Deceased Estates and Testamentary Trusts (NSW)

What Is a Testamentary Trust in NSW?

A testamentary trust is a trust established by will upon a person’s death.

A will establishing a testamentary trust will usually set out the following:

• the beneficiaries of the trust – these are the people who may benefit from the trust;
• the trustee(s) of the trust – these are the people who are appointed to administer the trust; and
• the terms of the trust – governing the operation of the trust. 

Trustees in NSW must exercise powers and duties in accordance with the terms of the trust (as set out in the will) and other relevant laws, including the Trustee Act 1925 (NSW).

Key features and benefits (NSW context):

• Asset protection: Testamentary trusts offer asset protection by allowing assets to be held and managed by a trustee and protected from wastage (i.e. beneficiaries with gambling addictions or have a history of irresponsible money habits), protected for the benefit of vulnerable persons (i.e. minors and those with disabilities or addictions) and shielded (to varying degrees) from spousal claims. 
• Discretionary distributions: Testamentary trusts can be set up to offer fixed or discretionary distributions. Where the testamentary trust gives the trustee discretionary powers to make distributions, the trustee will be responsible for making discretionary distributions of income and capital (subject to the terms of the will), providing flexibility that a standard will does not. 
• Tax advantages: Under federal tax law, certain income paid to minors from a testamentary trust may be taxed at ordinary adult rates (see Income Tax Assessment Act 1936 (Cth) s 102AG), which can be more beneficial as they also enjoy the tax-free thresholds. This can offer tax advantages by allowing the trustee to make distributions to beneficiaries on lower marginal tax rates to achieve more favourable tax outcomes.

A well-drafted testamentary trust should contain clear terms regarding the administration of the trust.

What Is a Deceased Estate in NSW?

Definition of a Deceased Estate

A deceased estate (NSW) refers to all the assets owned by a person at the time of their death, held either solely or as tenants in common, minus any outstanding debts or liabilities.

Role of the Executor or Administrator

If the deceased left a valid will, the executor is responsible for identifying, collecting, and managing the assets, paying off debts, and distributing the remaining estate according to the will’s terms.
If there is no will, a family member will usually apply to the Supreme Court of NSW for a grant of administration, after which they carry out similar duties to an executor.

Duration of Estate Administration

Most straightforward deceased estates in NSW can be finalised within 9–12 months, often referred to as “the executor’s year.”
However, if complications arise, such as the need to sell property, resolve disputes, or defend family provision claims, administration may extend beyond 12 months.

Tax Obligations of a Deceased Estate

The legal personal representative (executor or administrator) must finalise the tax affairs of both the deceased and the estate. This can include:

• Obtaining a Tax File Number (TFN) for the estate.
• Engaging a tax agent or accountant to lodge tax returns for the deceased (up to the date of death) and for the estate during administration.
• Calculating and paying any Capital Gains Tax (CGT) on asset sales made during estate administration.

Key Differences Between Deceased Estates and Testamentary Trusts

Understanding the difference between a deceased estate and a testamentary trust helps you choose the right structure for your estate plan in NSW and manage expectations during administration.

Control of assets (Executor vs Trustee)

• Deceased estate: The executor controls assets during the period of the estate administration and once the estate is finalised, will make final distributions to the beneficiaries, bringing the estate administration to an end.
• Testamentary trust: A trustee controls the assets of the trust in accordance with the terms of the trust (as set out in the will) and other governing laws (i.e. the Trustee Act 1925 (NSW)). The trustee will usually have discretionary power to make distributions as they see fit and will be responsible for ongoing asset management.

Tax implications

• Deceased estate: The transfer of assets from a deceased estate to a beneficiary is generally tax free, but once the asset has been transferred to a beneficiary, the beneficiary may be liable for income tax (on any income earned from the asset) or capital gains tax (if the asset is later sold). 
• Testamentary trust: The transfer of assets from a deceased estate to a testamentary trust is generally tax free, but the testamentary trust will then enjoy the benefits, such as income streaming and, in some cases, adult tax rates for minors on certain distributions (including tax free thresholds). The trustee of a testamentary trust should seek advice and assistance from a tax agent or accountant in relation to their general tax obligations, including liabilities arising from specific transactions. 

