What is a testamentary trust
A testamentary trust is a trust created by your will that comes into effect after you die. Structured correctly, it can save your children and grandchildren tens of thousands in tax every year. Structured poorly, or not at all, that money goes to the ATO instead.
Why business owners use testamentary trusts
A testamentary trust is not a legal formality. It is a commercial decision with measurable consequences for your family's tax position, asset protection, and control over wealth transfer. The flagship benefit is income splitting to minor beneficiaries at adult marginal tax rates. Section 102AG of the ITAA 1936 makes this possible. Where a standard inter vivos trust distribution to a child under 18 attracts penalty rates of up to 66%, a testamentary trust distribution is taxed as if the child were an adult.
Beyond tax, the structure protects inherited assets from creditors, bankruptcy, and family law claims. If you have watched a child go through a divorce, you understand why this matters. Assets held inside the trust belong to the trust, not to the beneficiary personally. Control is the third reason. A testamentary trust prevents a 19-year-old from receiving a $500,000 lump sum and spending it in two years. The trustee decides when distributions happen and how much flows to each beneficiary.
For adult beneficiaries, the trust creates ongoing tax flexibility: distributions can be adjusted year by year based on each beneficiary's other income. This is the same commercial thinking that drives your business structuring decisions today. The difference is that testamentary trust planning is most valuable when done before it is needed.
Testamentary trust tax rates explained with a real example
Tax-free threshold available to each minor beneficiary of a testamentary trust, taxed at adult marginal rates under section 102AG of the ITAA 1936.
Total annual income potentially shielded from tax when distributed equally to four minor beneficiaries, each using their full tax-free threshold.
Compared to tens of thousands payable under Division 6AA penalty rates if the same income were distributed from an inter vivos trust to minors.
Testamentary trust disadvantages you should weigh honestly
The tax numbers are real. So are the costs and limitations. Here is what you need to weigh before deciding.
How to set up a testamentary trust in Australia
Your lawyer drafts what they are instructed to draft. The question is whether the instructions are right.
Structural and tax design
This is the advisory layer where the critical decisions are made. Which trust type, discretionary or fixed? How many trusts? What powers should the trustee hold? How does the testamentary trust integrate with your existing family trust or business entities? Parkview sits here. Without this step, you are asking your lawyer to draft without a brief.
Estate planning lawyer drafts the will
The testamentary trust must be drafted into the will by a qualified estate planning lawyer. The structural design from step one becomes the lawyer's brief. Parkview does not draft wills or provide legal advice. The lawyer executes the document; the advisory work determines what goes into it.
Review and integration with your structures
The completed will and trust structure is reviewed against existing business entities, family trusts, succession plans, and your CGT position. Estate planning in Australia is not set-and-forget. As your business evolves, the estate structure should be reviewed alongside your annual tax planning at regular intervals.
The structural design layer between you and your lawyer
Estate structure review
Parkview reviews your existing structures: business entities, family trusts, asset positions, and beneficiary circumstances. The testamentary trust must be designed around what already exists, not bolted on as an afterthought. This review determines what the trust needs to achieve for your specific situation.
Testamentary trust design recommendation
Trust type, number of trusts, trustee powers, and beneficiary classes are designed around your tax position and family structure. Not a template. A family trust operates during your lifetime; a testamentary trust activates on death. Many business owners need both.
Integration with business and CGT planning
For SME owners considering a future sale, testamentary trust planning connects directly to CGT concessions advisory and pre-sale restructuring. The estate structure and the business structure are not separate conversations — they affect the same pool of wealth.
Coordination with your estate planning lawyer
Parkview provides the structural brief that becomes your lawyer's drafting instructions, then reviews the final document against the design intent. Through monthly strategic meetings, the estate structure is revisited as your business and family circumstances change.
Questions we hear from business owners
A testamentary trust can hold investments, land or property, cash, and other valuable assets such as artwork or jewellery. The trust deed within your will defines which estate assets transfer into the trust on your death, and the trustee manages them from that point forward.
Structures that work alongside your testamentary trust
Family trust setup
Operates during your lifetime for income splitting and asset protection. Designed alongside the testamentary trust so the two work together.
Asset protection structuring
Protection while you are alive complements the testamentary structure that protects beneficiaries after you are gone.
Corporate trustee services
A corporate trustee provides the same continuity benefits for testamentary trusts as it does for family trusts. Often the trustee of choice for multi-generational structures.
Business structure and tax advisory
For owners with a 1 to 3 year sale horizon, the testamentary trust design connects to small business CGT concessions and pre-sale restructuring decisions.
The structure your lawyer drafts is only as good as the design behind it
A testamentary trust delivers tax and protection benefits only when the structural decisions are made before the will is drafted.
Parkview reviews your existing structures, designs the trust, and provides the brief your lawyer needs. One session to confirm whether a testamentary trust fits your situation.
- Map your existing entities and family circumstances
- Model the section 102AG tax benefit against your beneficiaries
- Get the structural brief your estate planning lawyer needs
