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23 April 2026
Advantages of Testamentary Trusts in NSW
- Rayda Palma-Parazo, BA HRD, LLB, GDLP
- Estimated reading time: 7 mins
Rising costs, volatile property and commodity markets and geopolitical issues are amplifying the uncertainties in today’s global economic landscape. With financial vulnerabilities looming on the horizon, how can you protect the future of your children and the next generation?
Having a comprehensive estate plan can help ensure your assets are distributed according to your wishes. This includes preparing instructions to set up a testamentary trust under your Will to protect your loved ones. However, not many people realise the additional asset protection and advantages of testamentary trusts in NSW.
What is a Testamentary Trust?
A testamentary trust is a trust created under your Will and takes effect when you pass away. It provides greater control and flexibility over the distribution of your assets.
The terms of the testamentary trust are defined in your Will. They include whether you will give full control to your beneficiaries or nominate a trustee to manage the fund. You can also specify restrictions or limitations in your Will as to how the testamentary trust shall be administered.
You should consider setting up a trust if your beneficiaries:
- are still minors or under 18 years of age
- have diminished mental capacity
- may not use their inheritance well
Moreover, you can choose to create several testamentary trusts in your Will, and nominate different trustees for each of them. Ideally, each of your beneficiaries should have a separate testamentary trust.
How do Testamentary Trusts Work?
When you pass away, the assets of your testamentary trust will be turned over to the trustee for administration. The trustee holds the assets for and on behalf of your beneficiaries until such time as determined in your Will.
Once the trust expires, all the assets included in the trust will be transferred to your beneficiaries. This could either be when:
- your beneficiary, who is a minor, reaches a certain age
- a beneficiary achieves a specific goal or event, e.g., get married, graduate from college
A testamentary trust can have a broad range of beneficiaries, which may also include members of an extended family. Hence, it is up to the trustee to decide which beneficiaries will receive distributions from the trust each year. This benefit could either be a gift of trust income or trust capital.
However, while the trustee is still considering who will receive the distributions, no person can have a vested interest in the assets. Moreover, the trustee can determine the extent of interest that the elected beneficiary may have over the trust.
Who can be a trustee?
Anyone can be your trustee, including your spouse or partner, or your children. You can also appoint an organisation, such as the NSW Trustee and Guardian, to be the trustee of your testamentary trust.
Your trustee has full control over the administration and management of the testamentary trust. Hence, it is imperative that you appoint someone you trust and who will consider your beneficiaries’ best interests. That is why most testators or Will makers appoint the Executor of their Will as the trustee of their testamentary trust.
What are the advantages of testamentary trusts in NSW
Aside from providing maximum flexibility, a testamentary trust also offers a greater degree of asset protection. Some of the advantages of incorporating a testamentary trust in your Will are:
1. Protection against creditors
Your trustee holds all the assets included in a testamentary trust for and on behalf of the beneficiaries. Thus, beneficiaries do not have direct access to their inherited wealth. Instead, they have an equitable right to the proper administration of the testamentary trust.
If one of your beneficiaries is experiencing solvency issues, their assets are susceptible to claims made by creditors or other third-parties. However, because they do not hold their inherited wealth under the testamentary trust, those assets may be insulated from claims by creditors.
Moreover, beneficiaries will not be able to use trust property or income from the testamentary trust to settle their debt. In addition, assets under the trust can be protected from beneficiaries who are not capable of managing their finances correctly.
2. Tax Benefits
A testamentary trust allows your trustee to distribute the testamentary trust benefit they receive to other beneficiaries. In general, a trust pays income tax on the accumulated net trust income or the funds that have not been distributed.
By splitting trust income across multiple beneficiaries, the trustee also spreads the burden of tax and minimises estate tax liabilities. Moreover, the trustee may even prevent the trust from paying income tax.
In addition, the trustee can divert the income from the assets to children or minors for the payment of school fees. Those funds are taxed at a lower rate than other trusts until the children reach the age of eighteen. Moreover, the children can also enjoy tax-free benefits until they have become of legal age.
3. High Risk Beneficiaries
A testamentary trust may also protect your beneficiaries with high-risk circumstances from losing their inherited wealth. For example, you have beneficiaries who cannot manage their affairs well or have issues associated with money. Beneficiaries who are operating a business or working in a profession that is susceptible to legal claims are also considered high-risk.
Because a trustee manages the assets under a testamentary trust, your beneficiaries cannot dispense their inheritance as they please. Moreover, your trustee has the legal right to limit what your beneficiaries will receive from the trust. Therefore, the assets under the trust may be protected from circumstances that could lead to bankruptcy or legal action against your beneficiaries.
4. Children with Special Needs
A testamentary trust also ensures a child with special needs or disabilities is taken care of well into the future. This includes your beneficiaries who have difficulty making significant decisions due to an illness, addiction, or disability.
Moreover, one of the many advantages of testamentary trusts in NSW includes the healthcare of your beneficiaries. You can also help take care of your beneficiaries when they temporarily lose capacity if you have a testamentary trust in place. Therefore, a testamentary trust can help you look after the wellbeing of your beneficiaries even when you’re gone.
5. Retirement/Pension Funds
A testamentary trust enables the proceeds from the superannuation to be directed to the trustee instead of the beneficiaries. Thus, if a beneficiary is a pensioner, their inheritance under the trust will not affect their eligibility to receive pension.
In general, funds from a superannuation are not included in the assets of a deceased estate. Moreover, Centrelink does not consider assets held by testamentary trusts when evaluating retirement or pension funds eligibility.
6. Capital Gains Tax
A testamentary trust also provides some Capital Gains Tax (CGT) and stamp duty benefits. The trustee can also spread the capital gains on assets held by the trust across the beneficiaries in a tax-efficient manner. Hence, the trustee may lower the tax liability of beneficiaries over time.
Moreover, if the capital assets in the trust are sold at a loss, the capital losses cannot be distributed to the beneficiaries. Instead, those losses will be carried over in the trust and offset against future capital gains.
7. Family Law Proceedings
A testamentary trust enables you to protect the assets of your beneficiaries during the breakdown of their marriage. In general, assets under a testamentary trust are considered financial resources for family property division purposes. Thus, those assets are protected from claims made in Family Law litigation.
Moreover, if one of your beneficiaries dies, assets under the testamentary trust will not be distributed directly to their widowed spouse. Therefore, those assets can be protected for other potential beneficiaries that the trustee may nominate, e.g., children and grandchildren.
Conclusion
Indeed, in NSW, there are several advantages of including a testamentary trust in your Will. However, you must ensure that your Will is structured properly with the incorporation of the testamentary trusts.
Moreover, the terms set out in your testamentary trust may have their own consequences that you must consider. Hence, receiving proper legal advice before incorporating a testamentary trust in your Will is very important.
VC Lawyers offers full legal support in Wills and Estates, including the preparation and incorporation of testamentary trusts. Our Solicitors are also experienced in Estate Planning, Tax and Superannuation, and Family Law proceedings. We offer practical advice and guidance to help you secure and protect your loved ones’ future.
NB: This blog post is neither a legal advice nor intended to be such, and is only for general information. The same should not also be taken as a financial or commercial advice. The reader must personally consult their professional adviser/s on the contents of this blog post. VC Lawyers is not liable for any loss or damage, direct or consequential, as a result of the reader’s or a third person’s misconstruction of the wordings or use/misuse of the contents of this blog post.
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