Testamentary vs Family Trust: Which One You Have

The testamentary trust vs family trust distinction starts with the document that created it. A testamentary trust arises under a will after death, or a relevant estate court order. A family trust usually starts with a discretionary trust deed during the settlor’s lifetime.

The Short Answer: What Creates Each One

Read the will for a testamentary trust and the executed deed for a family trust. The client’s description can tell you which documents to request, but it cannot establish the trust’s terms.

In ordinary Australian usage, a family trust is a discretionary trust established for a family during life. For tax-law purposes, “family trust” also has a narrower meaning when a family trust election is in force. Record those two facts separately.

Discretionary describes the trustee’s power to choose beneficiaries and distributions. Testamentary describes how the trust arose. A testamentary trust can therefore give its trustee discretion over distributions.

A court order changing a will or the distribution of an intestate estate can also produce a trust with relevant deceased-estate tax treatment. Read the order with the estate documents. A court order concerning a living family’s property does not automatically create a testamentary trust.

“Living trust” usually means a trust established while the creator is alive. “Revocable trust” usually means the creator retains a power to revoke it, particularly in American estate planning. Translate those labels into the actual Australian document and its powers before choosing a tax treatment.

Classifying the Trust From the Document You Hold

Start with the clause that creates the trust, then trace the assets and the people authorised to act.

Document check	Testamentary trust	Family discretionary trust
Creation	Will clause or operative estate court order	Executed deed and settlement
Initial property	Gift or estate assets held under the trust terms	Settled sum and later property acquired by the trustee
Decision-maker	Trustee named under the will, with any replacement provisions	Trustee named in the deed, updated for valid appointments
Beneficiaries	Named beneficiaries or class specified by the will	Beneficiary class and exclusions specified by the deed
Capital entitlement	Age, life interest, discretion or other conditions in the will	Distribution powers and takers on vesting in the deed

For a will, read the trust clause together with the residue clause and any codicils. Identify who holds capital, who can receive income and when a beneficiary becomes entitled to the capital.

For a deed, identify the settlor and settled sum. Then read the appointor provisions, trustee appointment powers and beneficiary definitions. Check every variation before relying on the original schedule. The trust deed checklist explains the clauses to inspect.

When either document is incomplete, request the complete executed version, schedules and attachments. For an estate, collect the probate grant or letters of administration and any court orders. For an existing trust, collect every variation, trustee appointment document and relevant trustee resolution.

Record the classification in the client file with the document name, clause reference and reviewer. Keep the creation method separate from fixed or discretionary entitlements and election status. Carry that classification into your tax software’s entity record and the applicable trust-type code.

Illustrative file example: a deceased client leaves shares to a trust under their will and also held an interest in an existing family trust. Open separate records. The will explains the new trust, while the existing deed continues to govern the family trust.

Where the Tax Treatment Differs

The largest practical difference is often income distributed to children. Estate-derived income can be excepted trust income, while an ordinary family trust distribution generally falls within the special rules for minors.

Under Division 6AA of the Income Tax Assessment Act 1936, section 102AG defines excepted trust income. Its deceased-estate provisions include wills and qualifying court orders. For assets covered by the estate-asset tracing restriction, trace income to estate property and qualifying accumulations or replacements. Unrelated contributions covered by that restriction do not qualify simply because the trust arose under a will.

For a minor receiving qualifying excepted income, ordinary individual tax treatment applies. A family discretionary trust’s investment income generally attracts the higher minor-income rules unless the beneficiary or income meets an exception. Apply the beneficiary’s residency and income circumstances using the ATO’s minor tax rates.

Keep estate-derived and later contributed assets identifiable in the accounts. Earlier assets and accumulations can retain excepted-income treatment under the previous rules, subject to anti-avoidance provisions. Record each asset’s acquisition or transfer timing and apply the official transitional rules. A distribution resolution alone does not establish whether an outside contribution qualifies.

Tax issue	Testamentary trust	Family discretionary trust
Minor beneficiary	Qualifying estate-derived income can be excepted trust income	Ordinary investment distributions usually fall under the minor-income rules
Asset passing from an estate	Deceased-estate CGT rules and the ATO’s testamentary-trust practice can apply	A lifetime transfer usually requires its own CGT analysis
Later asset sale	Trustee sale can produce a capital gain or loss	Trustee sale can produce a capital gain or loss
Return preparation	Trust income, entitlements and trustee assessments must be considered	The same trust-return matters must be considered
Election status	A family trust election can be relevant if its conditions are met	A family trust election is commonly considered for losses and franking-credit rules

The ATO’s testamentary-trust CGT practice treats the trustee like a legal personal representative for relevant estate-asset transfers. The practice has exceptions, including third-party sales and CGT event K3. It does not exempt every transaction by a testamentary trust.

