Families with property, a business or investments often hear three options for passing on wealth: a simple Will, a Will with a testamentary trust, or a family (discretionary) trust set up during their lifetime. For Asian families with children in Australia, grandchildren overseas or a family business, the choice matters for tax, protection and control.
These are not alternatives in every sense. A family trust works alongside a Will and does not replace it. This article explains what each one is, how they compare and when each tends to suit.
What each one is
A simple Will
A simple Will leaves assets directly to beneficiaries: “my estate to my children in equal shares”. Once the estate is administered, each child owns their share outright. It is clear, cheap to administer and easy to understand.
A testamentary trust
A testamentary trust is created by your Will and comes into existence only after your death. Instead of giving a child their share outright, the Will gives it to a trustee (often the child) to hold for a group of beneficiaries, such as the child, their spouse, children and grandchildren. Each year the trustee decides who receives income and capital. Many Wills give each child the option of taking their share outright or through their own trust.
A family trust
A family (discretionary) trust is set up by a deed during your lifetime. Assets are transferred to or acquired by the trustee, often a family company, and the trustee distributes income among family beneficiaries each year. The trust does not end on your death. What matters for succession is who controls it afterwards, which is governed by the trust deed (through the appointor or guardian role), not by your Will.
Tax for minor children
This is the best-known difference. Unearned income paid to children under 18 is usually taxed at high penalty rates. However, income a minor receives from a testamentary trust can be “excepted trust income” and taxed at ordinary adult rates, with the usual tax-free threshold.
The rule has limits. Since 1 July 2019, only income from assets that came from the deceased estate (or what those assets have been converted into) qualifies. Income from unrelated assets added to the trust later does not qualify, and where a trust holds both kinds, only the estate-related share is excepted.
Distributions from a lifetime family trust to minors do not get this concession and are taxed at the penalty rates. A simple Will that gives minors their share outright, or holds it on a basic trust until they turn 18 or 25, offers no comparable flexibility.
Asset protection
Property held by a trustee is generally not owned by the beneficiaries, which can offer protection:
- Bankruptcy and creditors: a beneficiary who is a director, a professional or runs a business may face claims. Assets in a properly run discretionary trust are generally harder for creditors to reach than assets owned outright.
- Relationship breakdown: for a child who later separates, trust assets are not automatically protected. The family courts can take a trust into account, particularly if the child controls it. Testamentary trusts can still make it more difficult to treat inherited assets as matrimonial property, and structures can be designed with this in mind.
- Vulnerable beneficiaries: a trust can protect a beneficiary with an addiction, disability or poor financial judgement, with someone else as trustee.
A simple Will offers none of this once the assets have been distributed.
The proposed trust minimum tax (not yet law)
As at October 2026, the Government has introduced legislation for a 30% minimum tax on discretionary trust income from 1 July 2028. This is not yet law and may change. Under the proposal:
- deceased estates and genuine testamentary discretionary trusts established for legitimate estate planning are excluded, subject to conditions;
- certain income for vulnerable minors is excluded;
- lifetime family trusts would generally be affected, although there is a proposed election to be exempt where distributions go only to beneficiaries nominated in advance;
- restructuring relief is proposed from 1 July 2027.
Separately, the CGT discount reform is already law and applies to gains accruing after 1 July 2027. It affects trusts and individuals alike.
If you have a family trust, it is worth reviewing it with your accountant as the law progresses. If you are preparing a Will now, the proposal is one reason testamentary trusts remain attractive, though the final conditions will matter.
Disadvantages of testamentary trusts
Testamentary trusts are not right for everyone:
- They need annual tax returns, bank accounts and records, which brings ongoing accounting costs.
- The trustee must understand their duties and act properly.
- They work best when there is enough wealth to justify the administration.
- They can cause family friction if one child controls a trust for siblings.
- For beneficiaries overseas, trust distributions may be taxed differently in their country, and foreign resident beneficiaries face withholding rules in Australia.
When each one suits
- Simple Will: modest estates, adult children in stable circumstances, or a surviving spouse inheriting everything.
- Will with testamentary trusts: larger estates, beneficiaries with young children, business owners or professionals, blended families, or a beneficiary who needs protection.
- Family trust: holding a business or investments during your lifetime for income distribution and asset protection. It needs its own succession plan through the deed, plus a Will.
Many families use a combination: a family trust for the business, and Wills with testamentary trusts for personal assets.
Questions to discuss with your lawyer
- What will each beneficiary receive, and roughly how much?
- Are any beneficiaries minors, at risk, or living overseas?
- Who should control each trust after your death?
- Do you have a family trust, and who is the appointor after you?
- How does the proposed trust minimum tax affect your existing structures?
- Should beneficiaries be able to choose between an outright gift and a trust?
Frequently asked questions
What is the difference between a testamentary trust and a family trust?
A testamentary trust is created by your Will and starts after your death, funded by your estate. A family trust is set up during your lifetime by a deed. Minor beneficiaries of a testamentary trust can be taxed at adult rates on estate-derived income, which is not the case for a family trust.
Testamentary trust vs Will: which is better?
A testamentary trust is part of a Will, not a replacement. The question is whether your Will should leave assets outright or through trusts. Trusts suit larger estates or beneficiaries who need flexibility or protection.
What are the disadvantages of a testamentary trust?
Ongoing accounting and administration costs, trustee responsibilities, possible family friction and complexity for overseas beneficiaries. For smaller estates the costs may outweigh the benefits.
Will the new trust tax apply to testamentary trusts?
Under the proposal introduced in October 2026, genuine testamentary trusts and deceased estates are excluded, subject to conditions. The legislation is not yet law, so the final rules may differ.
How Chua Tan Associates can help
We draft Wills with testamentary trusts for families across Australia and for families overseas with Australian assets, and we review how existing family trusts will pass on after death. We consider beneficiaries living in Asia, family businesses and blended families, and work with your accountant on tax. We advise in English, Mandarin and Cantonese, so parents and the next generation can understand the plan together.
Related reading
Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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