What's All the Hype About Testamentary Trusts?
Published: 1 July 2026 | Last Updated: 1 July 2026
You may have heard the term “testamentary trust” mentioned by another lawyer, come across it while researching your will, or heard them mentioned in the recent budget announcements. Maybe you’ve wondered what they actually mean, and whether it's something you need.
What is a testamentary trust?
A testamentary trust is a trust that's created by your will and only comes into existence after you die. Instead of leaving assets directly to a beneficiary, you leave them to a trustee, who holds and manages the assets on that beneficiary's behalf, according to terms you set out in your will.
Why the sudden interest?
Testamentary trusts aren't new, but more people are asking about them because of what they offer beyond a standard will.
● Asset protection: assets held in a testamentary trust are generally shielded from a beneficiary's creditors, and can be structured to offer protection if a beneficiary later separates from a partner or faces bankruptcy.
● Tax flexibility: income distributed from a testamentary trust to minor beneficiaries (such as grandchildren) is generally taxed at adult rates, rather than the higher penalty rates that usually apply to minors' income. That can make a meaningful difference to how far an inheritance stretches.
● Control across generations: you can set out how and when beneficiaries access capital, which is useful if a beneficiary is young, vulnerable, or simply not ready to manage a lump sum.
What about the 2026 Federal Budget Changes?
In May 2026, the Federal Budget flagged a new 30% minimum tax on discretionary trust income, due to start from 1 July 2028, and there was real concern in the estate planning world that this could catch testamentary trusts as well. Since then, the government has proposed to exempt testamentary trusts from this new tax altogether, provided they're used for genuine estate planning purposes.
This is good news, because it means the two main advantages of a testamentary trust: asset protection and tax-effective distributions to family members, seem to remain. It’s important to note though, that this is still a proposal rather than finalised law. The detail will depend on legislation that hasn't been released yet.
One of the practical benefits at stake: under the current rules, when you combine the tax-free threshold with the low income tax offset, each minor beneficiary of a testamentary trust can generally receive around $22,000 in trust income a year without paying tax. For a family with several grandchildren, that adds up quickly.
Who should actually consider one?
Testamentary trusts tend to suit people with larger or more complex estates, blended families, business or farming assets, or beneficiaries who may need extra protection: whether that's young children, a family member with a disability, or someone in an unstable relationship or business venture.
Who probably doesn't need one
A testamentary trust adds a layer of ongoing administration, potential tax returns, trustee obligations, and a degree of complexity that isn't necessary for every estate. If your circumstances are straightforward, a well-drafted standard will may achieve everything you need without it.
Our honest view
A testamentary trust is a tool, not a trend. and they can be a very powerful tool when used well. The right question isn't “do other people have one,” it's “does this actually solve a problem I have.” We'll always give you a straight answer either way.
By Jessica Spence | Wills and Estates | Orange NSW
This article is general information only and does not constitute legal advice. Your circumstances are unique, if you have questions about your situation, please get in touch for advice specific to you.