For many clients with significant assets, family complexity, or business and investment exposure, testamentary discretionary trusts are one of the most effective estate planning tools available. When properly structured, they provide long-term flexibility, asset protection and tax planning opportunities that a simple Will cannot.
Despite this, testamentary trusts are often poorly understood. Some clients are told they are only relevant for “very wealthy” estates, while others receive only a surface-level explanation of how they actually operate. In practice, they are most valuable for clients who want control, adaptability and protection built into their estate plan from the outset.
This article explains how testamentary discretionary trusts work, why they are commonly recommended in specialist practice, and the considerations that need to be addressed to ensure they operate as intended.
What is a testamentary discretionary trust?
A testamentary discretionary trust is a trust created by a Will that comes into existence on the Will-maker’s death. The trust does not operate during the person’s lifetime. Instead, it is “switched on” once probate is granted and estate assets are transferred into the trust.
The trustee then holds those assets on discretionary terms for a defined class of beneficiaries. The trustee decides:
which beneficiaries receive income or capital,
when distributions are made, and
in what amounts.
In NSW, these trusts can generally operate for up to 80 years, allowing them to span generations if required.
How testamentary discretionary trusts operate in practice
From a practical perspective, the process usually follows this sequence:
The Will-maker dies and probate is obtained.
Estate assets are identified and transferred into the testamentary trust in accordance with the Will.
The trustee begins managing and distributing assets under the trust terms.
The effectiveness of the structure depends heavily on how the Will is drafted. A well-constructed Will clearly identifies:
which assets fund each trust,
who controls the trust,
how control passes if key roles fail, and
how and when distributions can be made.
In specialist practice, much of the value lies in getting these mechanics right.
Why testamentary discretionary trusts are commonly recommended
For many clients, testamentary trusts are not an optional add-on — they are a sensible default structure.
They are particularly useful where:
There are multiple beneficiaries
Discretion allows trustees to respond to different needs over time rather than locking in rigid entitlements that may no longer make sense years later.
Beneficiaries are minors
Income distributed from a testamentary trust to minors is taxed at adult marginal rates, which can be a significant advantage where assets generate ongoing income.
Asset protection matters
Separating control from entitlement can reduce exposure where beneficiaries face business risk, relationship breakdowns or creditor claims.
Long-term family wealth is a goal
Testamentary trusts allow assets to be managed across generations, rather than passing outright and losing structure at the first distribution.
Control is the central issue
While tax efficiency is often discussed, control is usually the more important consideration.
Key questions include:
Who should act as trustee?
Should there be an appointor, and if so, who holds that role?
What happens if the trustee dies, loses capacity or acts against the family’s interests?
Specialist drafting focuses heavily on these issues. Poor control provisions are one of the most common causes of post-death disputes and loss of intended outcomes.
Tax outcomes – realistic expectations
Testamentary discretionary trusts offer legitimate tax flexibility, particularly for:
That said, they are not tax-free structures. Trustees must comply with annual accounting and tax obligations, and capital gains tax may arise when assets are sold after death.
For most asset-holding clients, these ongoing obligations are a reasonable trade-off for flexibility and protection, provided they are understood upfront.
Interaction with family provision claims
Testamentary trusts do not eliminate the risk of family provision claims, but they can be used to structure provision in a way that balances competing interests.
Courts look beyond labels to substance. Where a beneficiary effectively controls trust assets, those assets may still be relevant when assessing whether adequate provision has been made. For this reason, testamentary trusts should be designed with a clear understanding of how control and benefit will be viewed if a claim arises.
Common issues seen in practice
Even where testamentary trusts are appropriate, outcomes can be undermined by drafting issues, including:
trusts that are never properly funded,
unclear succession of trustees or appointors,
inconsistencies between superannuation nominations and Will structures,
overly broad beneficiary classes that create uncertainty, and
insufficient guidance for trustees on how discretion should be exercised.
These are not conceptual problems — they are practical ones, and they tend to emerge years after the Will is signed.
Testamentary trusts require ongoing stewardship
A testamentary discretionary trust is not a “set and forget” arrangement. Trustees must:
actively exercise discretion,
maintain proper records,
manage tax compliance, and
navigate family dynamics over time.
For clients who value structure and long-term planning, this ongoing involvement is a feature, not a flaw.
Are testamentary discretionary trusts right for everyone?
Not every estate needs one, but for clients with:
multiple beneficiaries,
investment or business assets,
asset-protection concerns, or
a desire for long-term flexibility,
they are often an appropriate and effective solution.
The question is rarely “should I have a testamentary trust?”
It is more often “how should it be structured, and who should control it?”
Key takeaway
Testamentary discretionary trusts are a cornerstone of sophisticated estate planning. When thoughtfully designed, they provide flexibility, protection and control that simple Wills cannot replicate. The value lies not in the label, but in the quality of the structure and the advice behind it.
Related Guides — Wills & Estates Law in NSW
Testamentary discretionary trusts are an important estate planning tool that can help protect and manage assets for beneficiaries. The following guides cover other key aspects of wills, estates, planning, and administration in New South Wales to support comprehensive planning and effective estate management.
We can prepare a testamentary discretionary trust for you
At Thornton + King we have a team of wills and estate specialist lawyers who can help assess whether a testamentary discretionary trust is right for you, and can help to prepare one if it is. We’ve been providing advice on wills and estates since 1924, so there isn’t much that we haven’t seen or done before. To speak to an expert wills and estate solicitor, give us a call or submit an enquiry now.
