Most wills still say something like "everything to my spouse, then equally to my children." It's simple, and for some families it's enough. But when a child inherits outright, the assets land in their personal name. They're taxed at their rate, exposed to their creditors and any future separation, and grandchildren can't share the income without penalty tax.
A testamentary trust changes where the inheritance lands. This guide explains what a testamentary trust is, how it's taxed, what protection it really gives, how it's set up in a will, and how the 2027 tax changes and the proposed 2028 trust tax affect it. The will itself is prepared by your solicitor. We do the tax modelling and work alongside them.
What is a testamentary trust?
A testamentary trust is a trust written into your will. It doesn't exist while you're alive. On your death, once the executor has dealt with the estate, the assets you've directed into it pass to its trustee instead of to the beneficiary.
Most are discretionary trusts, like a family trust: the trustee decides each year which beneficiaries receive income and capital. The usual design gives each child a trust for their share, makes that child the trustee or controller (once they're old enough and if it's appropriate), and lets the trust benefit their partner, children and grandchildren too.
| Leaving assets outright | Testamentary trust | Family trust set up while alive | |
|---|---|---|---|
| When it starts | On death, through the estate | On death, under the will | Now, by deed |
| Who owns the assets | The beneficiary personally | The trustee | The trustee |
| Income to children under 18 | Not applicable (child would only inherit directly) | Adult rates on income from estate property | Penalty minor rates |
| Protection from beneficiary's creditors | None | Generally good, while assets stay in the trust | Generally good |
| Flexibility to share income across the family | None | Yes | Yes |
| Running costs | None | Yearly accounts and tax return | Yearly accounts and tax return |
| Proposed 2028 minimum tax on discretionary trusts | Not applicable | Genuine testamentary trusts excluded in the Bill as introduced | Would apply if the Bill passes |
How are testamentary trusts taxed?
A testamentary trust is taxed like other trusts: each year the trustee decides who is entitled to the income, and those beneficiaries pay tax at their rates. Income nobody is entitled to is taxed to the trustee, potentially at the top rate. The difference is how children are treated.
Children under 18. Normally, trust income paid to a child is taxed at penalty rates: on the ATO's latest published rates (2025–26), nil up to $416, 66% of the excess up to $1,307, then 45% of the whole amount. Income from a testamentary trust is "excepted trust income", taxed at adult rates with the $18,200 tax-free threshold, if it comes from property that came from the deceased's estate (or from accumulations of that property).
The 2019 integrity rule. Since 1 July 2019, the concession only covers income from assets transferred from the estate and what those assets turn into. If someone later adds their own money to a testamentary trust, income on that money is taxed at the minor rates. Keep the estate assets and later contributions clearly separated.
Adults are taxed at their own marginal rates, as with any trust distribution.
Worked example: grandchildren at adult rates
Hypothetical, rounded, 2026–27 resident rates, before Medicare levy.
Say Margaret leaves $1,500,000 to her daughter Kate through a testamentary trust. Kate earns over $190,000. Kate has three children aged 9, 12 and 15. The trust's investments earn $75,000 a year.
| How $60,000 of the income is taxed | Tax per year |
|---|---|
| Kate inherited outright and earns it at 47% | $28,200 |
| Kate had put it in a family trust she set up herself, distributing $20,000 to each child (45% of the whole amount) | $27,000 |
| Testamentary trust distributes $20,000 to each child at adult rates ($270 tax each, cancelled by the $700 low income tax offset) | $0 |
The other $15,000 can go to whoever in Kate's family suits that year. The $20,000 per child must genuinely be used for that child, for school fees, activities or savings in their name, not quietly absorbed into Kate's household. The ATO's section 100A rules apply to testamentary trusts like any other trust.
How does a testamentary trust protect an inheritance?
Because the beneficiary doesn't own the trust assets, they're generally harder to reach. It's real protection, but not absolute.
- Creditors and bankruptcy. If a beneficiary is sued or goes bankrupt, assets held by the trustee aren't their personal property. Distributions they've received are. A beneficiary with a risky business or profession is a common reason to use one.
