Testamentary Trusts In Australia

How They Work, 2026 Tax Rules And Who Needs One

A testamentary trust is a trust written into your will that only starts when you die. Instead of leaving assets to someone outright, you leave them to a trustee who manages them for your beneficiaries. The main benefits are asset protection, control for young or vulnerable beneficiaries, and children under 18 paying adult tax rates on trust income (ASIC Moneysmart).

Quick Summary

Best suited to families with young children or grandchildren, a beneficiary who needs protecting, or an estate large enough to produce meaningful investment income. Minors pay adult rates only on income from estate assets. The catch is super doesn’t flow in automatically and smaller estates rarely justify the running costs.

Table Of Contents

• What Is A Testamentary Trust?
• How Does A Testamentary Trust Work?
• How Is A Testamentary Trust Taxed In 2026?
• Worked Example: Splitting Investment Income With The Kids
• Testamentary Trust Vs Family Trust Vs Leaving It Outright
• Benefits Of A Testamentary Trust
• Disadvantages & When It Isn’t Worth It
• Super Doesn’t Go Into Your Will By Default
• Testamentary Trusts, Centrelink & The Age Pension
• How To Set Up A Testamentary Trust: Step By Step
• Final Thoughts
• Frequently Asked Questions (FAQ)

What Is A Testamentary Trust?

A testamentary trust is a trust that’s written into your will and takes effect when you die. Until then it doesn’t exist. There’s no deed to sign now, no bank account and no tax return.

When you die, your executor gathers your assets, pays debts and then transfers some or all of what’s left to the trustee of the testamentary trust. The trustee holds those assets for your beneficiaries and makes decisions under the rules you set in the will, for example paying a child’s school fees until they turn 25 (ASIC Moneysmart).

Moneysmart describes it as suiting beneficiaries who are minors, have diminished capacity, or may not manage an inheritance well. In our experience, that’s only part of the story. The tax treatment of income paid to children is often what makes a testamentary trust worth the extra cost, and it’s also the part most people misunderstand.

If you’re still getting your head around how wealth passes between generations in Australia, start with our guide to inheritance tax in Australia (there isn’t one, but there are taxes that behave like it), and our overview of estate planning in Australia.

How Does A Testamentary Trust Work?

Who’s Who In A Testamentary Trust

Role	Who it usually is	What they do
Will-maker	You	Sets the rules in the will: who can benefit, who controls the trust, when it ends
Executor	Spouse, adult child or professional	Administers the estate and transfers assets into the trust
Trustee	Often the main beneficiary, sometimes with a co-trustee	Owns and manages the trust assets, decides distributions each year
Appointor	Named in the will	Can remove and replace the trustee, so this is where real control sits
Beneficiaries	Spouse, children, grandchildren, sometimes companies or other trusts	Receive income or capital at the trustee’s discretion

The testamentary trust is a separate trust from your deceased estate. It’s created under the will and keeps going after the estate is finalised, with its own tax obligations (ATO).

Discretionary Vs Fixed Testamentary Trusts

Most testamentary trusts are discretionary. The trustee decides each year who gets income and capital, which is what makes income splitting and asset protection possible. A fixed testamentary trust sets each beneficiary’s share in advance. That’s simpler and more certain, but gives up most of the tax flexibility.

In NSW, a trust can’t run forever. The Perpetuities Act sets the maximum perpetuity period at 80 years, so your will needs a vesting date within that limit (NSW Legislation).

How Is A Testamentary Trust Taxed In 2026?

Minors Pay Adult Tax Rates On Testamentary Trust Income

Children under 18 normally pay penalty rates on unearned income such as trust distributions. That rule exists to stop parents shifting investment income to their kids. Income from a deceased person’s estate, including income a testamentary trust earns from estate property, is “excepted income” and is taxed at ordinary adult rates instead (ATO).

Income For The Year (resident under 18)	Family Trust Distribution	Testamentary Trust Income From Estate Assets
$0 to $416	Nil	Nil
$417 to $1,307	66% of the excess over $416	Nil
$1,308 to $18,200	45% of the whole amount	Nil
Above $18,200	45% of the whole amount	Adult marginal rates on the excess

Adult rates exclude the 2% Medicare levy and low income offsets are not shown.

Source: ATO Minor rates (latest published, 2025–26)
Source: ATO Adult rates and $18,200 tax-free threshold

The 2019 Rule: Only Estate Assets Qualify

This is the rule that catches people out. Since 1 July 2019, testamentary trust income doesn’t get adult rates if it comes from assets acquired by or transferred to the trustee on or after that date that are unrelated to property of the deceased estate (ATO).

In plain English, you can’t top up a parent’s testamentary trust with your own savings and have the kids pay adult rates on the earnings. Estate assets, and assets bought by selling or reinvesting estate assets, still qualify. Fresh money from outside doesn’t, and the ATO splits the income between the two (ATO).

So keep clean records of what came from the estate. Mixing in outside money is allowed. It just gets taxed differently, and it makes the accounting harder.

