A testamentary trust for minors lets income from a deceased estate be paid to children at adult tax rates instead of the punitive rates that normally apply to minors. It’s created through a will, takes effect on death, and provided the assets genuinely came from the estate, income distributed to a child can be largely or entirely tax-free up to roughly $22,575 per child in the 2025–26 year once the low-income tax offset is factored in. The trade-off is structural: someone has to control that money until the child is old enough to handle it themselves, and the rules around what counts as “estate income” are stricter than most parents assume.

If you’re weighing up whether to include a testamentary trust in your will, three questions tend to come up in that order: how the tax concession actually works, who holds the purse strings while your child is young, and what happens the day they turn 18. We’ll go through all three.

What is a testamentary trust, and why does it matter for minors specifically?

A testamentary trust is created under the terms of a will and only comes into existence once the estate is administered. Until then, it’s just a clause sitting in a document. The trustee, the person or entity you’ve named, takes control of nominated assets and manages them for the beneficiaries you’ve set out, according to the terms you’ve written.

For adult beneficiaries, a testamentary trust is mostly about asset protection and flexibility. For minor beneficiaries, there’s an additional reason it gets used: the tax treatment.

Ordinarily, income paid to a child under 18 from a standard family or discretionary trust is taxed at penalty rates, designed specifically to stop parents from splitting income to a child’s name to dodge their own marginal rate. A testamentary trust sidesteps this, but only for income that genuinely traces back to the deceased estate. The Tax Act calls this excepted trust income, and it’s the single most important concept in this area.

How does the expected trust income work?

Section 102AG of the Income Tax Assessment Act 1936 sets the rule: income a minor receives from a trust that resulted from a will is taxed at ordinary adult rates, not the minor’s penalty scale. In practice, that means a child beneficiary gets the same tax-free threshold and marginal rates as any adult, currently $18,200 tax-free, with the low-income tax offset extending the effective threshold to around $22,575 for the 2025–26 income year.

Run the numbers, and the gap is significant. Three minor beneficiaries splitting $60,000 of trust income between them, each receiving $20,000, would pay close to nothing in tax under the excepted income rules. The same $60,000 paid to a single high-income parent, taxed at their top marginal rate, could attract tax in the tens of thousands. That difference is the entire commercial case for a testamentary trust.

But, and this is where a lot of older online guidance is now out of date, the concession narrowed considerably in 2019.

The 2019 changes: why “where the money came from” now matters more than ever

Before 1 July 2019, it was common practice to inject extra funds into a testamentary trust from outside the estate, a related family trust distribution, a loan, an external gift, invest those funds, and have the resulting income treated as excepted income too. The ATO viewed this as inflating the trust’s corpus specifically to capture the tax concession, and Parliament closed it down.

Since that date, excepted income only applies to income from property that was:

• transferred to the trustee from the deceased’s estate, and
• transferred as a result of the will (or an intestacy, or a court order varying the distribution)

It extends to reinvestments and accumulations of that original property. Sell a rental house, the estate left to the trust and put the proceeds into shares, and the dividends are still considered income. But money injected from anywhere else after that date, a top-up from a family trust, a loan facility, a gift from a living relative, produces ordinary income that’s taxed at the minors’ penalty rate, even if it sits in the same trust account as the estate funds.

The ATO’s current guidance gives a useful illustration of how this plays out where a testamentary trust mixes estate and non-estate money: each dollar paid to a minor has to be traced back proportionally to its source, so a trust holding $500,000 from the estate alongside $1 million of outside capital will only treat roughly a third of any distribution as excepted income. The rest is taxed at the penalty rate regardless of which “pool” it notionally came from. For a family weighing up whether to top up a testamentary trust with non-estate funds, this tracing requirement is usually the deciding factor against doing it.

A few other scenarios come up often enough to flag specifically:

Borrowing inside the trust

If the trustee borrows money after death and invests it, the ATO’s position is that income from those borrowed funds generally won’t qualify as excepted income. The connection back to the deceased’s estate is broken.

Superannuation death benefits

If super is paid into the estate (rather than directly to a beneficiary or a binding nomination) and then forms part of the testamentary trust, the resulting income is usually still excepted income, because it satisfies the “from the estate, under the will” test. This is one reason a superannuation proceeds testamentary trust clause is now standard in a lot of NSW wills. It gives the executor the option to direct death benefits this way without locking it in for years in advance.

Adding a beneficiary after death

If the trust’s terms are later varied to add a beneficiary who wasn’t named in the will, distributions to that new beneficiary won’t qualify. They weren’t a beneficiary “as a result of the terms of the will.”

Who controls the money while the child is too young to manage it?

This is the question almost every parent asks first and finds hardest to get a straight answer to. A testamentary trust doesn’t hand a lump sum to a 12-year-old. The trustee holds and manages the assets on the child’s behalf, and the will sets the rules for how and when distributions happen.

