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Protect their inheritance
until they're ready.
Most parents worry about what would happen to their children if something happened to them. A testamentary trust is a powerful way to protect your children's inheritance, ensuring it's managed responsibly until they're ready.
What is a testamentary trust?
Unlike a family trust you create during your lifetime, a testamentary trust only comes into existence when you die. It's created by your will and springs into action to protect assets for the people who matter most to you.
Created by your will
The trust doesn't exist while you are alive. It only comes into being when your will takes effect.
Trustees manage assets
The people you appoint as trustees hold and manage the assets according to your instructions.
Beneficiaries receive benefit
Your children receive the benefit of the assets, but trustees control access until they're ready.
Why use a testamentary trust?
Children too young to manage inheritance
If you die while your children are minors, they legally can't manage property. Even adult children may not be mature enough to handle a significant inheritance.
Example: A 21-year-old inheriting $500,000 outright might spend it quickly. The same amount in trust can fund education, a first home deposit, and provide ongoing support.
Protecting from poor decisions
Some beneficiaries, regardless of age, may not be capable of managing money wisely. A trust protects them from their own poor decisions.
Example: A beneficiary with gambling problems or addiction issues can still benefit from inheritance without risking it all.
Protection from relationship property claims
Assets held in a testamentary trust may be better protected from a beneficiary's relationship property claims than an outright inheritance.
Example: If your adult child's marriage fails, assets in a properly structured trust may not form part of their relationship property division.
Providing for vulnerable family members
Family members with disabilities or special needs may need ongoing support without risking government benefits.
Example: A child with an intellectual disability can receive support from trust assets while trustees manage benefit entitlements.
How testamentary trusts work.
Your will creates the trust
Your will contains detailed provisions setting out the trust, who the trustees are, who can benefit, and how trustees should manage and distribute assets.
On your death, the trust activates
When you die, your executor administers your estate. Once administration is complete, assets transfer to the trustees of the testamentary trust.
Trustees manage the assets
Your trustees invest and manage the assets, making distributions according to your instructions. They might pay for education, healthcare, or housing.
Beneficiaries receive distributions
Beneficiaries receive money or assets as trustees decide is appropriate, within the guidelines you've set.
Trust terminates at specified time
Your will specifies when the trust ends, usually when children reach certain ages. The remaining assets then distribute outright.
Common structures.
Simple age-based trust
Assets held until children reach a specified age (often 25 or 30), then distributed outright. Simple to administer and provides protection during critical years.
Best for: Parents with young children who simply need time for their children to mature
Staged distribution trust
Assets distributed in stages, perhaps one-third at 25, one-third at 30, and the remainder at 35. Balances protection with giving beneficiaries increasing responsibility.
Best for: Larger estates where gradual access reduces the risk of poor decisions
Discretionary trust
Trustees have broad discretion about when and how much to distribute. Can continue for the beneficiary's lifetime if needed.
Best for: Protecting vulnerable beneficiaries who may never be able to manage assets independently
Multiple separate trusts
Different children have different trusts with different terms, recognising that siblings may have different needs and capabilities.
Best for: Families where children have significantly different circumstances
Testamentary vs Family Trust
| Aspect | Testamentary Trust | Family Trust |
|---|---|---|
| When created | On your death, by your will | During your lifetime |
| Assets | Assets from your estate | Assets you transfer in |
| Ongoing costs | None until trust activates | Annual compliance, accounting |
| Your control | Full control while alive | Assets held by trustees |
| Creditor protection | Protects beneficiaries only | May protect your assets |
| Flexibility | Update by changing your will | Deed of variation needed |
For many parents, a testamentary trust in their will is more practical than setting up a family trust during their lifetime.
Key Takeaways
Related Guide
Learn how testamentary trusts fit into your overall will and estate planning.
Read the Creating Your Will GuideRelated Reading
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