A testamentary discretionary trust protects your children's inheritance by holding assets in a structured, legally protected way rather than distributing them outright.

This means an inheritance held inside a testamentary trust is generally better protected from a beneficiary's divorce settlement, shielded from creditors, and can be distributed in a tax-effective way that a direct inheritance cannot match.

Two families. Same circumstances. Completely different outcomes.

Two families. Both hardworking. Both loved their children deeply. Both had Wills in place when they died. The first family left their estate directly to their adult children. Within three years, one of those children went through a divorce. Half of what had been left to them walked out the door in a property settlement. Gone. Not because of anything that family did wrong. Simply because of how the inheritance landed.

The second family had a Will that included a testamentary discretionary trust. Their child went through the same thing. A difficult divorce, a contested property settlement. The inheritance stayed protected. The structure held. What that family had spent a lifetime building remained where it was meant to be. Same circumstance. Completely different outcome.

What is a testamentary discretionary trust?

A testamentary discretionary trust is a trust created inside your Will that comes into effect when you die. Unlike a direct inheritance, where assets are transferred immediately and unconditionally to a beneficiary, a testamentary trust holds those assets in a structured way and gives the trustee discretion over how income and capital are distributed among a class of beneficiaries. The trust is established by the terms of your Will and is administered by a trustee you nominate.

How a testamentary trust protects against divorce

When a beneficiary receives an inheritance outright, that inheritance generally becomes part of their personal asset pool. In a divorce or separation, it is usually automatically considered in the property settlement as property of the parties personally owned and may be more readily accessible to a former spouse.

When an inheritance is held inside a testamentary discretionary trust and managed by an independent trustee, the courts may treat it very differently and consider it to be a financial resource only, leaving the assets within the trust intact.

The tax advantages most people do not know about

One of the most significant advantages of a testamentary discretionary trust is the ability to stream income to beneficiaries in a tax-effective way. Under Australian tax law, minors who receive investment income are generally taxed at penalty rates. Inside a testamentary discretionary trust, minor beneficiaries can receive income from the inherited assets at ordinary adult marginal tax rates. This is a benefit that is not available in any other structure and can result in substantial tax savings for families with minor children over many years.

Income can also be distributed across a broader class of beneficiaries based on their individual tax positions, allowing the family to legally minimise the overall tax paid on earnings from the inherited assets. This is general information only.

Who should consider a testamentary discretionary trust?

A testamentary discretionary trust is worth considering for most Australian families with assets to leave behind. It is particularly relevant for parents of young children, families where a beneficiary is in a relationship that may be vulnerable, where there is concern about a beneficiary's financial management, or where there are meaningful assets that warrant structural protection.

What to do next

Understanding whether a testamentary discretionary trust is right for your family is the starting point. A Family Wealth Planning Session is where we look at your specific situation, your assets, your family structure, and what the right approach looks like in practice.

✦ Book a Family Wealth Planning Session

Frequently Asked Questions

What is the difference between a testamentary trust and a standard Will?

A standard Will distributes assets directly and outright to beneficiaries. A testamentary discretionary trust, created inside your Will, holds those assets in a protected structure with flexibility around how income and capital are distributed.

Can a testamentary trust protect an inheritance from divorce?

In many cases, yes. Because the beneficiary does not hold the assets outright, they may be treated differently in a property settlement. How the trust is structured and managed is important. Of course this is general information only and family law outcomes always depend on the specific facts and circumstances.

Do testamentary trusts save tax?

Yes, in many cases significantly. Income distributed to minor beneficiaries from a testamentary trust is taxed at adult marginal rates rather than at the penalty rates that normally apply to minors receiving investment income.

When does a testamentary trust start?

A testamentary trust is created by your Will and only comes into effect when you die. There is no cost or compliance requirement during your lifetime.

Is a testamentary trust complicated to run?

Not significantly. There are some administration requirements, but for most families these are straightforward and are far outweighed by the tax savings and protection benefits.

This content contains general information only. It is not legal advice. Your situation may differ,

And this is where tailored advice matters.