Estate Planning

Testamentary trusts

Operation of a testamentary trust

The testamentary trust is not physically established when the Will is done, it’s established when the individual dies. The Will gives the executor the option or direction to establish the trust upon the will maker’s death.

The testamentary trust operates similarly to other trust structures, in that there is a trustee and beneficiaries. For more information on trust structures, read the Tax and Structures module.

The main benefit of testamentary trusts is that beneficiaries under the age of 18 are taxed as adults rather than minors on any income paid from the trust*. Higher tax rates (45% of total income if more than $1,307 derived – or 66% for income between $416 and $1,306) can apply to minors on unearned (investment) income, so if they’re taxed as adults – due to distributions via a testamentary trust – then their tax can be minimised.

This means you can split the income among younger family members and by reducing taxes, this will result in greater income for the beneficiaries and may result in the inheritance lasting longer.

*As part of the 2018-19 Federal Budget: From 1 July 2019, the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

Note: The proposal has been legislated.