- Separation. A family court looks at who controls the trust. Where the beneficiary is sole trustee and controller, the court may treat the assets as theirs or as a resource they can draw on. Protection is stronger where control is shared or sits with someone else. See trusts and family law.
- Vulnerable beneficiaries. For a child with an addiction, a gambling problem or limited capacity, a protective testamentary trust with an independent trustee lets the inheritance be used for them without handing them control.
- Centrelink. Assets of a trust a beneficiary controls are usually counted against them. For a family member with a severe disability who relies on the Disability Support Pension, a special disability trust is usually the better vehicle, often alongside a testamentary trust for any excess.
How is a testamentary trust set up in a will?
Your solicitor writes the trust's terms into the will. The decisions that matter are yours:
- Who gets a trust. Usually each child for their share. Sometimes a separate trust for a spouse, or a protective trust for a vulnerable child.
- Who controls each trust. The trustee runs it. The appointor (or similar role) can replace the trustee. Name successors in case someone dies or loses capacity.
- Who can benefit. Typically the child, their partner, their descendants, and related companies and trusts. A narrower class gives more protection and less flexibility.
- Compulsory or optional. A compulsory trust gives more protection. An optional one lets each beneficiary decide after your death.
- When it ends. Most last up to 80 years, or until the trustee decides to wind them up.
- What goes in. Only assets your will controls.
Assets your will doesn't control
This is where testamentary trusts most often fail in practice.
| Asset | Does it pass under your will? | What to do |
|---|---|---|
| Property held as joint tenants | No. It passes to the surviving joint owner | Consider whether it should be tenants in common |
| Super | Only if paid to your estate | A binding nomination to your legal personal representative, if you want super to reach the trust |
| Life insurance inside super | Same as super | Same as super |
| Assets of your family trust | No. The trust continues under its deed | Plan who controls it: appointor succession, and the deed's terms |
| Your company's assets | No, but your shares in the company do pass | Check the constitution and who becomes director |
Super and tax. Super paid to your estate and then to an adult child is taxed on the taxable component, unless the child is a tax dependant (for example, financially dependent on you or in an interdependency relationship). Paid to a spouse or a child under 18, it's generally tax-free. Your will can direct super proceeds to the beneficiaries who pay no tax on them and other assets elsewhere. Our guide to SMSF death benefit nominations covers the nomination side.
What do the 2027 tax changes mean for testamentary trusts?
CGT from 1 July 2027 (law). Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, the 50% CGT discount is replaced by cost base indexation for gains accruing from 1 July 2027, for individuals and trusts, including testamentary trusts. Assets held on that date are treated as sold and reacquired at market value, so growth up to 30 June 2027 stays under the old rules and the tax is deferred until a later sale. A market valuation at 30 June 2027 (or the Government's apportionment method, once it's published) will matter when an estate or testamentary trust eventually sells.
Pre-CGT assets. Assets acquired before 20 September 1985 become subject to CGT for growth from 1 July 2027. If you, or an estate you're executor of, hold pre-CGT assets, read our guide to pre-CGT assets and 2027.
Inheriting assets. In general, a capital gain isn't triggered just because an asset passes to your executor or a beneficiary on death. The beneficiary or trust takes on a cost base under the inherited asset rules, and CGT arises when they later sell. For estates selling after 1 July 2027, the new rules apply to the post-2027 growth. Our CGT discount changes guide explains the transition.
The 2028 minimum tax on discretionary trusts (a Bill, not law). The Treasury Laws Amendment (Tax Reform No. 3) Bill 2026, introduced on 14 October 2026, proposes a 30% minimum tax on discretionary trusts from 1 July 2028. As introduced, deceased estates and genuine testamentary trusts are excluded. That makes testamentary trusts more attractive relative to a family trust set up while you're alive, if the Bill passes in that form. It may change before it passes. Track it in our discretionary trust tax changes guide.
