What Is a Testamentary Trust and Do You Need One in Victoria?

A Testamentary Trust is a trust created within a Will which comes into effect after the death of the Will maker, not at the time their Will is signed.

Far from being a vehicle reserved only for the wealthy, it can be a powerful estate planning tool that can provide asset protection and tax advantages for everyday Victorian families.

Whether or not a testamentary trust structure is suitable in your Will, depends on a number of factors. Some of these include:

• your personal circumstances;

• what you are wanting to acheive;

• beneficiary circumstances and needs;

• the nature of your assets; and

• adminsitration and ongoing costs.

How a Testamentary Trust Works

Unlike a standard Will that distributes assets directly to a beneficiary, a testamentary trust holds assets on behalf of the beneficiary, often a class of beneficiaries. A trustees role is to manage the trust and exercise their discretion to make distributions of income and capital to beneficiaries, in accordance with the testamentary trust provisions contained in the Will.

Some Benefits that a Testaemntary Trust can provide

• Asset Protection: Despite recent commentary around possible changes to the taxation of Testamentary Trusts and the class of beneficiaries that can be included to maintain tax benefits, one of the key incentivies to incorporate a testamentary trust remains - increased asset protection. When a testamnetray trust has a wide class of beneficiaries (e.g spouse, adult children, minor children, grandchildren), there can be greater protection to the beneficaires of the TT, than if assets were gifted to a specific beneficary personally. Examples include:

  • relationship breakdowns;

  • vulnberable beneficiaries (e.g minor children, substance abuse, spendthrift, addiction);

  • beneficaries within a high risk profession;

  • beneficaires with bankruptcy / creditors exposure (e.g company directors and buisness owners); and

  • beneficaireis who are under a disability.

• Tax treatment for minors: income a minor receives from a testamentary trust can qualify as “excepted trust income”. This means distributions of income to minors can be taxed at ordinary adult marginal rates (and importantly at the tax-free threshold) rather than the penalty rates that may otherwise apply to a minors unearned income. In practice, a child with no other income may receive a distribution of roughly $18,200 (before any offsets) with no tax payable. This is a stark contrast to the heavy penalty tax that may apply on the same distribution of income from an inter vivos trust, such as a discretionary family trust (e.g $416 compared to $18,200).

Since May 2026 the Federal Budget has annonced changes to the taxation of trusts. As at July 2026, the position has not yet been settled on the elements required to ensure a testamentary trust maintains benefical tax treatment, particulalry for minor children.

You should always seek professional legal advice about whether or not a testamentary trust is appropriate for your personal circumstances from a dedicated estate planning lawyer.

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This article provides information only, it is not legal advice. Reach out to Simmons Legal if you would like advice on your personal circumstances.