There are many opportunities and risks to be considered in advising your clients.
At Danaher Moulton we do Complex Estate and Business Succession Planning every day for family offices, high net wealth clients, blended families and families looking to exclude beneficiaries from a Will. Testamentary Trusts and Family Trusts are essential in protecting your wealth.
Family Trusts vs Testamentary Trusts
Control, Succession and Practical Considerations for Advisers
Trust structures remain central to tax planning, asset protection and wealth succession. In practice, however, outcomes are often driven less by tax outcomes and more by who controls the structure, how that control transitions over time, and how effectively wealth is protected from family law risk and estate disputes.
This article provides a practical comparison of family trusts and testamentary trusts, with a focus on control, bespoke planning, estate claims, asset transfers, multiple beneficiaries, bucket companies and succession planning.
1. Family Trusts Overview
A family trust (typically discretionary) is established during a person’s lifetime. The trustee holds and manages assets for the benefit of a class of beneficiaries, with discretion as to income and capital distributions.
Key characteristics:
- Established during lifetime
- Commonly used for business and investment asset holding
- High flexibility for income distribution
- Control generally exercised by:
- the trustee, and
- the appointor (or principal), who can appoint and remove the trustee
The principal risk with family trusts is not the structure itself, but poorly planned control and succession.
2. Testamentary Trusts Overview
A testamentary trust is created under a will and comes into effect on death. Assets pass from the deceased estate into trust for ongoing management.
Key characteristics:
- Established on death through a will
- Control framework deliberately set by the will-maker
- Strong post-death asset protection
- Ability to tailor benefit and control
- Income streaming opportunities, including for minor beneficiaries
Testamentary trusts are increasingly used where there are young children, blended families, vulnerable beneficiaries, or heightened family law risk.
Testamentary trusts tend to be more bespoke designed for the beneficiaries of the Will maker. Types of testamentary trusts include Special Disability Trusts (preserve Centrelink benefits), Bloodline Trusts, Protective Trusts (where the intended beneficiary has limited control) and life estate testamentary trusts (one person benefits from the income and others benefit from the capital)
3. Bespoke vs General Nature of Trust Structures
Testamentary Trusts: Bespoke by Design
Testamentary trusts are inherently bespoke. They are specifically tailored to suit individual beneficiaries or to achieve defined objectives, rather than merely to hold assets.
Common examples include:
- Superannuation proceeds trusts, to manage death benefit proceeds
- Protective trusts, to shield beneficiaries from creditors or relationship breakdown
- Capital preserved trusts, where income may be applied but capital is protected
- Bloodline trusts, limiting benefit to direct descendants
- Life estate trusts, where one person receives income during their lifetime and another ultimately receives capital
This allows a will-maker to address vulnerability, family dynamics and long-term protection with precision.
Family Trusts: General in Nature
Family trusts are generally broader and more general. They are typically intended to:
- own business or investment assets
- distribute income flexibly during the controller’s lifetime
- provide general tax planning and asset protection
They are not usually designed to address individual beneficiary circumstances in a bespoke way.
4) Estate Claims and Exposure
Estate claim risk is a key distinction.
- Testamentary trusts created by a will do not protect against an estate claim where the claim arises against the estate itself. Assets remain exposed before flowing into the testamentary trust.
- Family trusts established during lifetime sit outside the estate and, particularly in Victoria, can be an effective estate planning tool to limit exposure to estate claims, provided control has been properly structured (note Loans and UPE’s can bring assets in a Family trust within an estate claim).
5) Transferring Assets Into and Out of Trusts – Tax Treatment
- Testamentary Trusts
- Assets passing from the will-maker into a testamentary trust are generally exempt from duty and CGT, with the cost base inherited
- Assets added later to a testamentary trust do not receive the same tax treatment as assets passing under the will
- Transfers of assets to beneficiaries are generally exempt from duty, though CGT may apply
- Family Trusts
- Assets transferred into a family trust during lifetime will generally trigger CGT and duty, a significant distinction from testamentary trusts
- Transfers of assets from a family trust to beneficiaries may be exempt from duty, though CGT may apply
- Additional points
- Assets held in a family trust do not transfer into a testamentary trust on the death of the will-maker.
