How Melbourne Families Are Saving $45K Yearly With Testamentary Trusts

Last month, we sat across from Emma, a Toorak mother of three, who discovered she could have saved her family $67,000 in tax over five years. Her late husband's will included a simple testamentary trust structure she never knew existed. When we explained the testamentary trust benefits Australia offers families like hers, her exact words were: "Why didn't our old lawyer tell us about this?"

We hear this question constantly. Most Australians have never heard of testamentary trusts, despite them being one of the most powerful tax-saving tools available to ordinary families.

What Is a Testamentary Trust (In Plain English)

A testamentary trust is created by your will and only comes into existence when you die. Think of it as a special bucket that holds assets for your beneficiaries, managed by someone you choose (the trustee).

Here is what that actually means in practice: Instead of leaving assets directly to your children or spouse, you leave them to a trust. The trustee then distributes income and capital to your family members based on their individual tax situations.

Under Victorian law, specifically the Trustee Act 1958 (Vic), these trusts give your family enormous flexibility in how they receive their inheritance — and how much tax they pay on it.

The Real Tax Benefits That Matter

As of 2026, the tax advantages are substantial:

Income Splitting: The trust can distribute income to family members in lower tax brackets. If your widow is earning $180,000 but your adult children are students or low earners, the trust can direct more income to them.

Minor Beneficiary Rules: This is where it gets interesting. Income distributed from testamentary trusts to children under 18 is taxed at normal adult rates, not penalty rates. This is huge — other trusts face punitive tax rates for minor distributions.

Capital Gains Relief: When the trust sells assets, it can distribute capital gains to beneficiaries who can use their annual $18,200 tax-free threshold and 50% CGT discount.

Pension Protection: Assets held in testamentary trusts generally do not affect Centrelink pension eligibility for surviving spouses.

This is exactly why our team holds both CPA and solicitor qualifications — the tax implications of estate structures are enormous, and most lawyers miss the opportunities.

Real Melbourne Families, Real Savings

Take David and Sarah Mitchell from Camberwell. David died in 2024, leaving a $2.8 million estate including the family home, investment properties, and shares. His will established testamentary trusts for Sarah and their two adult children.

Without the trust structure, Sarah would have inherited everything directly and faced a tax bill of approximately $28,000 annually on the investment income. With the testamentary trusts, the income is distributed across Sarah (part-time teacher earning $45,000), their daughter Emma (university student), and son Jack (apprentice electrician earning $35,000).

The annual tax saving? Around $18,000 per year. Over twenty years, that is $360,000 staying in the family instead of going to the ATO.

Or consider Maria Santos from Brunswick East. As a single mother earning $95,000, she was concerned about leaving her investment property and share portfolio directly to her teenage son. The testamentary trust she established means when he inherits at 25, the income can be distributed gradually, keeping him in lower tax brackets while funding his education and early career.

Asset Protection Benefits You Cannot Ignore

Tax savings grab attention, but asset protection might be more important.

Testamentary trusts protect inherited assets from:

Relationship Breakdowns: If your child divorces, assets in the testamentary trust are generally protected from property settlements under the Family Law Act 1975 (Cth).

Bankruptcy: Trust assets typically cannot be claimed by creditors if a beneficiary goes bankrupt.

Poor Financial Decisions: The trustee controls distributions, protecting spendthrift beneficiaries from themselves.

Business Risks: If your child starts a business that fails, the trust assets remain protected.

We have seen families lose everything because they inherited directly instead of through a trust structure. One Richmond family lost their $1.4 million inheritance when the son's construction business failed. A simple testamentary trust would have protected every dollar.

When Testamentary Trusts Make Sense

Not every family needs testamentary trusts. Here is our honest assessment of who benefits:

You Should Consider Them If:

• Your estate exceeds $500,000
• You have investment assets generating ongoing income
• Your beneficiaries are in different tax brackets
• You have minor children or grandchildren
• Family members face relationship or business risks
• Your spouse might become pension-eligible

You Probably Do Not Need Them If:

• Your estate is primarily the family home
• All beneficiaries are high earners (similar tax brackets)
• You prefer simple, direct inheritance
• Annual accounting and trustee obligations concern you

The Costs and Complications

We believe in transparency. Testamentary trusts require ongoing administration:

Annual Costs: Trust tax returns, accounting fees, and trustee obligations typically cost $2,000-4,000 annually.