Capital Gains Tax When Assets Move Into The Trust

Death itself doesn’t trigger capital gains tax on assets that pass to your legal personal representative or beneficiary. They’re treated as acquiring the asset on the day you died, and any gain or loss on that transfer is disregarded. CGT is still payable if the estate or trust later sells the asset (ATO).

When The Deceased Acquired The Asset	Cost Base For The Estate Or Beneficiary
Before 20 September 1985 (pre-CGT)	Market value on the date of death
On or after 20 September 1985	The deceased’s own cost base on the date of death

Source: (ATO)

For the family home, the inherited dwelling can be fully exempt if it’s sold under a contract that settles within 2 years of death and it was the deceased’s main residence and not producing income just before death. The ATO says the same exemption applies to the trustee of a deceased estate. Whether your testamentary trustee can rely on it depends on how the will is drafted and when the property moves, so check this before the house is transferred into the trust (ATO).

For more on how recent proposals could change capital gains, see our update on capital gains tax changes in Australia.

Will The Proposed Minimum Tax On Trusts Apply?

The 2026–27 Budget proposed a 30% minimum tax on discretionary trusts, starting 1 July 2028. It isn’t law yet. The Government has said deceased estates and discretionary testamentary trusts established for genuine testamentary purposes will be excluded (Treasury) (ATO).

There’s a catch that mirrors the 2019 rule for children’s tax rates. Treasury’s outline says income from assets added after 7.30pm on 12 May 2026 that are unrelated to the deceased estate won’t get the exemption. Keep estate assets and outside money clearly separate (Treasury).

Worked Example: Splitting Investment Income With The Kids

This Illustrative example uses 2025–26 minor rates (the latest the ATO has published) and the 45% top marginal rate plus 2% Medicare levy. It ignores franking credits, Medicare levy for the children, offsets, trust running costs and the chance that returns are lower or higher than assumed.

Mark is 46, lives in Balgowlah and earns well over $190,000, so each extra dollar of income is taxed at 45% plus the 2% Medicare levy. His mother leaves him $1.5 million in shares and cash. Mark has three children under 18. Assume the portfolio earns 4% a year, or $60,000.

Option	Who receives the $60,000	Tax payable ($ a year)
A. Inherited outright	Mark: $60,000 taxed at 47%	$28,200
B. Mark puts it in his existing family trust	3 children × $18,000 at 45% ($24,300) plus Mark $6,000 at 47% ($2,820)	$27,120
C. Left via a testamentary trust	3 children × $18,000 at adult rates (nil, under the $18,200 threshold) plus Mark $6,000 at 47% ($2,820)	$2,820

Source: ATO Minor rates
Source: ATO Excepted income
Source: ATO Adult rates

Option C saves $25,380 a year compared with inheriting outright. Over 10 years, before investment growth, that’s $253,800. Option B barely helps because minors pay penalty rates on family trust distributions.

Now say Mark adds $200,000 of his own savings to the testamentary trust. Under the 2019 rule, income from that $200,000 is unrelated to his mother’s estate, so any share of it paid to the children is taxed at minor penalty rates, not adult rates (ATO).

The saving only lasts while the children are under 18. Once they’re adults, distributions are taxed at their own marginal rates, which can still help while they’re students on low incomes.

Testamentary Trust Vs Family Trust Vs Leaving It Outright

Feature	Testamentary trust	Family trust	Left outright
Created by	Your will, on death	Trust deed, during your life	Your will
Can hold assets now	No	Yes	Not applicable
Tax on income to children under 18	Adult rates on estate-sourced income	Penalty rates (up to 45% of the whole amount)	Not applicable
Asset protection for the beneficiary	Can help, depends on drafting	Can help	None. The assets are theirs
Ongoing tax return and accounts	Yes	Yes	No
Set-up	Drafted into the will	Deed, trustee, TFN, bank account	Simple will

Source: ATO Minor rates
Source: ATO Excepted income

If you’re weighing up a family trust you control now, read our guide to setting up a family trust in Australia. Many of our clients end up with both: a family trust for business or investment assets they hold today, and testamentary trusts in their wills for what passes on death.

Benefits Of A Testamentary Trust

Asset Protection For Your Beneficiaries

Assets held by a testamentary trustee aren’t owned outright by the beneficiary. That can put distance between the inheritance and a beneficiary’s creditors, a failed business or a relationship breakdown. It isn’t bulletproof. A beneficiary who is also sole trustee and appointor has a lot of control, and a court can take that into account. Drafting and the choice of trustee matter more than the label.

Control For Young Or Vulnerable Beneficiaries

A trustee can manage the assets until a child reaches an age you choose, or for the life of a beneficiary who can’t manage money. This is the reason Moneysmart highlights.

Tax Flexibility Each Year

A discretionary trustee can direct income to the beneficiaries on the lowest tax rates each year, including children under 18 at adult rates on estate-sourced income, as shown in the example above (ATO).

Keeping Wealth In The Family Line

You can limit who can ever benefit, for example your children and grandchildren but not their partners. This is often called a “bloodline” clause. It’s a common reason our clients with blended families ask about testamentary trusts. For the bigger picture, see our article on the intergenerational wealth transfer in Australia.

