Leaving Assets to Your Kids? Why a 'Testamentary Trust' Protects Your Money from Divorce and Bankruptcy

⚠️ The "Standard Will" Risk: If you leave money directly to your children via a simple Will, that money becomes their personal asset. If they get divorced or go bankrupt, your inheritance is fully exposed to the Family Court or creditors.

💔 The Nightmare Scenario

You worked hard for 40 years to build a $2 million portfolio. You pass away, leaving it all to your son, John.

Two years later, John's marriage falls apart. His ex-wife files for divorce and claims 50% of the marital asset pool. Because John holds your inheritance in his personal bank account, it is considered "matrimonial property."

The Family Court awards $1 million of YOUR hard-earned money to his ex-wife.

This could have been prevented with a Testamentary Trust.

What is a Testamentary Trust?

A Testamentary Trust is a discretionary trust established inside your Will. Unlike a Family Trust you set up while alive, this trust does not exist until you die.

Instead of giving assets TO your beneficiary (John), you give assets TO THE TRUST. John can control the trust, but he does not technically "own" the assets. This legal separation provides two massive benefits.

Leaving Assets to Your Kids?

🛡️ Asset Protection

Because the assets sit inside the trust, they are not personally owned by your child.

Bankruptcy: If your child's business fails, creditors generally cannot seize the trust assets because they belong to the trust, not the individual.
Divorce: While the Family Court has broad powers, assets in a properly structured Testamentary Trust (especially those with an independent co-trustee) are significantly harder for an ex-spouse to attack compared to cash in a personal account.

The "Tax Magic" for Minors

This is the financial killer feature. Normally, minors (under 18) pay ~66% penalty tax on unearned income over $416.

However, income distributed from a Testamentary Trust is EXEMPT from this penalty (thanks to Section 102AG of the ITAA 1936). Minors are taxed at adult rates, complete with the $18,200 tax-free threshold.

💰 Example: The $20,000 Distribution

Your trust earns $20,000 in dividends.

Option A (Standard Family Trust): You give it to your 10-year-old grandson. He pays ~$9,000 in penalty tax.

Option B (Testamentary Trust): You give it to your 10-year-old grandson. He uses his $18,200 tax-free threshold. He pays ALMOST ZERO TAX.

(Imagine paying for your grandchildren's private school fees using pre-tax dollars!)

Standard Will vs. Testamentary Trust Will

Feature	Standard Will	Testamentary Trust
Upfront Cost	Cheap ($300 - $800)	Expensive ($2,000 - $5,000+)
Asset Protection	None (Assets are exposed)	High (Separate entity)
Tax Flexibility	None	Massive (Income Splitting)

Chief Editor’s Verdict

A Standard Will is "penny wise, pound foolish." You save a few thousand dollars on legal fees today, but you risk your family losing half their inheritance tomorrow to a bitter divorce or a failed business venture.

If you have assets over $1 million, own a business, or have young grandchildren, a Testamentary Trust is mandatory. It is the only way to rule from the grave and ensure your wealth stays in your bloodline.

[General Advice Warning & Legal Disclaimer]
This article provides general information only and is not legal advice. Estate laws vary by State (NSW, VIC, QLD, etc.). Family Court outcomes depend on individual circumstances. You must consult with a specialist Estate Planning Lawyer to draft a Testamentary Trust Will.