What is the main difference between a testamentary trust and a family trust in Australia?

The primary distinction is timing and creation. A family trust (also called a discretionary or inter vivos trust) is created during the settlor's lifetime by executing a trust deed. A testamentary trust is created by a Will and only comes into existence upon the Will-maker's death. This timing difference has significant consequences for tax treatment, particularly for minor beneficiaries, and for how assets pass into the trust (with or without CGT consequences).

Do I need a testamentary trust if I already have a family trust?

In most cases, yes — the two structures serve fundamentally different purposes and are complementary rather than interchangeable. Your family trust manages wealth during your lifetime. A testamentary trust governs what happens to your estate after death, and critically provides a tax advantage that a family trust cannot replicate: income distributed to minor beneficiaries from a testamentary trust is taxed at adult marginal rates under s102AG(2) of the Income Tax Assessment Act 1936, rather than at the penalty rates (up to 45%) that apply to family trust distributions to minors. If you have children or grandchildren who are or will be minors when you die, a testamentary trust alongside your family trust will almost certainly produce better outcomes. We recommend discussing your specific circumstances with your accountant.

Why are minors taxed differently in a testamentary trust compared to a family trust?

Under Division 6AA of the Income Tax Assessment Act 1936, minors (under 18) pay penalty tax rates on 'unearned' income — including distributions from a family trust. Amounts over $1,307 are taxed at the flat rate of 45%. However, section 102AG(2) of the ITAA 1936 creates an exception for 'excepted trust income', which includes income derived from property transferred to the trust from a deceased estate. Because a testamentary trust receives its assets from the deceased estate, income distributed to minors qualifies as excepted trust income and is taxed at adult marginal rates, with the full $18,200 tax-free threshold available to each minor beneficiary.

What are the CGT consequences of transferring assets into a testamentary trust versus a family trust?

This is one of the most significant differences between the two structures. Transferring assets into a family trust during your lifetime triggers a CGT event (typically CGT event E1 or E2 under the Income Tax Assessment Act 1997). You may be liable for CGT on any capital gain, though the 50% CGT discount may be available for assets held more than 12 months. By contrast, assets that pass to a testamentary trust pursuant to a Will are generally exempt from CGT under section 128-10 of the ITAA 1997 — the deceased's capital gain on death is disregarded, and the trustee acquires the asset at its market value at the date of death. Stamp duty may also be exempt on testamentary transfers in Victoria. You should consult your accountant regarding the CGT implications specific to your assets.

Can assets from my family trust be transferred into a testamentary trust after my death?

Assets held in a family trust do not form part of your estate — they are owned by the trustee of the family trust, not by you personally. Therefore, they cannot automatically pass through your Will into a testamentary trust. This is a critical planning point for high-net-worth individuals with significant wealth held in family trusts: your testamentary trust Will governs your personal estate assets only (property, shares, bank accounts, and superannuation directed via your Will). Careful structuring is required to ensure that family trust assets are also protected on death — this may involve vesting the family trust, distributing capital to beneficiaries who then hold it personally, or other strategies. We recommend discussing these options with your accountant and estate planning lawyer.

Does a testamentary trust protect assets from family provision claims (Will contests)?

A testamentary trust does not eliminate the risk of a family provision claim — eligible persons can still apply to the court to seek a larger share of the estate under the Administration and Probate Act 1958 (Vic). However, a well-drafted testamentary trust can provide some protection by demonstrating that assets are held on trust for defined beneficiaries rather than passing outright, which may influence the court's assessment of what is 'adequate' provision. A family trust is generally better protected from family provision claims because trust assets do not form part of the deceased's estate, though the court does have the power to 'notional estate' certain assets in some circumstances. You should seek specific legal advice about your exposure.

How long can a testamentary trust operate in Victoria?

In Victoria, trusts are subject to the rule against perpetuities, which generally limits a trust to 80 years from its creation. In practice, most testamentary trusts are structured to operate for one or two generations — commonly until minor beneficiaries reach adulthood and the trust capital is distributed. The Will should specify the 'vesting date' (when the trust must distribute its assets) and may give the trustee discretion to wind up the trust earlier if appropriate.

Testamentary Trust vs Family Trust: Which Structure Do You Need?

Estate Planning 11 March 2026 12 min read