Why a Simple Will Might Be Costing Your Kids Their Inheritance: Testamentary Trusts for Minor Children

In the landscape of Australian estate planning, few tools offer as much strategic power and peace of mind as the testamentary trust. While a standard Will is a direct "handover" of assets, a testamentary trust serves as a sophisticated fortress, protecting your legacy for the people who need it most—your children. 

If you are a parent of minor children, understanding how these trusts work is not just a matter of legal administration; it is about ensuring your children are financially secure, tax-protected, and shielded from life’s unpredictability. 

What is a Testamentary Trust? 

Unlike a standard "Family Trust" (inter vivos trust) that you might set up while you are alive, a testamentary trust is created within your Will and only "springs to life" upon your death. 

Instead of assets like cash, property, and shares passing directly to your children, they are held in a trust managed by a person or entity you nominate, known as the Trustee. This structure is particularly vital for minor children who, under Australian law, cannot legally own significant property or sign contracts until they turn 18. 

1. The "Fortress" of Asset Protection 

One of the primary reasons Australian parents opt for testamentary trusts is asset protection. In a standard Will, once an inheritance is paid out, it becomes the personal property of the beneficiary. This leaves it vulnerable to several risks: 

2. Unmatched Tax Efficiency for Minors 

In Australia, the tax benefits of a testamentary trust are arguably its most famous feature. Ordinarily, if you distribute income from a regular family trust to a minor, they are hit with "penalty" tax rates (often as high as 47% for amounts over $416) to discourage people from hiding income in their children's names. 

However, the Australian Taxation Office (ATO) treats income from a testamentary trust differently. Minors who are beneficiaries of these trusts are taxed at ordinary adult marginal rates. 

The practical impact is massive: As of the current tax year, a child could receive roughly $18,200 per year from the trust completely tax-free. If you have three minor children, you could potentially funnel over $54,000 of investment income into their care (school fees, medical costs, extracurriculars) without paying a cent in income tax. This "income splitting" can save families tens of thousands of dollars annually.