A testamentary trust is a discretionary trust that is created under your Will when you die. The primary purpose of a testamentary trust is to manage your estate assets to produce income for beneficiaries. A trustee (who can be the same person as the executor of the Will), administers the trust on behalf of beneficiaries.

Testamentary trusts have several advantages:

  • Minor children can be taxed at adult rates.
  • Bankrupts and spendthrifts can be protected.
  • The trustee can direct different classes of income to beneficiaries by income streaming.

Where testamentary trusts are activated, the surviving spouse may receive assets and income of the trust (i.e. means tested) if:

  • the surviving spouse directly controls the trust (irrespective of whether they are a beneficiary), or
  • An associate has control and the surviving spouse is a potential beneficiary.

The rationale for the rules is that if a surviving spouse has direct control of a trust, they can exercise their discretion as trustee to benefit themselves. Further if an associate (eg. family member or professional advisor) has control and the surviving spouse is a potential beneficiary it is reasonable to expect that the surviving spouse will share in the benefits of the trusts.