How a Testamentary Trust Can Protect and Grow Your Family’s Wealth
When you’re working hard to build a business, grow investments, or create a legacy, it’s just as important to plan how your wealth is passed on as how it’s earned. A carefully structured testamentary trust is one of the most effective tools for that purpose — offering tax-efficiencies, asset protection and controlled wealth distribution that a simple will often cannot match.
What is a Testamentary Trust?
A testamentary trust is a trust established within your will, which only comes into effect when you pass away. Rather than leaving assets directly to beneficiaries, you nominate a trustee to manage those assets for the benefit of your loved ones, under rules you set.
Because the trust exists under your will, it gives you long-term structure beyond the immediate inheritance.
Why It Matters
If you simply leave assets (business interests, investments, property) to beneficiaries outright, there are several potential risks:
A beneficiary’s marriage break-up or relationship change could impact the inheritance
A beneficiary may face business, litigation, or bankruptcy risks
Tax-outcomes may be inefficient, especially if minors are involved
The wealth may be spent too soon, rather than being preserved for future generations
A testamentary trust allows you to retain control over: who gets what, when they get it, how it’s distributed — and it allows for tax-planning and protection tools that help keep the wealth working for the family.
Key Benefits of a Testamentary Trust
Tax Advantages for Minors & Families
Income distributed from a testamentary trust to minor children (under 18) may be taxed at adult marginal tax rates rather than the high penalty rates that apply in other trust arrangements. However, for full benefit, the assets must originate from the deceased’s estate (via the will) or the investment of those assets — if other assets are introduced after death (e.g., new gifts/loans), those may not attract the same tax treatment.
Asset Protection from Creditors & Risk
Since the trustee legally owns the assets (not the beneficiary), these assets are typically outside the personal estate of the beneficiary. That means if your beneficiary is a professional with liability risk or a business owner, the trust can protect the inheritance from creditors, lawsuits or bankruptcy.
Safeguarding Wealth Through Relationship Changes
If the beneficiary later undergoes a marriage separation or divorce, assets held in a testamentary trust are not automatically their personal property. While courts may still consider the trust as a “financial resource”, the separation of ownership adds a layer of protection.
Control Over Timing & Purpose of Distribution
With a testamentary trust, you can dictate:
At what age or milestone can beneficiaries access capital
That income is used for specific purposes (education, housing, healthcare)
That distributions are staged rather than a large lump sum
This control helps ensure you leave more than just money — you leave structure and intention.
Multi-Generation Wealth Preservation
Many testamentary trusts can run for up to 80 years (depending on jurisdiction), allowing you to preserve wealth for children, grandchildren and beyond.
When It’s Especially Worth Considering
This structure often makes sense when:
You have young children or grandchildren
You run a business or are in a profession with liability exposure
You own significant investments or property and want tax optimisation
You have vulnerable beneficiaries (e.g., children with special needs)
You want to protect wealth through relationship breakdowns or protect it from creditors
You’re thinking in generations, not just from you to your children
What You Need to Know (and Ask) Before You Proceed
Complexity & Cost: A testamentary trust is more complex than a simple will. It requires drafting, ongoing administration, tax returns and professional advice. For smaller estates, the benefit may be outweighed by cost.
Trustee Quality: The person (or company) you appoint as trustee must be capable, trustworthy and willing.
Assets & Origin Rules: To access the tax advantages, you must ensure the assets satisfy the “estate origin” rule (they come via estate/will) — new assets added after death may not qualify.
Superannuation & Residence Issues: Some assets (like superannuation proceeds, life insurance or main residence) may not automatically sit inside the will/trust or may lose certain exemptions. You will need to seek specific advice.
Review Regularly: Your situation will change — new business sales, relationships, tax law changes — so regularly review your estate plan and trust provisions.
Contesting & Family Provision Risk: A will (even with a testamentary trust) can still be challenged under family provision rules. Make sure the plan is clearly drafted and documentation supports your intentions.
How to Get Started
Define your objectives: asset protection, tax-efficiency, generational support, vulnerable beneficiaries, business risk?
Identify which assets and which beneficiaries you wish to include in the trust structure.
Select a trustee and decide on structure — discretionary, protective or fixed.
Work with an experienced estate-planning lawyer and your accountant/tax adviser to draft your will with the testamentary trust included.
Review your entire estate plan periodically (e.g., every 3-5 years or after major life events).
Final Thoughts
A testamentary trust is not a legal add-on anymore but a strategic legacy tool. For business owners, professionals, investors and wealth-builders who want more than a simple transfer of assets, this structure offers control, tax savings, protection and multi-generation design.
If you’re unsure whether a testamentary trust is right for you, now is the perfect time to seek guidance.
Start the conversation with our SMSF Manager at Alexander Spencer, and our team can connect you directly with our AS Wealth Advisors specialists to help you understand your options and design a structure that protects your wealth today and strengthens your legacy for tomorrow.
Disclaimer: This article is general information only and does not constitute legal, tax or financial advice. The suitability of a testamentary trust depends on individual circumstances. Laws and tax rules may change.