Testamentary trusts in Victoria.

A testamentary trust in Victoria is a discretionary trust written into your will that only comes into existence on your death. Your executor obtains a grant of probate, the estate is gathered in, and the assets you have nominated pass into the trust rather than into a beneficiary's own name.

The trustee — often the primary beneficiary, sometimes with an independent co-trustee — then decides how and when capital and income are distributed among a defined class of beneficiaries, usually a child and their own children and entities.

Because the beneficiary never owns the assets outright, the inheritance is held at one remove from their personal risks, while remaining available to them for a home, education, medical costs or business capital.

A testamentary trust is established through your will and generally does not operate during your lifetime.

The reason most people ask about a testamentary trust is protection. Because the beneficiary does not own the inheritance outright, it sits behind the trust rather than in their name, which can keep it out of reach of a bankruptcy trustee, or of a family law property pool if a child's marriage later breaks down. For a beneficiary who runs a business, works in a role with personal liability, or is in an uncertain relationship, that separation is worth real money.

The protection is genuine, but it is not a force field. How well it holds depends on how the trust is drafted, who controls it, and how the beneficiary actually deals with it over the years. A trust a beneficiary treats as their own bank account, or one that is drafted loosely, offers far less than one set up properly and used the way it was intended. That is the difference between a structure that works when it is tested and one that falls apart at the worst possible moment, and it is not something a template can deliver.

A testamentary trust also changes how the inheritance is taxed, and the advantage compounds over decades. Each year the trustee can decide which beneficiaries receive the trust's income, so it can be directed to family members on lower marginal rates rather than piling onto a single high-rate return. Across a long-held investment portfolio, that flexibility is one of the main reasons these trusts exist.

The standout feature is how children are taxed. Income paid from a testamentary trust to a beneficiary under 18 is taxed at ordinary adult marginal rates, with the full tax-free threshold, instead of the penalty rates that normally apply to a child's unearned income. For a family with young children or grandchildren, that can be a meaningful saving every year, for many years.

How much of this is worth capturing depends on the size of the estate, the assets it holds and each family member's own tax position. That is exactly the sort of thing we work through with you and your accountant before deciding whether a trust earns its keep, rather than building one in for its own sake.

If someone in your family has a severe disability, a special disability trust is one of the most valuable structures in Australian estate planning, and one of the least understood. It is a specific kind of trust recognised under the Social Security Act 1991 and the Social Security (Special Disability Trust) Guidelines 2021, built to provide for a person's long-term care and accommodation without stripping them of their pension, or the family of gifting concessions that would otherwise be lost.

The benefits are significant. Eligible family members who are pensioners can contribute up to a set gifting concession without it counting against their own pension, and the trust can hold assets up to an indexed cap before the beneficiary's payments are affected. In return, the rules are strict. The beneficiary has to meet the legal definition of severe disability, the funds can generally only be spent on their reasonable care and accommodation needs, and the trust is subject to annual reporting and can be audited. The gifting figure, the asset cap and the eligibility test interact in ways that are easy to get wrong, and a single misstep can cost the very concessions the trust was meant to secure.

A special disability trust can be built into your will so that it only comes into existence if it is genuinely needed and worthwhile at the time. Whether it is the right tool, and how it should sit alongside the rest of your estate, is a conversation worth having early, because it changes how the whole will is structured.

Superannuation is treated differently again, and it derails more estate plans than any other asset. Super death benefits are only tax-free when they are paid to a dependant the tax law recognises, and that is a narrower group than most people assume: broadly a spouse, a child under 18, someone who was financially dependent, or a person in an interdependency relationship. Pay a death benefit to an independent adult child and a significant slice can be lost to tax.

A superannuation proceeds trust is a testamentary trust built to receive super death benefits and hold them for those tax-dependent beneficiaries, so the concessional treatment is preserved rather than wasted. It only works if the will, the fund nomination and the trust are set up to line up with one another, which is why super has to be planned as part of the estate, not left to a form sitting with the fund.