Duration and flexibility

• Deceased estate: Short-term (often completed within 6–12 months) and primarily involving the collection of assets, the payment of liabilities, and the distribution of the remaining assets to those entitled (beneficiaries under the terms of the will or where there is no will, under intestacy laws).
• Testamentary trusts: Medium to long-term (potentially up to 80 years), offering ongoing control, asset protection, and tailored income and capital distribution – features not generally available under a standard will, which makes direct gifts to beneficiaries. 

Who Controls the Assets — Executor vs Trustee

Executor (deceased estate NSW) 

During estate administration, the executor named in the will usually applies for probate, and once probate is granted, then proceeds with collecting assets, paying liabilities, and distributing the balance of the estate to the beneficiaries named in the will. An executor’s role is temporary and comes to an end once the estate administration is finalised. 

Trustee (testamentary trust NSW)

Once a testamentary trust is established, the trustee controls and manages the trust on behalf of the beneficiaries in accordance with the terms of the trust (which are set out in the will itself) and other governing laws, including the Trustee Act 1925 (NSW). The trustee will usually have broad discretion as to when, what, and to whom to distribute income and capital (giving flexibility and the potential for more tax-effective outcomes). 

Tax Benefits for Beneficiaries

Why testamentary trusts can help

A properly drafted testamentary trust may offer tax-effective outcomes, including:

• Income splitting: distributing trust income to beneficiaries on lower marginal tax rates.
• Excepted trust income for minors: distributing trust income to minors who are taxed at marginal tax rates on distributions from testamentary trusts (including the tax free thresholds).
• Asset management: trustees can control the timing of the sale of assets to achieve greater CGT outcomes.

How this differs from a deceased estate. Although the transfer of assets from a deceased estate to a beneficiary is generally tax free, once the assets are transferred to the beneficiary, the beneficiary will be subject to income tax on any interest or dividends earned from the inheritance, and capital gains tax if the asset is later sold. 

Duration and Flexibility

Deceased estates: estate administration is temporary, often completed within 9–12 months (longer if the estate administration is complex or a family provision claim arises). The executor’s job comes to an end once all debts and taxes are paid and the net estate is distributed to the beneficiaries.

Testamentary trusts: designed for the long term, offering ongoing control of assets and distributions over many years (often up to 80 years, subject to the rule against perpetuities under the Perpetuities Act 1984 (NSW) and the trust terms). This structure and longevity often promote inter-generational wealth preservation – an advantage not always available when gifts are made directly to beneficiaries.

When to Use a Testamentary Trust

A testamentary trust (NSW) is often preferable to a standard will (where gifts are made directly to beneficiaries), where a person is seeking asset protection and tax advantages. Consider using one when:

• Beneficiaries are minors or vulnerable. A trustee can stage income and capital support (for education, health, housing) instead of handing over a lump sum.
• You want protection from life events. By having a trustee own the assets it can help insulate those assets from a beneficiary’s bankruptcy or relationship breakdown (case-specific), unlike cases where the beneficiary has received the gift directly. 
• You seek greater tax flexibility. A properly drafted testamentary trust may allow income splitting across family members and, in some cases, tax advantages when making distributions to minors.
• Generational wealth preservation. Trusts can operate long-term (subject to the Perpetuities Act 1984 (NSW), supporting generational wealth preservation.

Need Help with Deceased Estates or Testamentary Trusts in NSW?

For expert and practical advice on testamentary trusts in NSW, managing deceased estates (NSW), or comparing the advantages and disadvantages of a simple estate versus testamentary trusts, contact Empower Wills and Estate Lawyers on 1300 414 844. We’re ready to help you implement the right structure for you and your future generations.