Australia: Understanding Testamentary Trusts

Last Updated: 26 March 2008
Article by Michael Norbury

Trusts have been known to lawyers for centuries, they have been around since before the reign of King Henry VIII.

Trusts are very common in Australia.

According to the Australian Taxation Office website in 2004/05 about 5% of the 13m tax returns filed in Australia were trust returns. Of these about 10% related to deceased estates.

A trust will be created in many different factual situations including being made under a will. A trust made under a will comes into existence as a consequence of the willmaker dying, not when the will is made. Trusts created under a will are known as "testamentary trusts", other trusts are known as "inter vivo trusts". This article deals with testamentary trusts, in particular discretionary testamentary trusts.

Testamentary trusts take many forms including:

  • a life tenancy;
  • a life interest estate;
  • a trust for minors;
  • a trust for protected beneficiaries; or
  • charitable trusts.

However, in some circles the expression "testamentary trust’ has a narrower meaning: it is a discretionary trust created under the will of a deceased person. In the remainder of this article, the term "testamentary trust" will be used in that sense.

Form of a Testamentary Trust

Testamentary trusts are drafted to mimic the operation of an inter vivos discretionary trust: the testamentary trust will have a broad range of discretionary objects, usually the members of an extended family. The trustee of the testamentary trust selects from the class of discretionary objects that person or those persons who will receive a gift of trust income or trust capital.

Until the trustee selects an object to benefit, no person has a vested interest in the assets of the trust.

Careful drafting of the testamentary trust will ensure that the discretionary object selected, who becomes a beneficiary, only has an interest in the trust to the extent that the trustee has determined.

The trustee of the testamentary trust may be the executor of the deceased estate or he may be some other person, who will be appointed by the will or pursuant to a formula contained in the will. Often the trustee will be the person to whom the willmaker, but for the testamentary trust, would bequeath his assets or a good part of them.

Consider a grandfather in making a will. The grandfather is a widower. The grandfather has a son and a daughter, both of whom have children. The grandfather could leave his estate equally to his children, in which case after satisfaction of estate formalities and debts, the son and the daughter will own half their father’s assets each. If, however, the son is a trustee of a testamentary trust which consists of half the

grandfather’s assets, and the daughter a trustee of a similar trust, then instead of owning the grandfather’s assets, the son will be trustee of a trust, in which he is a discretionary object which consists of half his father’s assets. The daughter is in a similar position in relation to an identical second trust. Instead of ownership the son and daughter merely control the assets.

Why use a Testamentary Trust?

A testamentary trust offers three advantages compared with ownership passing directly to a beneficiary.

1. Asset Protection

As with an inter vivos discretionary trust because a discretionary object has no interest in a particular asset until the trustee exercises his discretion in favor of that object, it follows that a creditor of that particular discretionary object can have no recourse to the assets of the trust unless the trustee of the trust specifically gives the discretionary object an interest in the asset of the trust by either distributing the asset to the

discretionary object, or by resolving to distribute that asset to the discretionary object.

Compare this with the position where the discretionary object is given a gift outright under the will: the creditors of the discretionary object can have recourse to that asset.

2. Tax

Distribution to Beneficiaries

A distribution from a testamentary trust to a beneficiary of that trust is "exempt trust income". Unlike most other forms of unearned income, in the hands of a minor beneficiary (i.e. Someone under the age of 18), exempt trust income will be taxed at adult marginal tax rates, not penalty tax rates.

Tax rate for resident minors


Normal unearned income tax rates (e.g. Distribution form inter vivos trust)

Exempt trust income (e.g. Distribution from testamentary trust)

0 to 417



excess over 417 to 1,307



excess over 1,307 to 6000



excess over 6000 to 30,000



excess over 30,000 to 80,000



Thus, compared with the position where the discretionary object is given the gift outright under the will, if the discretionary object is an adult and in receipt of other income (e.g. Employment income), the tax saving may be substantial if the income can be distributed to a minor.

If the discretionary object who is a minor were to receive the gift outright, the discretionary object would be taxed on the income generated by that asset at the unearned income rate.

Undistributed Income

Where an inter vivos trust does not distribute taxable income in the year in which it is earned, the trustee of the trust will usually be required to pay tax on that income at the highest marginal rate - 45% (S99A ITAA36).

However, in a testamentary trust this may not be the case. Where the tax year in which the accumulation occurs ends within three years of the death of the willmaker, the trustee may be taxed at usual adult tax rates, not a flat 45%. Where the tax year is outside this period, the trustee will be taxed at adult marginal rates, but without the benefit of the tax-free threshold.

Capital Gains Tax

Ordinarily, on the passing of assets from one person to another a capital gains tax event will occur, and the disposer may be liable for capital gains tax. This applies whether or not the disposal is as a result of a sale.

In the context of a deceased estates, this outcome is ameliorated by S128-15(3) ITAA97 which defers the taxing point until the beneficiary disposes of the assets, perhaps years after receipt from the willmaker.

In the context of an inter vivos trust, a capital gains tax event occurs when the trustee distributes an asset in species to a beneficiary. It does matter that the beneficiary gives no consideration for the asset, a present capital gains tax liability might arise.

The in species distribution of an asset by the trustee of the testamentary trust to a beneficiary of the trust at any time will be treated as being subject to S128-15(3) with the capital gains taxing point deferred until the beneficiary disposes of the asset provided that the asset was originally the property of the deceased willmaker at his death.

Assets acquired by the testamentary trust after the death of the willmaker will be taxed when transferred by the trustee to the beneficiary (i.e. Same as inter vivos trust).

3. Family Law

As asset passing from a deceased estate to a party to a marriage, who subsequently becomes the subject of a family law property dispute will find the assets from the deceased estate included in the divisible property of the marriage.

Similarly property the subject of an inter vivos trust which was acquired during the marriage will also be included in the divisible property of the marriage.

Where property is the subject of a testamentary trust, and one of the beneficiaries is the subject of a family law property dispute, provided it can be said that the party the subject of the family law property dispute does not control the trust, that property will not form part of the divisible property of the marriage.


Testamentary trusts offer a willmaker advantages which are not available where the willmaker’s assets pass directly to beneficiaries. However, a testamentary trust will usually lead to greater administrative costs to the estate. In making a decision to include a testamentary trust in a Will, these costs must be weighted against the advantages.

Michael Norbury is a Partner at Madgwicks Lawyers and practices in the areas of commercial law and revenue law in many industry sectors. Recently Michael has been appointed to the Australian Tax Institute’s State Taxes Subcommittee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.