Why “Just Leaving It to the Kids” Isn’t Always the Best Answer

One strategy that often comes up in these conversations is the testamentary trust. I want to spend a bit of time unpacking what these trusts are, why they’re used, and how they work in practice, before walking through a real‑world example - Craig Phillips, Snr Financial Adviser at Phillips Wealth Partners. 

Eatate Planning

Estate planning is one of those topics that’s easy to put off. It’s not always comfortable, and it can feel a long way off when life is busy. But done properly, it’s one of the most practical and generous things you can do for the people you care about.

What is a testamentary trust?

A testamentary trust is a trust that’s created by a will. Unlike a family trust, it doesn’t exist during your lifetime. It only comes into effect after you pass away, once your estate is settled and the assets are transferred into the trust.

From that point on, the trust holds assets — such as cash, investments, or property — for the benefit of the people you’ve chosen. The rules about how those assets are managed and distributed are set out in your will.

People use testamentary trusts for a few key reasons: to protect assets, to manage tax more effectively (particularly for children), and to make sure their wealth is used in a way that aligns with their wishes over time, not just at a single point.

Who is involved?

Every testamentary trust has a few important roles.

First, there’s the testator: that is the person who creates the will and sets the trust rules.

Then there are the beneficiaries: the people who are intended to benefit from the trust. These might be a spouse, children, grandchildren, or even broader family members. Some beneficiaries are specifically named, while others may fall into a broader group defined in the trust deed.

The trustee is the person (or company) responsible for running the trust day to day. They make decisions about investments and distributions, and they must always act in line with the trust deed and in the best interests of the beneficiaries.

Finally, some trusts also include an appointor. This role provides an extra layer of oversight. The appointor has the power to replace the trustee if things are

not working as intended.

Why do people use testamentary trusts?

One of the biggest advantages of testamentary trusts I see on a regular basis, is the tax treatment for children.

Normally, income earned by minors is taxed at very high rates. However, income distributed from a testamentary trust can often be treated as excepted trust income. This allows children to access adult marginal tax rates, including the standard tax‑free threshold. For families with younger beneficiaries, this can make a meaningful difference over time.

Testamentary trusts can also provide strong asset protection. Because the assets sit inside the trust and are controlled by the trustee, they’re generally better protected from creditors, financial mismanagement, and in some circumstances, relationship breakdowns.

There’s also the concept of a life interest, where someone can use an asset, such as living in a property or receiving income from it, without owning it outright. This can be particularly useful in blended family situations or where long‑term protection of assets is a priority.

That said, testamentary trusts aren’t a one‑size‑fits‑all solution. They involve costs, administration, and ongoing governance. They also need to fit within your broader estate plan, including superannuation, insurance, and existing trust structures. Like most good strategies, they work best when they’re thoughtfully designed.

Using Mitch and Mabel as an example

To bring this to life, let’s look at a complete example.

Mitch and Mabel want to leave $2 million to their grandchildren, Maurice (15) and Mandy (13). Their concern isn’t about generosity — it’s about timing, protection, and making sure the money is used well.

Instead of leaving the money to the grandchildren outright, Mitch and Mabel include a testamentary trust in their wills.

When they pass away, $2 million from their estate is transferred into the trust. Maurice and Mandy are named as the beneficiaries, and a trustee is appointed. This could be a trusted family member or a professional trustee, depending on what Mitch and Mabel are comfortable with.

The trustee invests the $2 million in a diversified portfolio. Let’s assume the trust earns around 4% per year, generating roughly $80,000 in income.

• While Maurice and Mandy are still minors, the trustee uses that income to help with schooling costs, extracurricular activities, and general living expenses. Because the trust is a testamentary trust, the income distributed to them may qualify as excepted trust income and be taxed at normal marginal rates, rather than the higher rates that usually apply to children.
• As they get older, the trust continues to operate. The capital remains inside the trust, but income can be used to support university costs, rent, or other reasonable expenses. Mitch and Mabel have included a specific provision prioritising education, so the trustee can confidently direct funds toward tertiary study, trade training, or other approved learning pathways.
• The trust deed also gives the trustee discretion to help with major life events. If Maurice wants assistance with a first home deposit at 23, or Mandy wants funding to start a business, the trustee can assess those requests and make distributions if they align with the purpose of the trust.
• Importantly, neither grandchild can automatically access the capital. Under the terms of the trust (in this example), each becomes entitled to their share when they turn 25. At that point, the trustee can transfer their portion of the trust assets to them, or deal with the assets as directed by the trust deed.
• Along the way, if investments are sold or rebalanced, the trust may be eligible for concessional capital gains tax treatment, subject to the tax rules at the time.
• From an asset protection perspective, the structure also provides comfort. While the trust is operating, the assets don’t belong to Maurice or Mandy personally. That can provide a level of protection if they run into financial trouble or experience relationship difficulties early in life.

What I like about this approach is the balance it creates. Mitch and Mabel aren’t trying to control every outcome. Instead, they’re setting sensible boundaries, appointing people they trust, and giving their grandchildren support when it’s actually needed.

For many families, testamentary trusts are not about tax alone. They are about stewardship, protection, and peace of mind, knowing that the personal wealth built will continue to help the people they specifically want to.

 

This article is general information only and does not take into account your personal objectives, financial situation or needs. Testamentary trusts involve legal and tax considerations, and professional advice should be obtained before implementing any estate planning strategy.