What is a trust?
A trust is a legal arrangement where one person (the trustee) holds and manages assets on behalf of someone else (the beneficiary). Unlike leaving assets directly in a will, a trust gives you more control over how, when, and under what conditions your assets are distributed.
Trusts are not just for the wealthy. Many Australian families use trusts to protect children’s inheritance, provide for family members with disabilities, or manage assets across generations. Understanding the basics can help you decide whether a trust might be useful in your situation.
Key roles in a trust
Settlor — The person who creates the trust. In a testamentary trust, this is the person who dies and whose will establishes the trust.
Trustee — The person or company responsible for managing the trust assets and making decisions according to the trust rules. This is a serious responsibility with legal obligations.
Beneficiary — The person or people who benefit from the trust. They may receive income, capital, or both, depending on how the trust is set up.
Testamentary trust
A testamentary trust is created through your will and only comes into effect after you die. Your assets pass into the trust rather than directly to your beneficiaries.
This type of trust is commonly used to protect an inheritance for children until they reach a certain age, or to provide ongoing income to a spouse while preserving capital for the next generation. It can also offer tax advantages, as income distributed to minor beneficiaries from a testamentary trust is taxed at adult rates rather than the higher rates that normally apply to children.
Testamentary trusts are particularly useful in blended families, where you want to provide for a current partner while ensuring assets eventually pass to children from a previous relationship.
Discretionary trust (family trust)
A discretionary trust gives the trustee flexibility to decide how income and capital are distributed among a group of beneficiaries. The trustee can vary distributions from year to year depending on circumstances.
These trusts are commonly used for tax planning, business ownership, and protecting family assets. The flexibility can be valuable — for example, distributing more to a beneficiary in a low-income year, or less to one going through a divorce.
However, discretionary trusts are complex to set up and maintain. They have ongoing compliance requirements and may not be appropriate for straightforward situations.
Unit trust
A unit trust divides ownership into fixed “units,” similar to shares in a company. Each unit holder has a defined entitlement to income and capital based on the number of units they hold.
Unit trusts are often used for investment property ownership or joint ventures where parties want clear, proportional ownership. Unlike a discretionary trust, the trustee cannot vary distributions — each unit holder receives their fixed share.
This structure suits situations where multiple parties are investing together and want certainty about their respective interests.
Special disability trust
A special disability trust is designed for beneficiaries with severe disabilities. It allows family members to provide for a loved one without affecting their eligibility for Centrelink payments like the Disability Support Pension or NDIS funding.
There are strict rules about who qualifies, what the trust can pay for, and how much can be contributed. The trust must be used primarily for the beneficiary’s care, accommodation, and daily needs.
If you have a family member with a significant disability, this type of trust can be an important part of planning for their long-term security.
Protective trust
A protective trust is designed to shield assets from risks associated with a particular beneficiary — such as bankruptcy, legal claims, or poor financial decisions.
The trustee maintains control over the assets and can restrict or withhold distributions if the beneficiary’s circumstances make direct payments risky. This might be appropriate for a beneficiary with addiction issues, a history of failed businesses, or an unstable relationship.
Protective trusts balance care for the beneficiary with protection of the family’s assets.
Bare trust
A bare trust is the simplest type. The trustee holds the asset, but the beneficiary has an absolute right to both the income and the capital. The trustee has no discretion — they must hand over the assets when the beneficiary asks.
Bare trusts are often used to hold assets for minors until they turn 18, or as a simple mechanism for transferring property between family members.
Because the beneficiary has full entitlement, bare trusts don’t offer asset protection or tax planning benefits.
Superannuation and trusts
Your superannuation fund is technically a type of trust, with the fund trustee holding your retirement savings on your behalf.
When you die, your super doesn’t automatically follow your will. Instead, the fund trustee decides who receives your death benefit — unless you have a valid binding death benefit nomination in place.
Understanding how super interacts with your estate plan is important, especially if you want to ensure your super goes to specific people.
Do you need a trust?
Trusts add complexity and cost. For many people, a straightforward will is sufficient.
However, a trust may be worth considering if:
- You want to protect an inheritance for young children
- You have a blended family
- A beneficiary has a disability, creditors, or personal challenges
- You want to provide for a spouse while preserving assets for children
- You’re concerned about potential family provision claims
A solicitor experienced in estate planning can help you decide whether a trust makes sense for your situation.