What is a testamentary trust?
When you think about a will, you might picture a simple document that says who gets what after you pass away. But for some people, a will can be much more than just a list of gifts. It can include legal tools designed to protect assets, reduce tax, and make sure your wishes are carried out exactly as intended. One of the most powerful of these tools is a testamentary trust.
A testamentary trust is a trust created in your will that only comes into effect after you die. It’s a legal structure that holds and manages the assets you leave behind, according to detailed instructions you’ve set out. Instead of your beneficiaries receiving their inheritance in one lump sum, the assets are placed into the trust and managed by a trustee on their behalf.
How does a testamentary trust work?
When you die, your will is administered by your executor, just like with any other will. However, if your will contains a testamentary trust, part or all of your estate is transferred into that trust instead of directly to your beneficiaries.
From there:
A trustee is appointed - this person (or people) controls and manages the trust. You choose the trustee in your will.
Trust terms are followed - your will sets out the rules for how the trust operates, such as who the beneficiaries are, what they can receive, and under what conditions.
Assets are protected and managed - the trustee decides how to invest, distribute, or preserve the trust assets, within the rules you’ve set.
Why would you use a testamentary trust?
There are several situations where a testamentary trust can be an advantage over a simple will:
1. Protecting vulnerable beneficiaries
If a beneficiary is a minor, has a disability, struggles with managing money, or is vulnerable to outside influence, a testamentary trust allows you to protect their inheritance. The trustee can control when and how funds are accessed, rather than handing over a lump sum that could be quickly spent or lost.
2. Protecting against relationship breakdowns or bankruptcy
Assets in a testamentary trust can be more difficult for outsiders — such as a divorcing spouse or a creditor — to claim. While not bulletproof, it’s an extra layer of protection that can make a big difference in safeguarding family wealth.
3. Tax advantages
One of the biggest benefits is the ability to distribute income from the trust to multiple beneficiaries, including children, who can receive it at adult tax rates (often much lower than the marginal tax rate of a single adult beneficiary). This can significantly reduce the overall tax payable on investment earnings.
4. Providing ongoing income instead of a lump sum
You might want your assets to provide financial support over a long period, rather than all at once. For example, investment returns could fund school fees, living expenses, or specific needs year after year.
Who should be the trustee?
Choosing the right trustee is critical. This person will have legal control over the trust and will be responsible for making decisions about investments, distributions, and following your instructions.
You can appoint:
A trusted family member or friend who understands your wishes and the needs of your beneficiaries.
A professional trustee company for impartiality and experience.
Multiple trustees for checks and balances.
It’s important to choose someone who is both financially responsible and able to manage potential family tensions.
Are there any downsides?
While testamentary trusts offer many benefits, they’re not for everyone. Things to consider include:
Complexity: They’re more complicated to set up than a standard will and require careful legal drafting.
Ongoing administration: The trustee must manage the trust, keep records, and often prepare annual tax returns.
Costs: There may be set-up costs and ongoing accounting or legal fees.
If your estate is relatively small or straightforward, the extra complexity might not be necessary.
Is a testamentary trust right for you?
You might benefit from a testamentary trust if you:
Have young children or beneficiaries who aren’t financially mature.
Want to protect assets from divorce or bankruptcy claims.
Have significant investments or business assets.
Want flexibility in distributing income in a tax-effective way.
On the other hand, if your estate is simple, your beneficiaries are financially responsible adults, and you’re not concerned about asset protection or tax planning, a standard will might be all you need.
Final thoughts
A testamentary trust can be one of the most effective ways to protect your legacy and provide for your loved ones over the long term. It offers flexibility, control, and in some cases, significant tax benefits - but it needs to be set up properly to work as intended. If you think a testamentary trust could be right for you, book an appointment with KM Legal here. We can assess your circumstances and find the best solution for you.