Many people know something about “family trusts” or “discretionary trusts”. Maybe you or someone in your family has one already. 

When it comes to looking at your estate planning needs, you should get legal advice about whether or not you should have a similar sort of discretionary trust that is set up in your Will and comes into existence when you die. 

Such trusts are called “testamentary trusts” and they can be used to provide your nominated beneficiaries with some choices, protections and benefits that are not available from a traditional Will that bequeaths an inheritance directly to the beneficiary.

For example, Beneficiary Controlled Testamentary Trusts (also called BCTTs) can provide your beneficiaries with additional benefits such as asset protection and taxation advantages. 

This Basic Guide contains general discussion of questions that commonly arise about creating a Beneficiary Controlled Testamentary Trust. However, you will need to speak to a lawyer to discuss more fully these and any other questions, or to provide advice about your specific circumstances. 

When making their Will, most parents usually them want their children to benefit from inheritance when the parents have died. Such Wills usually leave the deceased estate directly to the children I equal shares with further provision regarding what happens if a child dies before the parents do.

Here are some things that can result from the making such a Will:

  • If a beneficiary is declared bankrupt, the inheritance will vest in the trustee in bankruptcy, who can then use it to pay debts owed to creditors of the beneficiary.
  • If a beneficiary goes through a divorce or separation, the inheritance would be used or at least taken into account as a financial resource for the purposes of the couple’s Family Law property settlement.
  • When the inheritance is invested, the income on that investment would normally be taxed at the beneficiary’s marginal tax rate. The applicable tax rate could be as high as 45% if the beneficiary is earning other income.

Modern Wills often now contain Beneficiary Controlled Testamentary Trusts as a way to both minimise or avoid such problems as well as providing some other advantages. 

Instead of the inheritance going into the hands of each of your beneficiaries directly, they can instead take their inheritance in the form of a separate Beneficiary Controlled Testamentary Trust for each beneficiary that they can control themselves.  Each beneficiary can choose to use this Trust or dispense with it or mould it to their needs, depending on their circumstances when they inherit.

So, for example, if a beneficiary is an adult able to manage his or her own affairs, he or she can inherit through a Beneficiary Controlled Testamentary Trust that is created on the terms contained in the Will. That beneficiary would then be the Trustee and controller of his or her own Trust, with the initial capital of the Trust fund being the property or assets inherited under that Will. The potential beneficiaries of that Trust would typically be the primary beneficiary, his or her spouse and, their children or grandchildren and their respective spouses.

The Will in that case would provide that the capital of that Trust is to be held on trust for such one or more of those beneficiaries as the Trustee (i.e. the primary beneficiary) determines at any time within 80 years after the Will maker’s death. That primary beneficiary also has access to the capital of the Trust at any time if he or she wants it to become his or her property.

While the capital remains a part of the Trust, the primary beneficiary (as Trustee) would usually invest it or apply it for his or her benefit or for the benefit of one or more of the other beneficiaries. The Will would provide that the primary beneficiary (as Trustee) has the absolute discretion to either accumulate the income from any investment within the Trust or to pay that income to any one or more of the potential beneficiaries as he or she decides in his or her own absolute discretion.

Those arrangements will result in the following:

1. Asset Protection

For the duration of the Trust, the Trust assets are owned by the Trust rather than by the primary beneficiary or any of the other beneficiaries. If the beneficiary becomes bankrupt, the assets of the Trust are generally not then available to a Trustee in Bankruptcy for payments to creditors.

2. Taxation

Each primary beneficiary of a Beneficiary Controlled Testamentary Trust is able to share the income investing the Trust capital with the other beneficiaries of his or her Trust. This can have the effect of minimising the applicable income tax. 

A particular feature of Beneficiary Controlled Testamentary Trusts is that because the Trust arises under the Will of a deceased person, child beneficiaries are treated as separate taxpayers in relation to the income earned from that Trust. As the law currently stands, each child beneficiaries is entitled to receive income from the Trust up to the income tax free threshold. Beyond that, the income to the child beneficiary would be assessable at the lowest income tax rate (currently 15 cents in the dollar). 

This tax treatment applies to testamentary trusts arising from the terms of a Will. It is not available in the case of children who are beneficiaries of a discretionary family trust created during the Will maker’s lifetime.

3. Family Law

For Family Law purposes, in the event of a property settlement following a divorce or separation, the assets of the Trust are unlikely to be regarded as property of any of the beneficiaries. However, the Family Court does have the power to treat the assets in the Trust as a family resource in deciding on the appropriate division of the marital property.

In doing so, the Family Court would also have regard to the rights of other potential beneficiaries of the Trust and so it would generally be expected that the result would be better than if the assets held in the Trust had instead been bequeathed to the beneficiary directly rather providing the inheritance to him or her in the form of a Beneficiary Controlled Testamentary Trust. 

If Family Law or bankruptcy issues were of real concern, there measures also exist to make it less likely that the Courts could treat the assets as property or as a resource. However, those sorts of measures have other consequences, such as a loss of control of the relevant Trust, that would require careful advice and consideration. 

Apart from these specific features of Beneficiary Controlled Testamentary Trusts, there are other beneficial features worth considering. 

As Beneficiary Controlled Testamentary Trusts do not come into effect until after the Will maker’s death, there are no running costs for the Trust until that time comes. The beneficiary is free to weigh up whether any additional complication or cost of having a Beneficiary Controlled Testamentary Trust would be compensated for by the benefits of having such a Trust. If they don’t want one, the terms of the Trust can also permit the primary beneficiary to elect to receive their inheritance directly rather than in the form of such a Trust.

The terms of Beneficiary Controlled Testamentary Trusts are very flexible so as to operate effectively in most situations. Our lawyers at Craddock Murray Neumann Lawyers can look at the particular circumstances of you and your nominated beneficiaries and then come up with an estate planning solution that best suits your specific requirements. 

For more information on how our Wills & Estate Planning lawyers can help you with Beneficiary Controlled Testamentary Trusts, please contact our team at