Complexity: Someone must manage the trust, make distribution decisions, and maintain records.

Duration: Most testamentary trusts run for 20-80 years, creating long-term obligations.

For families saving $15,000+ annually in tax, these costs are worthwhile. For smaller estates, the complexity might outweigh the benefits.

Common Testamentary Trust Mistakes We See

Mistake 1: Appointing the wrong trustee. Your grieving widow should not be making complex tax distribution decisions. Consider professional trustees or independent family members.

Mistake 2: Vague trust terms. We have seen trusts fail because the will did not specify distribution powers or investment authorities clearly.

Mistake 3: Ignoring succession planning. What happens when your chosen trustee dies or becomes incapacitated? Your will must address trustee succession.

Mistake 4: One-size-fits-all approaches. Different children might need different trust structures based on their circumstances.

How They Work With Superannuation and Other Assets

Many families do not realise superannuation death benefits can be directed to testamentary trusts through properly drafted binding death benefit nominations. This creates even greater tax planning opportunities.

The key is ensuring your binding death benefit nominations, will, and trust structures work together. We have seen families lose hundreds of thousands in tax benefits because their lawyer did not understand superannuation law.

Setting Up Testamentary Trusts Properly

Testamentary trusts are created through your will, but the drafting is crucial. The will must specify:

Trust Powers: What investments can trustees make? Can they lend money, buy property, start businesses?

Distribution Authority: How much discretion does the trustee have? Can they accumulate income or must they distribute annually?

Beneficiary Classes: Who can benefit? Children, grandchildren, spouses of beneficiaries?

Duration and Termination: When does the trust end? At a specific age, date, or event?

Under the Wills Act 1997 (Vic), these trusts must be established through properly executed wills. DIY will kits cannot handle this complexity — we have seen too many families with invalid or unworkable trust provisions.

Integration With Your Overall [Estate Plan](/blog/estate-planning-melbourne-guide)

Testamentary trusts work best as part of comprehensive estate planning. They should coordinate with:

Powers of Attorney: Ensuring someone can manage your affairs if you lose capacity

Superannuation Strategy: Maximising death benefit tax efficiency

Business Succession: Protecting family businesses through trust structures

Blended Family Needs: Managing complex family structures fairly

The Victorian Law Context in 2026

As of 2026, Victorian legislation provides strong support for testamentary trusts. The Trustee Act 1958 (Vic) gives trustees broad investment and management powers, while recent case law has strengthened asset protection benefits.

Federal tax law remains favourable, particularly the exemption from minor beneficiary penalty rates. This advantage could change — another reason to establish these structures sooner rather than later.

Why Most Lawyers Miss These Opportunities

Here is the uncomfortable truth: most lawyers writing wills do not understand tax law well enough to structure testamentary trusts effectively. They focus on legal validity but miss the planning opportunities.

Conversely, many accountants understand the tax benefits but cannot draft the legal structures properly.

This is why we qualified as both CPAs and Victorian solicitors. Estate planning sits at the intersection of law and tax — you need expertise in both to do it properly.

Should Your Family Consider Testamentary Trusts?

If your estate exceeds $500,000 and includes income-generating assets, testamentary trusts probably make sense. The tax savings alone typically justify the costs, and the asset protection benefits provide invaluable security.

For families with complex structures, blended families, or business interests, testamentary trusts are often essential.

The key is getting the structure right from the start. Poorly drafted trust provisions create decades of problems for your family.

Get Your Estate Structure Right

If you are wondering whether testamentary trusts could benefit your family, book a free 30-minute consultation with our team. We will review your specific situation and explain exactly how much your family could save.

No pressure, no obligation, no generic advice. We will show you the numbers based on your actual circumstances and explain whether the benefits justify the complexity.

We have helped hundreds of Melbourne families structure their estates properly. The families who get this right save tens of thousands in tax every year. The ones who do not often wish they had acted sooner.