Key point: Don't rewrite your will on the strength of a Bill alone. Do review it now if it leaves everything outright, if it was written before 2019, or if it doesn't deal with super, family trusts and companies. Those reasons stand whatever happens in Parliament.
Testamentary trust pros and cons
| Pros | Cons |
|---|---|
| Adult tax rates for children and grandchildren on income from estate assets | Yearly trust return, accounts and 30 June resolutions |
| Income can be shared across the beneficiary's family each year | More expensive to prepare than a simple will |
| Generally better protection from a beneficiary's creditors | Protection in a separation depends on who controls the trust |
| A way to provide for a vulnerable beneficiary without handing them control | Only covers assets the will controls |
| Genuine testamentary trusts excluded from the proposed 2028 minimum tax (Bill as introduced) | Section 100A and other integrity rules still apply |
| You set the rules while you're alive | Terms are hard to change after death |
When is a testamentary trust worth it?
| Your situation | Our usual view |
|---|---|
| Children with young families or high incomes, estate with investments | Usually worth it |
| A child in a risky business, or in an unsettled relationship | Worth it for protection, with care about who controls it |
| A child with an addiction, gambling problem or limited capacity | A protective trust with an independent trustee |
| A family member on the DSP with a severe disability | Special disability trust, often plus a testamentary trust for the excess |
| Small estate, mostly the family home, adult children on modest incomes | A simple will may be enough. The running costs can outweigh the benefit |
| Most wealth sits in a family trust or SMSF | The will is only part of the answer. Plan trust control and super nominations too |
Mistakes we see with testamentary trusts
- A will with testamentary trusts, but the main assets pass outside it: joint property, super with no nomination to the estate, a family trust nobody planned succession for.
- One trust for all children, forcing siblings to agree on everything.
- The child who most needs protection named as sole trustee.
- Money added later by a parent mixed with estate assets, so the income loses adult rates.
- Distributions to grandchildren that never reach them.
- No review after a marriage, separation or birth. Marriage revokes an earlier will in every state unless it was made in contemplation of the marriage.
How BPAG helps
We model what a testamentary trust would save your family, check your current will, super nominations and trust deeds for gaps, and give your solicitor a clear brief. After a death, we run the estate's and the trust's accounts and tax returns and plan each year's distributions. Our estate planning check agent reads your will, powers of attorney and death benefit nominations together and flags gaps, and our trust deed agent summarises who controls each trust in the group. Your accountant reviews everything, and nothing goes to you or your solicitor without a person approving it.
Wills are prepared by your solicitor. Advice on super contributions and pensions comes from a licensed financial adviser, and we work alongside them. For the full list of things to get in order, see our estate planning checklist and our succession and estate planning service.
Frequently asked questions
Does a testamentary trust avoid probate?
No. A testamentary trust is created by your will, so the will still goes through probate and the executor administers the estate first. Once the estate is ready to distribute, the assets go to the trustee of the testamentary trust instead of to the beneficiary personally.
Can a testamentary trust hold the family home?
Yes. A will can also give someone a right to occupy the home, which can preserve the main residence CGT exemption when the home is later sold, in the circumstances the tax law allows. State land tax treatment varies, so check it for your state.
Does each child get their own testamentary trust?
Usually, yes. Most modern wills give each child their own trust for their share, with that child as the main beneficiary and controller where appropriate. That avoids siblings having to agree on every decision and keeps each family's affairs separate.
Can a beneficiary choose not to use the trust?
Some wills give each beneficiary the choice to take their share outright or into a trust, decided after death. This suits families where the need is uncertain. Others make the trust compulsory, which gives more protection for a vulnerable beneficiary.
Is a testamentary trust revocable?
While you're alive you can change or revoke your will, and with it the trust, as often as you like, as long as you have capacity. Once you die, the trust's terms are fixed by the will and can generally only be changed by a court or as the will allows.
Does a testamentary trust need a tax file number and an ABN?
It needs its own tax file number and lodges a trust tax return each year it has income. It needs an ABN only if it carries on an enterprise, such as running a business.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.