What is a Testamentary Discretionary Trust and Do I Need One?

A Testamentary Discretionary Trust (TDT) is one of the most powerful tools available in Australian estate planning, particularly for people with blended families, significant assets, or beneficiaries who may need protection from creditors.

How Does a Testamentary Discretionary Trust Work?

Unlike a standard bequest under a Will, where you simply give an asset outright to a beneficiary, a Testamentary Discretionary Trust is a structure embedded inside your Will that activates when you die.

When the TDT is triggered:

1. A Trustee (appointed by you in the Will) takes legal control of the nominated assets.
2. Beneficiaries (your surviving partner, children, grandchildren, etc.) can receive income from those assets during their lifetimes.
3. The capital is protected and cannot be used or redirected without the Trustee’s approval.
4. When the final life interest expires (e.g., after your surviving partner passes), the remaining capital is distributed to the ultimate beneficiaries you named, typically your own children.

Who Should Consider a Testamentary Discretionary Trust?

A TDT is particularly beneficial if:

• You are part of a blended family and want to provide for your partner without risking your children’s inheritance being redirected.
• You have a beneficiary who may be exposed to creditors (e.g., in business or a profession).
• You have beneficiaries who are minors and would otherwise be taxed at punitive rates on their inheritance income.
• You want to achieve multigenerational wealth preservation.

The Tax Advantages

One of the most compelling reasons for a Testamentary Discretionary Trust is the significant tax benefit available to minor beneficiaries.

Under normal trust rules, income distributed to a child under 18 is taxed at very high “penalty” rates. However, income distributed from a Testamentary Discretionary Trust to a minor is taxed at the standard adult resident tax-free threshold — currently around $18,200 per year.

This means that if you have multiple grandchildren as beneficiaries, each can receive up to $18,200 per year tax-free from the trust’s income. This can be used to fund school fees, education costs, or savings, all in pre-tax dollars.

What Does It Cost?

Setting up a Will that includes a TDT is more complex than a standard Will, and therefore costs more to prepare. However, the ongoing cost is minimal until the trust actually activates on your death. The ongoing administrative cost of running the trust (annual tax returns, trustee decisions) is typically modest relative to the tax savings achieved.

Related Topics

• Legal Matters: Blended Families & Wills, Radio Episode
• What are the Risks of Sideways Inheritance?
• What Happens to Your Estate Without a Will in QLD?