What Is the Difference Between a Testamentary Trust and a Family Trust?
When it comes to planning for the future, protecting assets, and supporting your loved ones, trusts can be powerful legal tools. Two of the most common types are the testamentary trust and the family trust. While both aim to manage and distribute assets to beneficiaries, they differ in how and when they are created, the level of control they offer, and their purpose.
In this article, our testamentary trust lawyers explain the key differences between a testamentary trust and a family trust and help you determine which structure might suit your circumstances.
What Is a Testamentary Trust?
A testamentary trust is a trust that is created through a person’s will. It comes into effect only after the will-maker’s death. Once the person passes away, their deceased estate is administered, and the assets held in the estate are transferred into the trust. A trustee is then responsible for managing and distributing those assets to the beneficiaries of the trust according to the instructions laid out in the will.
The main aim of a testamentary trust is to ensure the deceased person's assets are protected and distributed in a controlled and tax-efficient manner.
The benefits of a testamentary trust include flexibility in how assets are distributed, protection of the assets, protection for vulnerable beneficiaries, and potential tax advantages—especially when distributing income to children under 18.
Testamentary Discretionary Trust
One of the most flexible forms of testamentary trust is the testamentary discretionary trust. This type of trust gives the trustee the power to decide how to distribute income and capital among the beneficiaries. This allows the trustee to consider each beneficiary’s personal circumstances—such as their financial stability, age, or vulnerability—before distributing assets.
This flexibility makes it an ideal solution for families with high-risk beneficiaries (e.g. those facing bankruptcy, family law disputes, or mental health issues) or for those wanting to provide long-term support to children or vulnerable dependants.
What Is a Family Trust?
A family trust, sometimes known as a discretionary trust, is established during a person’s lifetime. It is not linked to a will and does not rely on someone’s death to become active. Once set up, the trust is operational immediately and can be used for a variety of purposes—such as managing investments, running a business, or protecting family assets.
Like a testamentary trust, a family trust involves a trustee, a trust deed, and a group of beneficiaries. However, the key difference lies in the level of control and flexibility available to the person who creates it.
Key Uses of a Family Trust
Protecting assets from creditors and legal claims
Distributing income or capital among family members to reduce tax
Planning for future generations
Holding property or business interests in a secure structure
Because family trusts are established while the individual is alive, they can be adjusted and updated as circumstances change.
Key Differences Between Testamentary and Family Trusts
1. When They Are Created
The biggest difference between these two types of trusts is timing.
A testamentary trust is created through a will and only takes effect upon the death of the will-maker. It forms part of the deceased estate.
A family trust is established during a person’s lifetime and starts operating as soon as the trust deed is signed.
2. Purpose
The purpose of the trust influences how it’s structured and used.
A testamentary trust is generally set up to provide financial support and control after someone passes away.
A family trust is usually used to manage wealth during one’s lifetime, protect assets from risk, and reduce tax.
Both trusts can support vulnerable beneficiaries, but testamentary trusts are more commonly used in estate planning for dependents, minors, or individuals with long-term needs.
3. Control and Flexibility
In a testamentary trust, control over the assets is passed to the appointed trustee after the will-maker dies. The trust follows the terms set out in the will.
In a family trust, the person who creates the trust can often act as the trustee or appoint one, and they can modify the trust while alive using the trust deed.
This means family trusts offer more ongoing flexibility, while testamentary trusts offer more post-death control.
4. Who Controls the Assets
In both trusts, assets held in the trust are legally owned by the trustee, not the beneficiaries. The beneficiaries of the trust may receive distributions, but they don’t control the trust unless appointed as a trustee.
Testamentary trusts rely on the trustee to act according to the deceased’s wishes.
Family trusts allow the creator to remain actively involved as a trustee or through the trust deed.
5. Tax Benefits
Both trusts offer tax benefits, but how they apply varies:
Testamentary trusts can distribute income from the trust to children under 18 and tax that income at adult rates, a significant advantage not available to family trusts.
Family trusts can distribute income and capital to family members strategically, but minors are taxed at penalty rates on unearned income.
If reducing tax is a goal, professional advice is essential to choose the most tax-efficient option.
6. Level of Protection
Both types of trusts offer asset protection, especially from family law disputes, creditors, or financial risk. However:
Testamentary trusts are commonly used as protective trusts to safeguard inheritances for high-risk or vulnerable family members.
Family trusts can protect wealth from business liabilities or relationship breakdowns but are more exposed if not properly managed.
Which Trust Is Right for You?
The right trust depends on your goals, circumstances, and timing. If you want to protect your family and provide for loved ones after your death, a testamentary trust is an excellent option. A family trust may be more suitable if you're focused on managing wealth, protecting assets now, or reducing tax during your lifetime.
Here’s a quick summary:
| Feature | Testamentary Trust | Family Trust |
| When created | After death (via will) | During lifetime |
| Purpose | Support after death | Manage wealth while alive |
| Flexibility | Set by will | Ongoing control via a trust deed |
| Tax benefits for minors | Yes | No |
| Asset protection | Strong | Strong (with planning) |
| Suited for | Estate planning | Wealth management, tax planning |
Get Legal Advice You Can Trust
Both testamentary trusts and family trusts play an important role in estate planning and asset management, but they’re not one-size-fits-all. The right solution depends on your personal goals, family situation, and financial circumstances.
At Direct Lawyers, our expert estate lawyers help Queensland families navigate the complexities of trust law. We’ll guide you through your options, draft your trust deed, and ensure your trust is legally sound and aligned with your wishes.
Get in touch today to book a free consultation
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