Disadvantages & When It Isn’t Worth It

A testamentary trust adds cost and admin. The trust needs its own tax return every year, someone has to make and record distribution decisions and an accountant usually needs to be involved (ATO).

It also only captures assets that pass through your estate. Super without the right nomination, jointly owned property that passes to the surviving owner, and assets already held in a family trust or company don’t automatically flow into it (ASIC Moneysmart).

Good fit	Poor fit
Children or grandchildren under 18 likely to inherit within your lifetime horizon	An estate mostly made up of the family home that will be sold and split
Investment assets large enough to generate meaningful income	Modest estates where trust costs would eat most of the tax saving
A beneficiary in a risky profession, business or shaky relationship	Adult beneficiaries on low incomes who will spend or pay off debt with it
A beneficiary with a disability or addiction issue	Families with no one suitable or willing to act as trustee
Blended families wanting assets to stay with their own children	Most wealth sitting outside the estate (super, joint assets) with no plan to change that

Our view is if your estate is mostly a home that will be sold and split between adult children who don’t need protecting, a testamentary trust usually adds cost without much benefit. A simple, up-to-date will may be the better answer.

Super Doesn’t Go Into Your Will By Default

For many of our clients, super is one of their biggest assets and it isn’t automatically covered by a will as you nominate beneficiaries through your fund. If there’s no valid nomination, the fund trustee decides who gets the money (ASIC Moneysmart).

A death benefit can be paid to a dependant directly, or to your legal personal representative (your executor), who distributes it under your will. A binding nomination, where the fund allows it, can direct the benefit to dependants, your legal personal representative or both (ATO).

That’s the link most estate plans miss. If you want super to end up in a testamentary trust, it generally has to be paid to your estate first. Nominate your adult daughter directly and the money goes straight to her, bypassing the trust and its protections.

Tax matters as adult children are usually not tax dependants and the taxed element of a death benefit lump sum paid to a non-dependant is taxed at up to 15%, or 30% for an untaxed element, plus the Medicare levy and dependants pay nil (ATO).

Getting the nomination right is a separate decision from the trust and the right answer depends on who’ll receive it. Our guide to super death benefit tax explains the numbers, and our superannuation advice team can review your nominations.

Testamentary Trusts, Centrelink & The Age Pension

Some people expect a testamentary trust to keep inherited assets out of the Age Pension means tests for a surviving spouse, but usually it won’t.

For testamentary trusts activated after 31 March 2001, the Social Security Guide attributes the trust’s assets and income to the surviving partner if they control the trust, whether or not they’re a beneficiary. It also attributes them to the surviving partner if an associate controls the trust and the partner is a potential beneficiary (DSS).

If pension or aged care fees are part of your plan, get that advice before the will is signed. Our aged care advice team looks at these rules alongside the estate plan.

How To Set Up A Testamentary Trust: Step By Step

1. List What You Own & How You Own It – Separate assets that pass under your will from those that don’t (super, joint property, family trust and company assets).
2. Decide Who Needs A Trust – You can give each child their own testamentary trust, leave some beneficiaries assets outright, or both.
3. Choose Trustees & Appointors – Think about who will control the trust after you, and after them.
4. Check Your Super Nominations – If super should flow into the trust, the nomination usually needs to point to your legal personal representative.
5. Have An Estate Lawyer Draft The Will – Testamentary trusts aren’t a DIY job. Your financial adviser and lawyer should work from the same plan.
6. Review It – Revisit the will after marriage, separation, new children or grandchildren, a big financial change or the death of someone named in it.

Source: ASIC Moneysmart Wills and review triggers
Source: ATO Super nominations

Our estate planning service covers the financial side of these steps, and we brief your lawyer so the will matches the plan. If you’ve already received an inheritance, see what to do with an inheritance. Business owners should also read our guide to estate planning for small business owners.

Final Thoughts

A testamentary trust is one of the few estate planning tools with a real, measurable tax benefit, but only in the right situation. If your beneficiaries include young children, if someone needs protecting from themselves or others, or if your estate will throw off meaningful investment income, it’s usually worth the extra cost.

If your estate is mostly a home for adult children to sell and share, it probably isn’t. And whichever way you go, the trust is only as good as the plumbing around it. Check that your super nominations and the way you own your assets actually send money where the will expects it to go.

Frequently Asked Questions (FAQ)

References:

ASIC Moneysmart – Wills and powers of attorney
ATO – Registering a deceased estate trust and lodging returns
NSW Legislation – Perpetuities Act 1984 No 43
ATO – Your income if you are under 18 years old
ATO – Tax rates if you’re under 18 years old
ATO – Tax rates – Australian resident
ATO – Assets which pass to the beneficiary or legal personal representative
ATO – Inherited property and CGT
ATO – Superannuation death benefits
DSS – Guides to Social Policy Law – 4.12.3.30 Testamentary Trusts
ATO – Payments from super
Treasury – Second reading speech, Treasury Laws Amendment (Tax Reform No. 3) Bill 2026
ATO – Tax reform: introducing a minimum tax on discretionary trusts
Treasury – Capital Gains Tax and Discretionary Trusts Reform