You have real choices here, and they’re worth thinking through deliberately rather than defaulting to “give it to my sister”:

A family member trustee knows the child and the family situation but may be uncomfortable saying no to a request, particularly from an older teenager or from the child’s other parent. A professional trustee, a solicitor, an accountant, or a trustee company, brings independence and continuity if something happens to the person you’d otherwise have named, at the cost of a fee and a more formal process for every distribution decision. Some will name a “protector” or a small committee alongside the trustee specifically to oversee how discretion is exercised, which can be a reasonable middle ground if you’re not fully comfortable handing the decision to one person alone.

Most testamentary trusts for minors are drafted as discretionary trusts, which means the trustee decides how much goes to each beneficiary and when, within the boundaries the will sets. That flexibility is what makes the tax planning work; different income splits in different years, depending on each child’s circumstances, but it also means the trustee’s judgment matters more than the document itself in any given year.

What happens when the child turns 18?

This is the gap most family law and estate content skips over entirely, and it’s usually the very next question after “how is this taxed.”

Turning 18 doesn’t automatically end a testamentary trust or hand control to the now-adult beneficiary. The trust continues on whatever terms they will set, and under NSW succession law, a testamentary trust can run for up to 80 years from the date of death, which means it can extend well past the original minor beneficiaries into a grandchild’s generation if that’s what you intend.

For most families, though, the more common approach is staged: the will sets specific ages or milestones at which capital becomes available, finishing school, turning 21 or 25, buying a first home, rather than releasing everything the moment the child is legally an adult. There’s a reasonable argument for this beyond just caution: an 18-year-old with full access to a six-figure inheritance is a different proposition to a 25-year-old with the same amount, and the tax benefit of the trust doesn’t disappear once the beneficiary turns 18. The trust can keep distributing at the now-adult’s marginal rate rather than ending and forcing a lump-sum transfer.

If asset protection matters to you, say, you’re concerned about a future relationship breakdown or a beneficiary who struggles with money management, keeping capital inside the trust structure for longer, with the trustee retaining genuine discretion over timing, tends to do more work than an age trigger written rigidly into the will.

Testamentary trust vs family trust: which one actually helps a minor?

These two get confused constantly, and for a minor beneficiary, the difference isn’t cosmetic; it’s the entire tax outcome.

A family (or discretionary) trust is set up during your lifetime, funded with your own assets while you’re alive, and distributions to minor beneficiaries are taxed at the standard penalty rates. There’s no exception for family connection alone. A testamentary trust is created by your will, only comes into existence on your death, and is funded specifically from your estate, and it’s that estate connection, not the trust structure itself, that unlocks the excepted income concession.

In practical terms, if your estate plan currently relies on a family trust to eventually benefit your grandchildren, and a grandchild receives a distribution while still a minor, that income is very likely taxed at penalty rates unless another exception applies. Restructuring that gift to flow through a testamentary trust created in your will, rather than topping up an existing family trust after death, is usually the difference between a child keeping most of an inheritance and a substantial share going to tax in the first year.

What about vulnerable or disabled minor beneficiaries?

If a child beneficiary has a disability, NSW families have an additional structure worth knowing about: a special disability trust. Where a beneficiary is the principal beneficiary of a special disability trust, they’re treated as an “excepted person” under the minors’ income rules entirely, meaning ordinary adult tax treatment applies regardless of the source of the income, not just income traceable to the estate.

A testamentary trust can also be drafted with protective terms for a vulnerable beneficiary more broadly, not limited to a diagnosed disability, but extending to a beneficiary the testator is concerned won’t manage a lump sum well, whether because of age, vulnerability to undue influence, or a pattern of financial difficulty. These protective trusts typically give the trustee wider discretion to retain capital, apply income directly for the beneficiary’s benefit rather than paying it to them, and extend the trust term well past the standard milestones. If this applies to your family, it’s worth raising directly and early. It changes the drafting considerably from a standard testamentary trust clause, and it’s the kind of detail worth raising if you ever need to contest a will where provision for a vulnerable beneficiary looks inadequate.

A 2026 development worth knowing about

In May 2026, the Federal Government announced a new minimum tax measure targeting discretionary trusts, intended to commence from 1 July 2028. The announcement specifically foreshadows that existing testamentary trusts and income relating to vulnerable minors will sit outside the new regime, but the detail isn’t settled. Exposure draft legislation hasn’t been released, and open questions remain about how a will executed now, where the testator dies after the new measure takes effect, will be treated.

This doesn’t change anything about how testamentary trusts work today. But if your will currently includes, or you’re considering adding, testamentary trust provisions, it’s a reasonable prompt to have your estate plan reviewed once the draft legislation lands, rather than assuming a will drafted years ago will automatically be grandfathered. It’s also worth checking how this interacts with related planning, including any power of attorney arrangements you’ve put in place alongside your will.

A testamentary trust for minors isn’t something to draft from a template. The tax outcome depends heavily on which assets go in, how they’re funded after death, and how the trustee’s discretion is structured, and the rules tightened meaningfully in 2019 in ways a lot of older guidance still doesn’t reflect. If you’re updating a will or setting one up for the first time and want to talk through whether this structure fits your family, you’re welcome to contact us for a confidential consultation.