- An in-specie gift of cash into either a family trust or testamentary trust does not attract tax
6) Separating Inheritance Between Beneficiaries
How inheritance is separated or not is a major driver of future control risk and family conflict.
- Family Trusts
- Inheritance is not separated for the next generation
- No beneficiary has a fixed interest
- Control of the trust is critical, as the controller ultimately determines economic outcomes
- Testamentary Trusts
- It is common for separate testamentary trusts to be created for each beneficiary, with the will-maker’s assets divided accordingly
- This provides clearer separation of benefit and can reduce disputes and family law exposure
7) One Family Testamentary Trust vs Separate Testamentary Trusts
When implementing testamentary trusts, a key design decision is whether to establish a single family testamentary trust or separate testamentary trusts for each beneficiary. This choice has material implications for control, protection, governance and long-term outcomes.
Single Family Testamentary Trust
Holds assets collectively for multiple beneficiaries under a unified governance framework.
Potential advantages include:
- Centralised trustee control and consistent decision-making
- Stronger family law protection where beneficiaries do not control the trust
- Ongoing parental or independent oversight
- Flexibility to respond to changing family circumstances
- Avoidance forced asset fragmentation
- Administrative efficiency and reduced compliance complexity
This approach is often well suited where asset protection, capital preservation and oversight are priorities, particularly while beneficiaries are young or exposed to family law risk.
Separate Testamentary Trusts for Each Beneficiary
Separate trusts divide the estate into individual trust structures for each beneficiary.
Potential advantages include:
- Clear separation of entitlements
- Reduced day-to-day involvement between siblings
However, risks include:
- Greater family law exposure where a beneficiary controls their own trust
- Loss of parental oversight
- Divergent outcomes over time driven by differing trustee decisions, relationships or pressures
Staged or Hybrid Approaches
A common strategy is to commence with a single trust and allow separation later, either at a specified age or at trustee discretion once risk has reduced.
8) Control the Central Risk
Tax and asset protection benefits are often assumed. Control is where the most significant long-term risks and benefits arise.
- Family Trusts
- Control commonly rests with one person during life
- On death or incapacity, control may pass unintentionally
- A child who controls the trust often controls the economic benefit
- Testamentary Trusts
- Control is intentionally designed in advance
- Trustees can be independent or required to act jointly
- Benefit and control can be separated
9) Family Law risk for children
Relationship breakdown is now a mainstream planning consideration.
- In family trusts, protection depends on control and distribution history
- Where a child controls their own trust, it may be treated as a financial resource
Testamentary trusts generally provide stronger protection because:
- the structure is imposed by the will-maker
- the beneficiary does not own or control assets
- access to capital can be restricted or staged
10) Bucket Companies and Equalisation
Bucket companies can complicate estates:
- Retained earnings and franking credits may sit outside the estate
- Control of shares may not align with testamentary intentions
- UPEs and Division 7A issues can distort outcomes
Effective planning requires alignment between:
- bucket company shareholdings
- trust control
- equalisation clauses
- succession of trustee and appointor roles
11) Succession Planning: The Most Common Failure
Frequent issues include:
- no succession of appointor roles
- trustee shares passing without regard to control
- outdated trust deeds
Without planning, control can pass unintentionally or be disputed, undermining business continuity and family harmony.
12) Governing Documents and Legislative Framework
Family Trusts
- Governed by the trust deed that establishes the trust
- Subject to the Trustee Act in the relevant jurisdiction
Testamentary Trusts
- Governed by:
- the will that creates the trust
- the Trustee Act, and
- the Administration and Probate Act
- Once the estate is administered, the executor commonly transitions into the role of trustee, subject to the will’s terms
Final Thoughts
Family trusts and testamentary trusts are complementary, not competing, structures. Used together and designed with a deliberate focus on control, bespoke planning, protection and succession they can preserve wealth, reduce conflict and support families across generations.
The real risk is not choosing the wrong structure but failing to plan who will control it when the original decision-maker is no longer there.
At Danaher Moulton we deal with these issues every day. If you need help in advising your clients on Family Trusts and Testamentary Trusts, call us.
