Key takeaways
Wealth transfer is not just about leaving money but protecting it from tax, disputes, and erosion.
A testamentary trust, created through a will after death, is a flexible tool to safeguard family wealth.
It ensures assets are managed and distributed according to your wishes while offering tax and asset protection advantages.
I’ve often said that wealth isn’t just about how much you make – it’s about how much you keep.
And when it comes to passing on that wealth to the next generation, a well-structured estate plan can mean the difference between preserving your legacy or watching it disappear through tax or family disputes.
One of the most effective – yet underutilised – tools is the testamentary trust.
So let’s look at what it is, why it’s so valuable, and how you can use it to protect your family’s wealth.
However, please remember that this is general information only and not specific advice; you should seek further guidance from your qualified advisor before taking any action.
What is a testamentary trust?
Think of it as a special type of discretionary trust that comes into existence via your will after your death.
Instead of assets being left directly to beneficiaries, they’re held inside the trust and managed by a trustee (often your executor or a trusted family member).
The beauty of a testamentary trust lies in its flexibility – the trustee can decide how income and capital are distributed, making it easier to manage tax and adapt to changing family circumstances.
There are several other benefits when using a testamentary trust as compared to leaving assets directly to an individual, including the fact that there are normally no taxes applicable when leaving assets via a testamentary trust, similar to when leaving assets directly to an individual.
Beware of higher tax rates for children
If you’re considering leaving money directly to children or grandchildren, you’ll need to be aware of Australia’s stringent tax rules for minors.
This includes income or capital from assets that have been passed down.
Normally, children under 18 are slugged with penalty tax rates: the first $416 of unearned income (like dividends or capital gains) is tax-free, but anything above that gets taxed at a whopping 47%.
However, there is an exception – income paid from a testamentary trust is taxed at the normal adult rates.
That means your children or grandchildren can access the standard $18,200 tax-free threshold and then enjoy the usual marginal rates after that.
This creates a powerful tax planning opportunity to distribute income more efficiently across your family.
Protecting your wealth from relationship breakdowns
Here’s a scenario I’ve seen play out far too often:
You pass away, leave your child an inheritance, and shortly after they separate from their partner. Suddenly, a large portion of what you left behind is at risk of being divided in a family law settlement.
A testamentary trust can help protect against this.
By structuring your will so that assets remain in the trust, rather than in your child’s personal name, you make it more difficult for ex-spouses or creditors to make claims.
Some families take it a step further and establish a “bloodline trust,” which restricts beneficiaries to direct descendants only. This is particularly useful for families concerned about in-laws or blended family disputes.
Asset protection
When leaving assets directly to an individual they will be available to a creditor if they are sued.
This is not the case when left via a testamentary trust, as the individual does not own the assets. This principle can be important if the person you are leaving assets to is in a litigious occupation, such as medical or self-employed.
Benefits of testamentary trusts at a glance
| Benefit | Why It Matters |
| Tax efficiency | Children under 18 can use the adult tax-free threshold ($18,200) instead of being taxed at 47%. |
| Flexibility | Trustees can choose how and when to distribute income, dividends, or capital. |
| Asset protection | Inheritances are less exposed to creditors, bankruptcies, or relationship disputes. |
| Control over access | Parents can decide when beneficiaries take full control (e.g., age 21 or 25). |
| Family wealth planning | Allows pooling of assets for education, long-term growth, or charitable giving. |
Practical uses of testamentary trusts
Here are a few smart ways Australians are already putting them to use:
- Education Funds – set up a dedicated trust to cover private school or university fees for children and grandchildren.
- Supporting At-Risk Beneficiaries – for children who may struggle with money, addiction, or disability, a trust can provide a steady income without giving them direct control.
- Large Families – for families with multiple grandchildren, distributing income across many beneficiaries can be highly tax-effective.
- Philanthropy – by pairing a trust with a Public Ancillary Fund (PAF), you can donate to charities more strategically while reducing tax on capital gains.
- Loans Instead of Distributions – trusts can lend money to beneficiaries (to pay down a mortgage, for example) rather than distributing it outright, preserving long-term benefits.
- Passing down a family home to a surviving spouse not on title. Additional clauses also allow the use of the main residence tax exemptions on the home. This allows for improved asset protection if the surviving spouse is in a litigious occupation.
Don’t forget about superannuation
One big mistake I often see is people assuming their super automatically forms part of their estate.
It doesn’t!
Unless you have a binding death benefit nomination, your super fund trustee decides who receives it.
And if super is paid to a financially independent adult child, it may be hit with the so-called “super inheritance tax” – a flat 17% on the taxable portion.
Tax free payment of a member’s superannuation death benefits is only available if distributed to spouses (which has a broad definition), children under 18, and if someone is a financial dependent or in an interdependent situation (tax dependents).
Any life insurance payouts when paid to a non-tax dependent is taxed at 32%.
Getting this wrong could cost your family hundreds of thousands of dollars.
Final thoughts
At the end of the day, your will is not just about passing on money – it’s about passing on security, stability, and opportunity for your loved ones.
A testamentary trust can help you:
- Reduce tax,
- Protect assets, and
- Ensure your wealth is used the way you intended.
But remember – the devil is in the detail. This is where financial strategy and legal precision meet. So, while your financial adviser can help shape the right strategy, you’ll need an experienced estate planning lawyer to draft the documents correctly.
Your will should be as simple as possible – but no simpler.
Disclaimer
This article is general information only and is intended as educational material. Metropole Wealth Advisory or its associated or related entities, directors, officers, or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.
