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Everything went straight to her — including the share that was always meant, one day, for her kids.

A client sat across from me a few weeks ago. Her father had just passed away. Under his will, his estate went directly to her, no conditions attached. It seemed simple. It seemed generous.

Then she asked a simple question: if something happened to her now, would that money automatically go to her own children?

The honest answer was: not the way she thought. And by the time we'd worked through it, she'd already lost thousands of dollars in tax that a slightly different will could have avoided entirely.

That's what Episode 2 of The Unsolicitor's Opinion is about — testamentary trusts. One of the most underused, most misunderstood tools in estate planning, and the questions your accountant almost certainly wishes you'd ask, before it's too late to ask them.

WHAT IS A TESTAMENTARY TRUST?

The name puts people off, so let's deal with that first. "Testamentary" simply means "created by a will."

A testamentary trust doesn't exist while you're alive. It's written into your will, sitting dormant, and it only comes into existence when you die — and only for the assets you've directed into it.

Compare that to a family trust set up during your lifetime. That one exists now, has its own tax file number now, and needs decisions made about it every year, whether you like it or not.

A testamentary trust is different. It costs nothing to have sitting in your will. If it's never triggered — if your executor and beneficiaries decide the assets should simply be distributed outright — it's just never used. No ongoing cost, no ongoing complexity, until the day it's actually needed.

Think of it as an option you build into your estate plan now, that your family can choose to exercise later, when the circumstances of the day make it worthwhile.

WHY FAMILIES ACTUALLY USE THEM

There are two main reasons people build a testamentary trust into their will: protection, and tax.

Protection

If you leave money directly to a beneficiary, it becomes their personal asset — exposed to whatever is happening in their life at the time. A business that fails. A relationship that ends. A creditor with a claim.

Money held in a properly structured testamentary trust sits inside the trust rather than in the beneficiary's own name, which can make it considerably harder for a former partner, a trustee in bankruptcy, or a creditor to reach.

It's not a guaranteed shield in every scenario — courts look at how the trust is actually controlled and used, not just how it's labelled. But structured well, and left alone rather than treated as a personal bank account, it materially strengthens the protection available to your family.

Tax

This is the part that surprises people. Ordinarily, if a minor child receives investment income, it's taxed at punitive rates specifically designed to stop parents shifting income to children to reduce tax — rates that can apply from the first dollar.

Income distributed to a minor from a properly established testamentary trust is treated differently. It's generally what the tax office calls "excepted trust income" under section 102AG of the Income Tax Assessment Act 1936 (Cth), and can be taxed at ordinary adult rates, including access to the tax-free threshold.

For a family with grandchildren who are still minors, that difference — distributed sensibly each year — can be worth thousands of dollars annually, compounding over the years the trust is used.

(We haven't quoted exact dollar thresholds here, because they move with each year's tax scales. If this is relevant to your family, it's worth a conversation with your accountant and your lawyer together, working from this year's figures.)

WHAT'S CHANGING: THE 2026 TRUST TAX REFORMS

If you've been anywhere near a family trust conversation in 2026, you've probably heard something about major changes coming to how trusts are taxed in Australia. It's worth addressing directly, because it's caused a lot of confusion.

In the May 2026 Federal Budget, the Government announced a new 30% minimum tax on discretionary trusts, due to start from 1 July 2028. In plain terms: trustees of discretionary trusts would pay tax at a minimum rate of 30% on the trust's income, with individual beneficiaries receiving a credit for tax already paid at the trustee level.

Two things matter here:

1. This is not law yet. As at the time of writing, it remains at the announcement and consultation stage. Treasury opened formal consultation on 8 July 2026, and there's a real path between "announced in the Budget" and "sitting in the tax act." Details can and do change through that process.
2. Testamentary trusts are treated differently. Based on what's been announced, testamentary trusts already in existence at the time of the Budget announcement are specifically carved out of this new measure — the trusts we're talking about in this episode.

If you already have a testamentary trust structure in place, or you're building one into your will now, this proposed change is unlikely to be the thing that catches you out. If your family also uses a discretionary family trust set up during your lifetime, this is exactly the kind of reform worth discussing with your accountant well before 2028.

(This is a live, moving area of tax policy. Please check the current status of this measure with your accountant or via the ATO before relying on it for your own planning — this article reflects the position as at the time of publication and may not reflect later developments.)

WHO ACTUALLY NEEDS ONE?

A testamentary trust isn't for every family. In our experience, it comes up most often for:

• Parents or grandparents leaving money to grandchildren who are still minors, or likely to be minors by the time an inheritance flows through
• Blended families, wanting to provide for a spouse during their lifetime while ultimately preserving capital for their own children
• Anyone leaving an inheritance to a beneficiary going through — or at real risk of — a relationship breakdown
• Business owners or professionals whose beneficiaries carry higher personal or commercial risk
• Families with a beneficiary who has vulnerabilities around money — whether that's age, disability, addiction, or a track record of financial difficulty

If none of that applies to your situation, you may not need one at all — and we'd rather tell you that honestly than sell you complexity you don't need. Good estate planning is as much about knowing what to leave out as what to add.

WHERE TO FROM HERE?

A testamentary trust costs nothing to build into your will today, and it can save your family real money and real protection tomorrow.

If your will is more than a few years old — or you've never actually asked whether this applies to your family — that's worth a conversation.

Book a fixed-fee estate planning review at ellisonwhytelaw.com.au

This article and the accompanying podcast episode are general information only, prepared for an Australian audience, and are not legal advice. Every family's circumstances are different — please get advice specific to yours before acting on anything discussed here.

Listen to the full episode: The Unsolicitor's Opinion, Episode 2 — available on Spotify and YouTube.