A testamentary discretionary trust is one of the most effective estate-planning tools available under Australian law. When used properly, it can provide asset protection, tax flexibility, and long-term control over how wealth is managed after death.
At Thornton + King, our Wills & Estates team regularly advises individuals, families, and business owners on whether a testamentary discretionary trust is appropriate for their circumstances, and how to structure it correctly within a will.
What is a testamentary discretionary trust?
A testamentary discretionary trust is a trust created by a will that comes into effect only after the testator’s death. Unlike a standard family trust established during a person’s lifetime, a testamentary trust does not exist until probate is granted and the estate is administered.
The trustee (often a trusted family member or professional) is given discretion as to how income and capital are distributed among a defined class of beneficiaries, subject to the terms of the will.
In practical terms, this means assets can be held, invested, and distributed in a controlled way for years or even decades after death.
Why use a testamentary discretionary trust?
Testamentary discretionary trusts are commonly used where there are concerns about vulnerability, family complexity, asset protection, or tax efficiency.
1. Asset protection for beneficiaries
Assets held in a properly drafted testamentary trust may provide protection against:
This can be particularly important where beneficiaries are in high-risk professions or unstable personal circumstances.
2. Tax flexibility
Income distributed to minor beneficiaries from a testamentary trust can be taxed at ordinary adult marginal rates, rather than punitive minor tax rates. This is a significant advantage compared to inter vivos trusts.
The trustee can also allocate income between beneficiaries in a tax-effective manner, taking into account changing personal circumstances year by year.
3. Control over inheritance
A testamentary discretionary trust allows you to:
Stagger distributions over time
Prevent large lump sums being accessed too early
Impose conditions or guidance on how funds are used
This is commonly used where beneficiaries are young, financially inexperienced, or where there is a concern about external influence.
4. Blended families and second relationships
In blended family situations, testamentary trusts can help balance:
Providing for a current spouse or partner, while
Preserving capital for children from a previous relationship
This structure often reduces the risk of family provision claims and future disputes.
How does a testamentary discretionary trust work in practice?
While each trust is different, the general process is:
The will establishes the trust and appoints a trustee
Upon death, assets are transferred from the estate into the trust
The trustee manages those assets in accordance with the will
Income and capital are distributed at the trustee’s discretion
The effectiveness of the trust depends heavily on how it is drafted. Poorly drafted clauses can undermine tax benefits, create uncertainty, or expose assets to challenge.
Who should consider a testamentary discretionary trust?
A testamentary discretionary trust is not necessary for every estate. However, it is commonly appropriate where:
The estate includes significant assets or investments
There are minor children or vulnerable beneficiaries
Asset protection is a priority
There is a family business or complex ownership structure
The testator wants long-term control over wealth
As with all estate planning, suitability depends on personal, financial, and family circumstances.
Common mistakes we see
Some of the most common issues arise when:
Online or “off-the-shelf” wills are used
Trust provisions are copied without proper tailoring
The wrong trustee is appointed
Tax consequences are not properly considered
These mistakes often only become apparent after death, when they are difficult or impossible to fix.
Our approach
We take a strategic, plain-English approach to estate planning. When advising on testamentary discretionary trusts, we focus on:
Understanding family dynamics and risk factors
Ensuring the trust structure aligns with tax and asset-protection goals
Drafting clear, enforceable provisions that reduce the risk of dispute
Where appropriate, we also work alongside accountants and financial advisers to ensure the estate plan operates effectively in practice.
Speak to an experienced estate planning lawyer
Testamentary discretionary trusts can be powerful tools, but only when used correctly. If you are considering updating your will or want advice on whether a testamentary trust is right for you, our Wills & Estates team can assist.
To speak to a specialist estate planning lawyer, give us a call or submit an enquiry now.
