Trust Structures Every Professional Should Know
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Trust Structures Every Professional Should Know
- Key Takeaways
- Testamentary Trusts offer tax-effective income distribution (especially to minors) and protect assets from creditors, ex-partners, and financially inexperienced beneficiaries.
- Super Proceeds Trusts ensure your superannuation benefits are distributed to the right people with minimal tax, addressing the fact that super doesn’t automatically form part of your estate.
- Family Trusts, established during your lifetime, are flexible tools for managing investments, distributing income, and protecting assets, though they don’t offer the same tax benefits for minors as Testamentary Trusts.
- Professionals with complex wealth structures should use a combination of trusts to minimise tax, protect assets, and ensure their legacy is distributed according to their intentions.
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“I’ve worked hard for decades in mining and resources. Now I want to make sure my family is looked after – and ensure the wealth I’ve built doesn’t get eaten up unnecessarily by tax or disputes.”
If that sounds familiar, you’re not alone. Many professionals across a range of industries can be in a unique position: high income, substantial superannuation, and often complex shareholdings through Executive Share Schemes (ESS). But when it comes to estate planning, too many leave it to chance.
This article explores how Testamentary Trusts, Super Proceeds Trusts, and Family Trusts can help protect your wealth and ensure your family’s inheritance is passed on in a way that’s tax-effective, secure, and aligned with your wishes. We’ll also touch on how ESS shares fit into the picture and why they deserve special attention.
The Power of Testamentary Trusts
A Testamentary Trust is created through your Will and only comes into effect upon your death, meaning you won’t incur accounting and legal fees while you’re alive. It allows your assets to be held, and the income produced from those assets is managed by a trustee for the benefit of your chosen beneficiaries. This structure offers flexibility, protection, and significant tax advantages.
One of its standout features is the ability to distribute income to minors at adult tax rates. In contrast, discretionary family trusts operating outside a Will often attract punitive tax rates for minors. Testamentary Trusts also provide a layer of protection against creditors, ex-partners, and poor financial decisions by beneficiaries. Trustees can tailor distributions based on individual needs, which is especially helpful when beneficiaries are young, vulnerable, or financially inexperienced.
Superannuation: Don’t Leave It to Chance
Your superannuation may be one of your largest assets, but without proper planning, it can be taxed heavily or distributed in ways you didn’t intend. A Super Proceeds Trust is a specialised form of Testamentary Trust designed to receive superannuation death benefits. It ensures those benefits go to the right people and with minimal tax.
This structure is particularly relevant for professionals with substantial super balances and complex family arrangements. Superannuation doesn’t automatically form part of your estate, so without a clear plan, your loved ones may not receive what you intended. A Super Proceeds Trust provides certainty and control, helping you protect your family’s future.
Family Trusts: Managing Wealth While You’re Alive
Unlike Testamentary Trusts, Family Trusts – also known as discretionary trusts – are established during your lifetime. They’re commonly used for asset protection, income distribution, and tax planning. These trusts offer high flexibility in managing investments, businesses, or property portfolios.
Family Trusts allow you to distribute income to family members, support ageing parents, or fund children’s education. However, they don’t offer the same tax advantages for minors, are subject to strict rules as to income generated and are subject to different rules when it comes to estate planning. They’re best suited for professionals who want to manage wealth proactively and adjust strategies as circumstances change.
Comparing Trust Structures: What’s the Real Difference?
While both Family and Testamentary Trusts aim to protect and manage assets, they differ significantly in how and when they’re created and in the level of control they offer.
A Family Trust is governed by a trust deed and is active while you’re alive. You can implement asset protection strategies immediately, manage tax outcomes, and adjust the trust terms as needed. This flexibility makes Family Trusts ideal for managing current wealth.
In contrast, a Testamentary Trust is created through your Will and only comes into effect upon death. Its terms are locked in once you die and the Will is operating. These trusts also offer strong protections and tax advantages that make it a powerful tool for legacy planning.
Below we’ve outlined some of the key aspects and differences of Discretionary Family Trusts compared to Testamentary Trusts.
| Aspect | Discretionary Family Trusts | Testamentary Trusts |
|---|---|---|
| Formation | Established during your lifetime. | Established upon your death via your Will. |
| Purpose and Usage | Used for estate planning, managing assets, taxes, and providing for beneficiaries. | Primarily designed to address asset and income distribution after the Will maker’s death. Used to protect vulnerable beneficiaries such as children or disabled persons. |
| Flexibility | Offers flexibility and control over asset and/or income distribution each year. | Provides control over asset and/or income distribution after death, with conditions set in the Will. Can have a mechanism that the Trust be wound up once a person reaches a certain age over 18. |
| Tax Advantages | Subject to strict laws can be used to distribute capital or income tax effectively. Limited tax advantages for minors. |
Significant tax advantages, especially for minors who are taxed at adult rates. |
| Protection | Offers protections against creditors. | Offers protection against creditors, ex-partners (to a point) and poor financial decisions. |
| Administration | Governed by a trust deed and legislation and ATO rules. | Governed by the Will and probate laws and legislation. |
| Beneficiaries | Usually discretionary and beneficiaries can be designated and instructions for asset management outlined. | Beneficiaries are protected, especially minors or those financially irresponsible or under a disability. |
| Legal Implications | Subject to the terms of the trust deed and legislation and ATO rules. | Usually requires probate and can be subject to the Will maker’s personal estate. |
Many professionals choose to implement both: using a Family Trust to manage wealth during their lifetime and a Testamentary Trust to safeguard their estate and to ensure that certain beneficiaries are protected.
Why Professionals Need a Tailored Approach
Professionals often accumulate wealth through ESS shares, bonuses, and long-term incentives. This means estate planning isn’t just about writing a Will, it’s about understanding what you have and structuring your legacy.
