Income Protection for the Self-Employed in Australia

Estate planning is one of those topics many Australians tend to put off, often because it feels complicated or because it requires confronting uncomfortable conversations about the future. But for those who want to protect their wealth and ensure it is distributed wisely after they pass, testamentary trusts in Australia offer a genuinely powerful option worth understanding.

A testamentary trust is a trust created through your will and comes into effect upon your death. Unlike a standard will, which typically distributes assets directly to beneficiaries, a testamentary trust gives the trustee ongoing control over how and when those assets are distributed. This added layer of structure can offer significant benefits, from protecting vulnerable beneficiaries to reducing the tax burden on the people you care about most.

At MiQ Private, we have found that many Australians are unaware of the advantages that testamentary trusts can offer, or they assume that trusts are only relevant for the very wealthy. In reality, they can be an effective tool for a wide range of families, particularly those with minor children, blended family situations, or beneficiaries who may benefit from an additional layer of financial structure.

What Is a Testamentary Trust?

A testamentary trust sits within your will and is established after your death as a separate legal entity from your deceased estate. While your deceased estate manages the collection and distribution of your assets in the period immediately following your death, a testamentary trust can continue operating for many years, holding and managing assets on behalf of your nominated beneficiaries.

The trustee, who is named in your will, is responsible for managing the trust’s assets in accordance with its terms. Beneficiaries may include your spouse, children, grandchildren, or other nominated individuals.

Because a testamentary trust operates like a discretionary family trust, the trustee has flexibility in how income and capital are distributed to beneficiaries each year. This discretion can be used to manage the overall tax position of the family in a measured and considered way.

The Key Benefits of Testamentary Trusts in Australia

Tax Benefits for Minor Beneficiaries

One of the most significant advantages of a testamentary trust is the tax treatment available for minor beneficiaries. Under standard arrangements, minors are subject to penalty tax rates on investment income received outside of a testamentary trust. However, when income is distributed from a testamentary trust to a minor beneficiary, it can be taxed at adult marginal rates, including access to the tax-free threshold. This can result in substantially lower tax being paid across the family as a whole.

Asset Protection

Assets held in a testamentary trust are generally not available to a beneficiary’s personal creditors. This can provide valuable protection in the event of a beneficiary experiencing bankruptcy, financial hardship, or a relationship breakdown. Rather than an inheritance being lost to these circumstances, it remains protected within the trust structure.

Protection for Vulnerable Beneficiaries

If a beneficiary has poor financial management skills, health issues, or a disability, the trust can manage their inheritance on their behalf rather than handing over a lump sum that may not be used in their best interests. This kind of structured approach can be especially meaningful where a beneficiary needs ongoing support.

Blended Family Planning

For those in blended families, a testamentary trust can be structured so that assets benefit your current partner during their lifetime and then pass to your children from a prior relationship upon the partner’s death. This approach can help balance the competing interests of different family members in a fair and transparent way.

How Testamentary Trusts Work in Practice

When you include a testamentary trust in your will, you are essentially drafting a trust deed within the will itself. This sets out the terms of the trust, including who the trustee is, who the beneficiaries are, what assets are to be held in the trust, and how income and capital can be distributed.

After your death, your executor administers your estate. Once that process is complete, the relevant assets are transferred into the testamentary trust, which then continues to operate independently. A testamentary trust is a separate legal entity for tax purposes and must lodge its own tax return each financial year.

The trustee is responsible for managing the trust in accordance with its terms and in the best interests of the beneficiaries. Maintaining proper trust accounting records and understanding the tax profile of beneficiaries are important ongoing obligations.

Choosing the Right Trustee

The choice of trustee is one of the most important decisions you make when establishing a testamentary trust. The trustee has significant responsibilities, including managing the trust’s assets, making distribution decisions, and ensuring the trust complies with its terms and with Australian tax law.

Many people choose a trusted family member as trustee, which can work well where family dynamics are straightforward and the nominated person is capable and willing. In more complex situations, particularly those involving blended families, significant assets, or beneficiaries who may have conflicting interests, a professional trustee or co-trustee arrangement may be worth considering.

It is also prudent to name a successor trustee in case the original trustee is unable or unwilling to continue. Planning for trustee continuity is an aspect that is sometimes overlooked but can be critical to the smooth ongoing operation of the trust.

Who May Benefit From a Testamentary Trust?

Testamentary trusts in Australia are not just for high-net-worth individuals. Many different family situations can benefit from this structure, including parents of young children who want to protect an inheritance until those children reach adulthood, parents of adult children who may be experiencing financial difficulty or relationship breakdown, and business owners who want to separate estate assets from any business liabilities.

Those with beneficiaries who have a disability and receive government support payments may also benefit from a carefully structured trust, as the trust may be able to protect their eligibility for certain entitlements while still providing for their needs.

A useful question to ask yourself is whether your beneficiaries could genuinely benefit from having a degree of structure and oversight around how their inheritance is managed over time, rather than receiving a direct lump sum.

How a Testamentary Trust Fits Into Your Broader Estate Plan

A testamentary trust is just one component of a comprehensive estate plan. Other elements that may work alongside it include an enduring power of attorney, which authorises a trusted person to manage your financial affairs if you lose capacity during your lifetime, and an advance healthcare directive setting out your medical treatment wishes.

Where you hold assets in joint names, through a company or family trust, or inside superannuation, additional planning may be needed to ensure those assets pass in the way you intend. Superannuation, in particular, does not automatically form part of your estate and may require a separate binding death benefit nomination to ensure it reaches your intended beneficiaries.

Bringing all of these elements together into a cohesive plan is where a financial adviser can add real value, working alongside your solicitor and accountant to make sure nothing falls through the cracks.

Important Considerations Before You Proceed

Drafting a will that includes a testamentary trust is more complex than a standard will, and it is worth working with a qualified estate planning professional to ensure the deed is properly structured and legally sound. Coordinating with your financial adviser to ensure the trust fits within your broader financial plan is equally important.

It is important to note that in 2026, the Australian Government announced measures to introduce a minimum tax on discretionary trusts in certain circumstances. This makes it particularly important to seek current, personalised advice about how these changes may affect your planning.

How MiQ Private Can Help

Estate planning requires careful thought and personalised guidance. At MiQ Private, we can help you understand whether a testamentary trust is an appropriate part of your estate plan, and we can work alongside your solicitor or estate planning specialist to ensure all aspects of your plan are well coordinated.

We can discuss your family situation, your assets, and your goals, and help you think through the key decisions, including who should serve as trustee, how the trust should be structured, and how it fits within your broader financial plan.

We have found that those who take the time to plan their estate carefully leave behind not just financial security, but also clarity and reduced burden for the people they care about most.

Protect Your Family’s Future Today

If you would like to explore whether a testamentary trust makes sense for your family, we would be glad to help. Estate planning is one of the most meaningful steps you can take to protect the people you love, and it is never too early to start the conversation.

Get in touch with the MiQ Private team to arrange a conversation about your estate planning needs.