Knowledge Bank
What Is A Testamentary Trust?
Quick Answer
A Testamentary Trust is a trust created through your Will that begins after you pass.
Instead of an inheritance passing directly to a beneficiary, it can be held and managed by a Trustee for that beneficiary under the instructions contained in your Will.
A Testamentary Trust may provide greater flexibility, additional protection and a practical way of managing an inheritance over time.
Whether it is appropriate depends on the people you want to benefit, their circumstances and what you want the inheritance to achieve.
Introduction
Many people assume that preparing a Will simply means deciding who receives their assets after they pass.
Sometimes a direct inheritance is appropriate.
In other circumstances, a Will can establish a Testamentary Trust so that an inheritance remains managed for the beneficiary rather than passing to them immediately.
Within the broader estate plan, a Testamentary Trust allows your intentions to continue guiding how an inheritance is managed after you pass.
It is not appropriate for every family, but understanding how it works can help you decide whether it supports the outcomes you want to achieve.
Why Might Someone Use A Testamentary Trust?
A direct inheritance usually becomes the beneficiary’s personal asset as soon as they receive it.
A Testamentary Trust provides another option.
Instead of passing immediately to the beneficiary, the inheritance can remain within the trust and be managed for their benefit.
This may be helpful where the person making the Will wants to:
- provide some protection for the inheritance;
- allow flexibility in how and when assets are used;
- support a younger or vulnerable beneficiary;
- help manage financial or personal risks; or
- preserve assets for the beneficiary and, where appropriate, future generations.
The purpose is not simply to delay an inheritance.
It is to create arrangements that better reflect the beneficiary’s circumstances and what the inheritance is intended to achieve.
Practical Point
Most people do not include a Testamentary Trust because they expect something to go wrong.
They include one because circumstances can change and they want their estate plan to remain flexible enough to support the people they care about over time.
How Does A Testamentary Trust Work?
When the person who made the Will passes, the Will identifies which assets or share of the estate will be placed into the Testamentary Trust.
Those assets are then managed under the instructions contained in the Will rather than being transferred directly to the beneficiary.
The Will sets out:
- who may benefit from the trust;
- who will manage it; and
- how and when the trust assets may be used or distributed.
The beneficiary can still receive support or benefit from the inheritance.
The difference is that the assets remain within the trust and are managed under the arrangements chosen by the person who made the Will.
Who Manages The Trust?
The person responsible for managing the trust is called the Trustee.
The Trustee makes decisions about the trust assets under the instructions contained in the Will.
A Trustee may be:
- one trusted person;
- two or more people acting together; or
- a trustee company.
The right choice depends on the family circumstances, the assets involved and who is best placed to manage the inheritance responsibly over time.
A Simple Example
Consider a parent with two adult children.
The parent wants each child to receive an equal share of the estate, but the children’s circumstances are different.
One child is financially secure and comfortable managing money.
The other may need more support because of poor financial decisions, a vulnerable relationship, illness, disability or another personal circumstance.
Direct Inheritance
If both children receive their inheritance directly, each child receives their share personally and takes full control of it immediately.
The parent can divide the estate equally, but cannot provide different levels of management or protection to reflect each child’s circumstances.
Testamentary Trust
If each child’s share is placed into a separate Testamentary Trust, both children can still receive an equal benefit from the estate.
However, the inheritance can be managed differently according to each child’s needs.
The financially secure child may have greater control over their trust and use the assets with considerable flexibility.
For the child who needs more support, the Trustee may manage the inheritance more carefully, provide funds as needed and preserve part of the capital for the future.
The difference is important:
Equal treatment does not always require identical arrangements.
A Testamentary Trust can allow the same estate plan to respond to different family circumstances while continuing to carry out the parent’s underlying intention—to provide fairly for both children.
When Might A Testamentary Trust Be Helpful?
A Testamentary Trust may be worth considering where an inheritance may benefit from ongoing management, flexibility or additional protection.
This may include situations involving:
- young beneficiaries;
- a beneficiary with a disability, illness or other support needs;
- someone who has difficulty managing money;
- a beneficiary facing business, bankruptcy or creditor risks;
- concern about a future relationship breakdown;
- a blended family where different needs must be balanced; or
- assets that the family hopes to preserve over time.
Not every family needs a Testamentary Trust.
For some beneficiaries, receiving an inheritance directly may be entirely appropriate.
The question is whether the trust would help the estate plan respond more effectively to the people and circumstances involved.
Common Mistake
Testamentary Trusts are sometimes thought to be useful only for wealthy families.
The value of the estate is relevant, but it is not the only consideration.
A more important question may be whether a beneficiary needs protection, flexibility or support in managing their inheritance.
Equally, a Testamentary Trust should not be included merely because it is available.
It should have a clear purpose within the estate plan.
Frequently Asked Questions
Can A Beneficiary Also Be The Trustee?
Often, yes.
For some families, allowing an adult beneficiary to manage their own Testamentary Trust provides an appropriate balance of control and flexibility.
In other circumstances, an independent Trustee or an additional Trustee may provide greater support, oversight or protection.
The right arrangement depends on the beneficiary and what the trust is intended to achieve.
What Assets Can A Testamentary Trust Hold?
A Testamentary Trust may hold assets transferred from the estate, such as:
- cash;
- property;
- shares; and
- other investments.
The assets placed into the trust depend on the Will, the estate and the purpose of the trust.
Does A Testamentary Trust Guarantee Asset Protection?
No.
A Testamentary Trust does not make an inheritance untouchable or remove every future risk.
The level of protection may depend on how the trust is written, who controls it, how it is managed and the circumstances that arise later.
It may provide additional protection compared with a direct inheritance, but it should never be presented as a guarantee.
Final Thoughts
A Testamentary Trust is one way of allowing your intentions to continue beyond the initial distribution of your estate.
Instead of an inheritance passing directly to a beneficiary, it can remain managed for them under arrangements created through your Will.
Whether that is appropriate depends on:
- the people you want to support;
- their circumstances;
- the assets involved; and
- what you want the inheritance to achieve over time.
The objective is not to add complexity.
It is to choose the arrangement that best supports the wider estate plan.