For a post-CGT asset, the inherited cost base generally starts with the deceased’s cost base. For a pre-CGT asset, it generally starts with market value at death. Special rules apply to some dwellings and other assets. Collect acquisition records, capital improvements and any valuation needed under the inherited-asset cost-base rules.

Both trusts need annual lodgement obligations assessed, with a trust return where required. Reconcile distributions and retained income, including amounts assessable to the trustee. The 2026 trust return records beneficiary distributions, capital gains, franking credits and Div 6AA eligible income.

A family trust election is a separate tax decision. It can matter for either trust if the statutory conditions are met. Confirm existing elections before preparing distributions, because family-group restrictions can create tax consequences. The trust’s everyday name does not establish election status.

Where Control and Succession Differ

Control comes from the appointment powers in the governing document. A family trust deed often gives an appointor power to remove and replace the trustee. Read who succeeds to that power on death or incapacity.

For a testamentary trust, the will identifies the initial trustee and can specify replacement powers. The executor administers the estate, while the testamentary trustee administers the continuing trust. The same person can hold both roles, but executor status alone does not establish every trustee power.

Check whether the trustee is a company or individuals. For a company, inspect who controls its shares and directorships as well as who can replace it as trustee. The corporate trustee comparison explains that separate decision.

Both documents can specify when beneficiary interests vest, including an age or another event. At vesting, discretionary powers and beneficiary entitlements can change. Vesting does not necessarily mean assets move immediately or the trust ends that day. State perpetuity rules and the document’s terms affect the available period.

For long-term planning, record the vesting provision and obtain legal advice before a proposed extension. Continuing the same accounting treatment cannot extend a trust’s legal duration.

Trust assets are held by the trustee, so a beneficiary’s access to capital depends on their rights and the trustee’s powers. Creditors can have different routes depending on whose debt it is, fixed entitlements and transactions involving the trust. A testamentary origin can limit a beneficiary’s direct ownership, but neither trust label promises creditor protection.

Family law proceedings can examine effective control, entitlements and financial resources. The High Court’s discretionary-trust decision shows why a family trust label cannot settle that question.

Refer the client to their solicitor when the task requires interpreting disputed clauses, changing appointment powers or assessing creditor or family law exposure. Do the same before changing a will, extending vesting or transferring assets under uncertain authority.

Wordings That Mean the Same Thing, and Ones That Do Not

Inter vivos means established during life. A family discretionary trust created by deed belongs in that category. Testamentary means arising through death and the relevant estate arrangements.

Fixed and discretionary describe beneficiary entitlements. A fixed testamentary trust is possible, as is a discretionary testamentary trust. Read separate income and capital provisions because their entitlements can differ within one trust.

A deceased estate is the administration of the deceased’s assets and liabilities. A testamentary trust can continue holding assets after that administration is complete. The ATO treats estate returns and continuing testamentary-trust returns as distinct obligations.

The will is the document directing what happens after death. A trust created by it is the resulting arrangement for holding and administering particular property. One will can create several trusts or give assets directly to beneficiaries.

Once the documents identify the trust, use the testamentary trust guide for its ongoing administration. For a client establishing a trust during life, use the family trust setup guide.

What to Collect for Each at Onboarding

For a testamentary trust, collect the complete will and codicils, relevant court orders and the probate grant or letters of administration. Add its own TFN, trustee details and records showing which estate assets passed into it. The probate guide explains how the grant establishes authority for the estate.

For a family trust, collect the executed deed, every variation and trustee appointment document. Obtain duty stamping or endorsement evidence where applicable, the trust’s TFN and the current trustee and appointor details. Revenue NSW’s trust-establishment guidance illustrates why duty depends on the transaction and jurisdiction. Do not impose one state’s stamping rule on every Australian deed.

Run the same checks for both files:

• Match the trust’s name and trustee to the governing documents and latest valid appointments.
• Check any ABN against the Australian Business Register and confirm it belongs to the trust being recorded. An investment trust does not automatically need an ABN.
• Check TFN format and confirm the trust’s TFN through authorised ATO records. A format check alone cannot prove which entity owns it.
• Collect identity and authority evidence for the acting trustee and authorised contact. For a corporate trustee, check the company and authorised signers.
• Record beneficiary details needed for distributions, including minors, non-residents and trustee beneficiaries. A possible beneficiary class is different from the beneficiaries reported for actual entitlements.
• Collect existing elections, prior returns, accounts and distribution resolutions before carrying forward tax treatment.

If the scan has missing pages, send a specific follow-up:

Thanks for sending the deed through. Some pages are missing, so we can’t confirm the trust terms yet.

Please upload the complete signed deed, including the schedules and signature pages, plus every variation and any documents appointing or replacing a trustee.

If you don’t have the complete copy, please ask the solicitor who prepared it to send you one. We’ll confirm the trust type once we have the full document.

Keep the classification open until the complete documents support it. Then record the clause references, trustee authority and trust type before sending the approved entity details into your tax software.