When Peter and Sue, successful Melbourne professionals with a substantial asset portfolio, sat down to plan their estate, they faced a question that troubles many high-net-worth families: how can we ensure our hard-earned wealth is protected and benefits our children and grandchildren long after we are gone? A simple will just wouldn’t cut it. Their solution, a meticulously crafted testamentary discretionary family trust, stands as the gold standard in sophisticated estate planning in Australia.
With an estimated $3.5 trillion poised to be passed between generations in Australia over the next two decades, the conversation around not just creating wealth, but preserving it, has never been more critical. For affluent Victorian families, a testamentary trust offers a powerful combination of asset protection, tax minimisation, and long-term flexibility that a standard will simply cannot provide. It’s not just an estate planning tool; it’s a fortress for your family’s financial future.
What Exactly is a Testamentary Discretionary Trust?
Think of a standard will as a direct handover of assets—a lump sum of cash, a property, or a share portfolio given directly to a beneficiary. A testamentary trust, however, is a far more sophisticated structure. Established within your will, it only springs into existence upon your death. Instead of assets passing directly to your beneficiaries, they are transferred into this trust, which is then managed by a person or entity you appoint, known as the trustee.
This trustee holds the assets ‘on trust’ for a wide range of potential beneficiaries, typically your children, grandchildren, and even future generations. The ‘discretionary’ part is key: the trustee has the power to decide which beneficiaries receive income or capital from the trust, how much they get, and when they get it. This structure is firmly supported by Victorian legislation, including the Trustee Act 1958, providing a secure and reliable framework.
The Unmatched Fortress: Superior Asset Protection
For high-net-worth individuals, particularly those in business or professions with high liability risk, asset protection is paramount. This is where a testamentary trust truly shines.
Because the assets are legally owned by the trust, not the individual beneficiaries, they are shielded from a range of external threats. If a beneficiary faces bankruptcy or a business failure, creditors generally cannot access the assets held within the trust to satisfy their claims. For Peter, a surgeon, and Sue, a director of a public company, this was a non-negotiable benefit. It meant that their children’s inheritance would be safe from any potential professional indemnity claims or business liabilities they might face in their own careers.
This protection extends to one of the most common and emotionally fraught risks to family wealth: relationship breakdowns. Under the Family Law Act 1975, assets held in a well-drafted testamentary trust are not automatically considered part of the asset pool to be divided in a divorce or separation. While a court can still consider the trust as a financial resource, the beneficiary has no fixed entitlement to the assets, creating a powerful barrier that can protect generational wealth from being diluted or lost in a family law settlement. Modern trusts, like the one drafted for Peter and Sue, often include sophisticated clauses that can further protect assets if a beneficiary is going through a separation.
The Tax-Smart Strategy: Maximising Your Family’s Wealth
The tax advantages offered by a testamentary trust are, frankly, astounding, particularly when it comes to providing for minor children or grandchildren.
Normally, any unearned income over $416 received by a child under 18 is taxed at the highest marginal rate (currently 45%). This is designed to stop adults from splitting their income with their children to reduce their tax bill. However, income distributed from a testamentary trust to a minor beneficiary is treated differently. It is taxed at normal adult marginal rates, meaning each child can receive up to the tax-free threshold (currently $18,200) without paying any tax at all.
Let’s consider a practical example. Imagine Peter and Sue’s trust generates $100,000 of income per year. If this were distributed to their three young grandchildren, each could receive approximately $33,333. Each grandchild would pay tax at adult rates, resulting in a total tax bill of around $7,000. If that same $100,000 was instead given to their high-income earning daughter, she could lose up to $47,000 of it in tax. That’s an annual saving of $40,000, a benefit that compounds year after year, significantly boosting the family’s net wealth.
This income-splitting capability also allows the trustee to strategically stream different types of income (like capital gains or fully franked dividends) to the most appropriate beneficiaries to minimise the overall tax paid by the family group.
Flexibility for an Unpredictable Future
Life is unpredictable. The beauty of a discretionary trust is its inherent flexibility to adapt to the changing needs and circumstances of your family over decades. A standard will makes a fixed gift at a single point in time. A testamentary trust, however, allows the trustee to make tailored decisions year after year.
For instance, the trustee can provide more support to a beneficiary who is studying and has a low income, help another purchase their first home, or assist a family member facing unexpected medical expenses. It can also protect a beneficiary who may be vulnerable or unable to manage a large inheritance due to addiction, disability, or poor financial acumen. The trustee can provide for their needs without handing over a lump sum that could be squandered or misused.
Many trusts incorporate a ‘preservation age’, as seen in Peter and Sue’s will, often set when the youngest primary beneficiary turns a mature age, like 50. This ensures the capital is preserved during the beneficiaries’ younger, more impulsive years, protecting the core wealth for the long term while still allowing for income and support to be provided.
The Hayton Kosky Difference
For Victorian families like Peter and Sue, a testamentary discretionary trust is not a luxury; it’s an essential pillar of a robust estate plan. It provides peace of mind that your legacy will be protected from creditors, secure from relationship breakdowns, and managed in the most tax-effective way for generations to come.
The investment in expert legal advice to establish a tailored testamentary trust is insignificant compared to the potential losses from taxes, lawsuits, or divorce settlements. At Hayton Kosky, we specialise in crafting bespoke estate planning solutions for high-net-worth individuals, ensuring your wealth works for your family in the way you intended.
This article provides general information only and does not constitute legal advice. You should seek professional legal and financial advice tailored to your specific circumstances.