Your estate plan should reflect the complexity of your wealth, not just the simplicity of your intentions. Trust structures help minimise tax, protect assets from legal claims or disputes, and give you control over how and when your wealth is distributed.
Consider a scenario where you have $2 million in superannuation, $500,000 in ESS shares, and a property portfolio. Without a trust, your estate could be exposed to tax, legal claims, or mismanagement. Testamentary and
Super Proceeds Trusts can ensure your assets and the income those assets produce are distributed according to your wishes and assist your beneficiaries, while Family Trusts can help you manage and grow your wealth during your lifetime.
Let’s consider a scenario where a couple has two children under the age of 18. One member of the couple passes away, and the surviving spouse continues to earn an income of $100,000 per annum. Here’s how a testamentary trust can provide tax savings for this family:
Scenario:
- Surviving Spouse’s Income: $100,000 per annum
- Children: Two, both under 18 years old
- Deceased Spouse’s Estate: $1,000,000 (to be distributed through a testamentary trust)
Without a Testamentary Trust:
If the $1,000,000 estate is directly inherited by the surviving spouse and received a return of 5% per annum, the income would be $50,000 per year. This income would be added to the surviving spouse’s income, resulting in a total taxable income of $150,000.
- Surviving Spouse’s Income: $100,000
- Interest Income: $50,000
- Total Taxable Income: $150,000
Based on the Australian tax rates for the 2025-2026 financial year, the tax payable on $150,000 would be approximately $39,838 (including Medicare levy). The tax payable on the survivor’s salary of $100,000 alone, would be $22,788, which means the additional tax on the earnings from the $1,000,000 inheritance would result in additional tax payable of $17,050.
With a Testamentary Trust:
If the $1,000,000 estate is placed into a testamentary trust, the trustee can distribute the interest income to the children, who are taxed at adult rates. This means the $50,000 interest income can be split between the two children, each receiving $25,000.
- Child 1’s Income: $25,000
- Child 2’s Income: $25,000
Based on the Australian tax rates for the 2025-2026 financial year, the tax payable on $25,000 for each child would be approximately $1,292 (including Medicare levy).
- Tax for Child 1: $1,588
- Tax for Child 2: $1,588
- Total Tax for Children: $3,176
Comparison:
- Without Testamentary Trust: $17,050 (including Medicare levy)
- With Testamentary Trust: $3,176 (including Medicare levy)
Tax Savings:
By using a testamentary trust, the family can save approximately $13,874 in taxes annually.
This example demonstrates how a testamentary trust can provide significant tax savings by distributing income to minors at adult tax rates, thereby reducing the overall tax burden on the family.
ESS Shares: A Legacy Worth Protecting
Executive Share Schemes (ESS) are common in mining and resources, but they’re often misunderstood in estate planning.
Can your ESS shares be passed on to your children? What happens if they haven’t vested yet? Will your executor know what to do?
These are critical questions. The answers depend on your scheme’s rules and your estate plan. Some ESS shares vest immediately upon death, while others may be forfeited. It’s vital to understand your scheme’s terms and ensure your Will and trust structures accommodate them.
Executors must navigate legal and tax obligations, and a trust can simplify this process. ESS shares can be placed into a Testamentary or Family Trust to manage tax and control. This is especially important if your shares form a significant part of your wealth.
ESS shares aren’t just a reward – they’re a legacy. Treat them like one.
Real-Life Examples: Trusts in Action
Michael, a mining engineer, had $2.5 million in super and a portfolio of ESS shares. He used a Testamentary Trust to ensure his children received income from his estate without paying penalty tax. His trustee managed distributions based on each child’s needs, providing financial support without overwhelming them.
Jane, a geologist, set up a Family Trust to manage her property investments and distribute income to her retired parents. It gave her flexibility and protected her assets from potential legal claims. She also used the trust to support her children’s education and future home purchases.
Allan, an executive adviser, structured his ESS shares to flow into a Testamentary Trust on his death. This ensured his spouse received the full value without unnecessary tax and avoided disputes with other family members.
These examples show how trust structures can make a real difference in protecting and managing wealth.
What Should You Do Next?
If you’re a professional, start by reviewing your Will. Does it include Testamentary or Super Proceeds Trusts? If not, it might be time to update it.
Next, take a close look at your ESS scheme rules. What happens to your shares if you pass away? Can they be transferred, or will they be forfeited?
Consider setting up a Family Trust for ongoing wealth management. It’s a flexible tool that can help you manage investments, support family members, and protect assets.
Most importantly, speak with a legal adviser who can tailor a solution that fits your life and legacy. Estate planning isn’t one-size-fits-all, and the right advice can make all the difference.
Your Wealth Deserves a Plan
Estate planning isn’t just about ticking boxes. It’s about protecting what you’ve built and ensuring it benefits the people you care about most.
Whether you’re just starting to think about estate planning or already have a Will, it’s worth exploring how trust structures and ESS planning can protect your legacy.
Need help navigating trust structures and ESS planning? Our legal team is here to guide you. Call us on (07) 3220 1144 to discuss your needs.
Disclaimer: This information is general in nature and does not take into account an individual’s personal situation. Each person’s situation is unique and each person needs to consider whether the information is appropriate to their needs, and where appropriate, seek professional advice from us, an accountant and a financial adviser. Taxation, legal and other matters referred to herein are of a general nature only and are based on Hillhouse Legal Partners’ interpretation of laws existing at the time (July 2019) and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time. Although every effort has been made to verify the accuracy of the information contained, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained herein or any loss or damage suffered by any person directly or indirectly through relying on this information.
