How Testamentary Trusts Operate in Victoria

A Testamentary Trust is a powerful estate planning tool that can provide financial protection, tax advantages, and flexibility for your family. Unlike a trust you set up during your lifetime, a Testamentary Trust is created through your Will and only comes into effect after your death.

At Hemmings Legal, we regularly assist clients in Victoria who want to add a Testamentary Trust to their Will. Understanding how these trusts operate will help you decide whether one is right for your family.

What is a Testamentary Trust?

A Testamentary Trust is a structure created within your Will that holds part or all of your estate after your death. Instead of passing assets directly to beneficiaries, those assets are placed in the trust. A trustee (who you nominate) then manages the trust for the benefit of your chosen beneficiaries.

The trustee has discretion to decide how and when income or capital is distributed. This flexibility makes Testamentary Trusts particularly useful for families who want to protect assets and adapt distributions over time.

To learn about the importance of making a Will, read our article on why every adult needs a Will in Victoria.

Key Features of a Testamentary Trust

Created through a Will
The trust does not exist until you pass away. It is written into your Will and established once probate has been granted.
Trustees manage the assets
You appoint trustees in your Will. They are legally responsible for managing the assets in the trust according to the terms you set out.
Beneficiaries receive income or capital
Beneficiaries are the people who benefit from the trust. The trustee decides when and how they receive funds, which may be in regular distributions or lump sums.
Flexibility and protection
Trustees can make decisions based on circumstances at the time, giving families the ability to adapt to changes such as new financial needs, tax rules, or personal challenges.

How Testamentary Trusts Work in Practice

To see how a Testamentary Trust operates, consider the following examples.

Example 1: Protecting Young Children

James and Sarah have two children under 10. They create a Will with a Testamentary Trust. If they both pass away, their estate will be transferred into the trust. A trusted family member is appointed as trustee.

The trustee uses the trust to pay for school fees, medical bills, and other expenses while the children are young. The children do not take direct control of their inheritance until they reach 25. This ensures the assets are managed responsibly during their formative years.

Example 2: Blended Family

Anna has children from her first marriage and has since remarried. She wants to provide for her current spouse but also protect her children’s inheritance. Her Will sets up a Testamentary Trust that provides income to her spouse during their lifetime. When the spouse passes away, the remaining assets are distributed to her children.

This arrangement balances the needs of both her spouse and her children and reduces the risk of conflict.

Example 3: Protecting Against Financial Risks

Michael wants to leave money to his daughter, but she is going through a divorce. If he left the money to her directly, it could become part of her property settlement. By placing the inheritance in a Testamentary Trust, the assets are controlled by a trustee and remain protected, even if the daughter faces divorce or bankruptcy.

For further insight into protecting your family’s assets, see our article on estate planning for young families.

Example 4: Tax Advantages

Income from a Testamentary Trust can be distributed among beneficiaries in a tax-effective way. For instance, distributions made to minor children are taxed at adult rates rather than the penalty rates usually applied to unearned income for children. This can significantly reduce the overall tax burden on the family.

Choosing Trustees and Beneficiaries

When setting up a Testamentary Trust, it is important to carefully select your trustee. You may choose a trusted family member, close friend, or even a professional trustee. The trustee should be financially capable, trustworthy, and willing to take on the responsibility.

Beneficiaries can include children, grandchildren, a spouse, or even charities. The flexibility of a Testamentary Trust allows you to structure distributions in a way that best suits your circumstances.

Advantages of Testamentary Trusts

Asset protection from creditors or family law claims.
Flexibility to adapt distributions over time.
Tax savings, particularly for families with children.
Control over how and when beneficiaries receive their inheritance.

Key Takeaway

A Testamentary Trust is one of the most effective ways to protect your family and your assets after you pass away. By including a trust in your Will, you can provide financial support, safeguard against risks, and create long-term benefits for your loved ones.

At Hemmings Legal, we guide clients through every step of estate planning, from preparing Wills to structuring Testamentary Trusts. Contact us today to discuss whether a Testamentary Trust is the right option for you.