Testamentary Trusts Australia 2025: Benefits, Rules & Estate Planning

Estate planning in Australia has always been about more than just drafting a will. In 2025, testamentary trusts are fast becoming the go-to tool for families wanting to future-proof their legacy, minimise tax, and protect vulnerable beneficiaries. But what exactly is a testamentary trust, and why is it gaining popularity under the latest legal and tax landscape? Here’s what you need to know.

What Is a Testamentary Trust?

A testamentary trust is a trust created by a will, coming into effect only after the will-maker’s death. Unlike family or discretionary trusts set up during your lifetime, testamentary trusts are embedded in your estate plan and only spring to life when you pass away. This structure allows your chosen trustee (often a family member, professional advisor, or trusted friend) to manage and distribute assets to beneficiaries according to the rules you set out.

• Flexibility: Trustees can decide how and when to distribute income or capital to beneficiaries, tailoring support to their needs.
• Tax efficiency: Testamentary trusts can deliver significant tax savings, especially for minor children.
• Asset protection: Assets in the trust may be better shielded from creditors, family law disputes, or irresponsible spending.

2025 Policy Updates: What’s Changed?

Several recent legal and tax changes have impacted the way testamentary trusts operate in Australia. Here’s a summary of the most relevant updates for 2025:

• ATO Scrutiny on Tax Benefits: The Australian Taxation Office has tightened its interpretation of income that can be taxed at adult rates for minors. As of 2025, only income derived from assets directly gifted to the trust from the deceased’s estate qualifies. This means “washing” external assets through the trust for tax minimisation is no longer viable.
• Increased Complexity in Asset Protection: Family law courts are increasingly considering the nature of control and benefit in testamentary trusts. If beneficiaries have significant influence over the trust, these assets may be included in divorce settlements. Recent 2024–2025 case law highlights the importance of careful trustee selection and detailed trust terms.
• Digital Assets and Crypto: Updated probate rules now require clear instructions for digital assets, including cryptocurrencies, to be administered via testamentary trusts. This ensures your digital legacy is managed alongside traditional assets.

Testamentary Trusts in Action: Real-World Scenarios

Here are a few practical examples illustrating how testamentary trusts can work for Australian families in 2025:

• Protecting Young Beneficiaries: Sarah and James want their two young children to inherit their estate if both parents pass away. By using a testamentary trust, they ensure a trustee manages the funds until the children reach an age where they can responsibly handle a large inheritance. In the meantime, income paid to the children from the trust is taxed at adult rates, potentially saving thousands in tax each year.
• Shielding Assets from Relationship Breakdown: Tom wishes to leave his business to his daughter, who is married. By placing the business shares in a testamentary trust, he adds a layer of protection against claims if her marriage ends, provided the trust is properly structured and managed.
• Supporting Vulnerable Beneficiaries: Anna wants to provide for her adult son, who has a disability. A testamentary trust can ensure ongoing financial support without jeopardising her son’s Centrelink entitlements or exposing assets to exploitation.

Setting Up a Testamentary Trust: Steps and Considerations

Implementing a testamentary trust involves careful estate planning. Here’s how to get started:

1. Work with a specialist estate lawyer to draft a will that includes testamentary trust provisions tailored to your family’s needs and current laws.
2. Choose your trustee(s) wisely. Consider professional trustees for complex estates or vulnerable beneficiaries.
3. Define clear terms and instructions. Specify how and when income or capital should be distributed and for what purposes (education, health, living expenses, etc.).
4. Keep the trust deed up-to-date. Review your will regularly, especially after major life changes or legislative updates.

With the right advice and structure, a testamentary trust can be a powerful tool for securing your family’s financial future in 2025 and beyond.