tax Assessment Act 1936 applies special, higher tax rates to some income of people under 18.
Income a child receives from a deceased person's estate, including income of a testamentary trust, is generally "excepted income". The ATO states that excepted income is taxed at the same rates as an adult's income.
There is a limit. Income from assets acquired by or transferred to the trustee on or after 1 July 2019 that are not connected with the deceased estate is not excepted income.
Tax rules change, and the right structure depends on your family and assets. We recommend you obtain tax advice from your accountant before you finalise a will with a testamentary trust.
Where people get caught
Assets outside the estate do not go into the trust
Superannuation, life insurance and jointly owned property often pass outside your will. Plan how they will reach the trust, if that is what you want.
Outside assets are added to the trust later.
Income from unrelated assets transferred to the trust on or after 1 July 2019 is not excepted income for minors.
The wrong person is chosen as trustee.
The trustee has control of the assets. A trustee who cannot manage the role puts the beneficiaries at risk.
Government payments are not considered.
A trust for a beneficiary with a disability should be drafted with that beneficiary's payments in mind.
No tax advice is obtained.
Tax treatment depends on the facts. Speak to your accountant.
Common questions
When does a testamentary trust start?
After your death, once the estate is administered and the assets pass to the trustee under your will.
Can I change a testamentary trust?
While you are alive, you change it by making a new will. After your death, the terms in the will apply.
Is income from a testamentary trust taxed at adult rates for children?
Generally yes, as excepted income, subject to the 1 July 2019 rule for unrelated assets. Obtain tax advice from your accountant.
Who can be the trustee?
A person or a professional trustee you choose in your will. The trustee should be able to manage the legal, financial and tax side of the trust.
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