What is a Testamentary Trust?

A testamentary discretionary trust is a trust established by the Will of a Testator rather than during the lifetime of the Testator and the discretionary character follows from the power of the trustees in exercising a discretion as to which of the beneficiaries named in the trust are to share in the capital and/or income of the trust fund.

In some circumstances, creation of a testamentary discretionary trust can be significantly tax effective – click here to see an example. Children as beneficiaries of the trust in the circumstances defined in the Act may enjoy a tax free threshold and normal rates of tax thereafter if the income received by them is “accepted trust income”.

The following circumstances may call for consideration of a testamentary trust:

  • A typical husband/wife mutual Will
  • tax benefits.
  • preserving pension entitlements.
  • Provision for a beneficiary with a disability – merit of channelling surplus income to non-disabled children and reversion of capital. In September 2006 the Federal Government introduced new means-test concessions that allow the severely disabled persons pension not to be affected by any trust income or trust asset, up to the value of $500,000.
  • Protection of assets – the spendthrift or potentially bankrupt child, protection of a child’s inheritance from a family law dispute.