Discretionary Trust vs Testamentary Trust: Key Differences and Use Cases

Trusts are a common feature of Australian estate planning, but the word “trust” covers very different legal tools. Two of the most frequently used are the discretionary trust, which is set up during a person’s lifetime, and the testamentary trust, which is created under a will and begins on death.

Both can help protect assets and manage distributions, yet they serve different purposes and come with different obligations. Choosing the wrong structure can create unnecessary cost, complexity, or tax outcomes that do not align with what you intended.

This blog explains the key differences, the typical use cases, and the practical questions that usually guide the decision.

What A Discretionary Trust Actually Does

A discretionary trust is created by a trust deed, usually while the person establishing it is alive. The trustee holds assets on trust for a class of beneficiaries. The defining feature is discretion. The trustee decides which beneficiaries receive income or capital, in what amounts, and when, subject to the deed.

Most family discretionary trusts also include an appointor, sometimes called a principal, who has the power to appoint and remove the trustee. In practical terms, this role often matters more than the name of the trust itself, because it controls who ultimately makes the decisions.

People often ask whether a discretionary trust is “safe” from creditors or relationship property claims. It can assist, but it is not a complete shield. Courts look closely at control, patterns of distributions, and whether the arrangement is genuine. If one person effectively treats the trust as their personal wallet, that protection may not hold under pressure.

If you are weighing up structures with an estate planning law firm, it is worth asking who controls the trustee and what happens to that control if you die or lose capacity.

How A Testamentary Trust Works

A testamentary trust is created by a will. It does not exist until the will-maker dies and the executor begins administering the estate. The will sets the trust terms, appoints the trustee, often the executor initially, and sets out beneficiaries and control mechanisms.

Many people choose testamentary trusts because they allow tailored arrangements for different beneficiaries. One child might receive assets outright, while another’s share remains in trust due to vulnerability, disability, poor money management, or exposure to divorce or bankruptcy risk.

Tax is also a common reason. In Australia, income distributed to minors is usually taxed at penalty rates. However, income from a testamentary trust may qualify as excepted trust income in certain circumstances, allowing ordinary marginal rates to apply. The rules are technical and depend on the facts, which is why this area often benefits from specific advice.

Timing and control: the first big fork in the road

A simple way to compare these trusts is to ask when you need them and who should control them.

A discretionary trust exists during your lifetime. It can own assets, operate a business, hold investments, and distribute income each year. Control usually sits with the trustee and the appointor.

A testamentary trust exists later. It is primarily an estate administration and succession planning tool. Control follows the instructions in the will and then rests with the trustee.

This timing difference often decides the structure on its own. If the aim is to manage family wealth and distribute income while you are alive, a discretionary trust is often the practical choice. If the aim is to manage inheritances after death, a testamentary trust is usually more appropriate.

At this point, many families speak with estate planning lawyers in Perth when they realise that control after death is not automatically resolved by holding assets in a family trust. The trust deed and the will need to work together, otherwise unintended trustee changes can occur.

Tax Differences

Tax should never be the sole driver, but ignoring it can be expensive.

Discretionary Trust Tax Basics

Trust income is generally assessed to beneficiaries who are presently entitled to it, based on trustee resolutions made each financial year.

Income that is not effectively distributed is usually taxed to the trustee at the top marginal rate, subject to limited exceptions.

The structure offers flexibility, allowing distributions to different beneficiaries in different years, within the deed’s limits.

Testamentary Trust Tax Basics

A testamentary trust operates under the same broad trust tax rules, but it can provide better outcomes for minors in some cases due to the excepted trust income rules.

It is less flexible in one respect. The governing rules set out in the will cannot be changed easily without risking disputes or breaching fiduciary duties.

If tax efficiency is a goal, administration matters. Record keeping, resolutions, and clear documentation are essential. A well designed structure with poor administration often falls apart when audited or challenged.

When Each Trust Is Commonly Used

Below are common use cases. In practice, many families use a mix.

Discretionary Trust: Common Reasons People Choose It

Running a family business with flexible distributions and planned succession of control.

Separating personal assets from business or investment risk.

Distributing income among adult beneficiaries within tax and anti-avoidance rules.

Long-term family wealth planning where trustee and appointor roles are carefully structured.

During these discussions, people often engage wills and estate lawyers in Perth to align their wills with existing trust deeds. A will can only deal with assets personally owned. If most assets sit in a discretionary trust, control provisions in the deed may be more important than gifts under the will.

Testamentary Trust: Common Reasons People Choose It

Protecting children’s inheritances until they reach a suitable age or stage of life.

Supporting vulnerable beneficiaries, including those with disability, addiction issues, or limited financial capacity.

Managing blended family arrangements where interests need to be balanced.

Tax planning for minors receiving investment income, where the rules apply.

Costs, Complexity, And the Risk Of “Set and Forget”

Both structures involve ongoing obligations. A discretionary trust usually requires annual accounts and trustee resolutions. A testamentary trust begins with estate administration and may continue for many years.

The key difference is timing. Discretionary trust compliance occurs while you are alive, often with the support of an accountant. Testamentary trust administration falls to executors and trustees, often at a time of grief and pressure. This is not a reason to avoid them, but it is a reason to choose trustees carefully and provide clear guidance.

Life often pushes estate planning onto the agenda at inconvenient times. In those moments, estate planning lawyers near me becomes a practical consideration when documents need to be signed properly and urgent decisions made without delay.

So, Which One Should You Choose?

The decision often turns on three questions:

1. Do you need the trust operating during your lifetime, or only after death?
2. Is flexibility of annual distributions the main issue, or control and protection of inheritances?
3. Who do you trust to act as trustee, and what governance will keep them accountable?

Many families already have a discretionary trust and later add a testamentary trust in their will, without addressing how the two interact. That overlap is where disputes often begin.

If your plan involves ongoing trust administration, a meeting with trust lawyers in Perth can be the difference between a structure that works quietly for decades and one that causes confusion when it matters most.

A Final Word on Matching Structure to Real Life

A discretionary trust and a testamentary trust are not rivals. They are tools for different jobs, and many Australian families use both.

The best structure is one that fits your assets, family dynamics, and tolerance for ongoing administration, while remaining robust if challenged. A sensible plan should also withstand ordinary life changes, including new relationships, changing health, children growing up, and the occasional family disagreement.