Owning and running a family business is not just a profession, or a short-term proposition. Your (and often many past family members’) life’s work, efforts, sacrifices and legacy are all on the line. Safeguarding your wealth and ensuring smooth transition to the next generation requires careful planning.
One effective way to protect both your family and your business legacy is by incorporating a testamentary trust into your will. This trust doesn’t take effect until after you pass away, giving you control during your lifetime while preserving benefits for those who follow.
Here are the top 8 reasons family business owners should consider this powerful tool:
1. Enhanced Asset Protection
A testamentary trust shields your estate from creditors, litigation, and relationship breakdowns. For business owners, this adds a layer of security, especially during turbulent transitions or unexpected legal challenges.
If your ownership interest in your business is going to pass to one or more beneficiaries through your Will, this strategy should be at the top of your list.
Alternatively, if the successor to your business will also be inheriting assets from your estate, using a testamentary trust protects those assets from business risk that business owners can be exposed to, particularly where personal liability may arise. For example, directors’ liability for company directors, or personal guarantees.
2. Tax‑Efficient Income Distribution
Trust income in Australia may be taxed at lower marginal rates, particularly for young or adult beneficiaries who don’t currently draw a wage. This can greatly benefit family members involved in the business who might otherwise face higher individual tax rates, or young family members that can receive larger distributions at marginal rates.
3. Greater Control Over Distribution
Unlike outright inheritance, using a trust allows you to dictate how and when assets are distributed. This flexibility helps ensure that appropriate layers of protection are applied to business assets inherited through a Will. For example, special provisions can be applied to business assets that pass through a Will to impose particular governance requirements, impose certain rights or restrictions over the business assets, or motivate beneficiaries to continue to contribute to the business.
4. Asset Protection for Vulnerable Beneficiaries
If a beneficiary is in financial distress, involved in a dispute (including a relationship breakdown), or requires additional support in the management of their inheritance, the trust can safeguard their inheritance and ensure it’s used responsibly.
This is useful where a vulnerable beneficiary will inherit business assets through a Will but requires additional support and protection to ensure their interest remains protected.
5. Support for Blended or Step‑Family Arrangements
Family businesses often span complex family structures. Testamentary trusts can be used to optimise an estate plan that takes into account bequests to current partners and children from previous relationships. A well thought-out estate plan that involves testamentary trusts can reduce conflict and promote fairness.
6. Safeguard Against Future Legal Challenges
By directing a beneficiary’s inheritance to a testamentary trust, you can help reduce the risk that a beneficiary’s ex-spouse or litigants could make a claim against those assets. Clear testamentary trust provisions strengthen the defence.
7. Flexibility to Avoid Capital Gains Tax and Stamp Duty
When assets pass directly to your beneficiaries under a Will, any future rearrangement of those assets—like transferring part ownership to another family member—can trigger capital gains tax (CGT) and, in some jurisdictions, stamp duty. This happens because your beneficiaries acquire a fixed interest in the asset from the moment of your death.
For instance, if you leave two properties to your two children in equal shares, and they later decide that each will retain one property outright, this results in each child transferring their half-interest in one property to the other. That transfer typically triggers CGT on 50% of each house, and possibly stamp duty, depending on your state.
By contrast, if the properties are held in a testamentary trust, your children may be able to take steps to divide the assets between them without incurring CGT or stamp duty.
8. Reducing Tax on Superannuation and Insurance Proceeds
Superannuation and life insurance payouts can be taxed at rates of up to 32% (commonly 17%) if not directed appropriately through your estate plan.
A testamentary trust gives your executors greater control over how these proceeds are distributed, helping to minimise tax liabilities. It also provides the added benefits of wealth protection, structured succession planning, and income distribution flexibility—especially valuable when these funds are intended to support a family business across generations.
How to Incorporate Testamentary Trusts into Your Family Business Plan
1. Align With Your Business Succession Plan
Ensure testamentary trust provisions are aligned with roles, ownership, and control arrangements for your family business, providing an orderly transition for successors.
2. Draft Clear Beneficiary Rules
Specify who can benefit, under what conditions, and how funds may be used (e.g. for education, business reinvestment, or emergencies).
3. Choose Trustees Carefully
Assign trustees you trust to make objective decisions, ideally people with both personal connection and professional capability. Consider appointing a guardian trustee (sometimes referred to as a ‘protector’) as a safeguard.
4. Periodic Reviews
Update your Will or trust if family structures shift, tax laws change, or new generations enter the picture. Business dynamics are fluid, your estate plan should be too. We recommend an estate planning review every 3 years, or if big life events occur – births, deaths or marriages in your family, or significant business events such as the sale or purchase of business assets.
What Success Looks Like for Your Family Business
When properly implemented, testamentary trusts help you leave behind a clear and protective strategy to ensure your business and personal assets pass in a thoughtful and controlled matter. We help you achieve this by assisting you to:
- Put in place a clear plan for how your wealth and business assets are managed after your passing.
- Implement protection for all beneficiaries, regardless of marital, financial status or their role in your family business.
- Integrate tax and legal efficiencies that preserve more assets for future generations.
- Ensure clarity and fairness, helping you to minimise the risk of disputes across loved ones.
About the author
ADLV Law work with business-owning families to safeguard their enterprises, clarify ownership structures, and ensure long-term continuity, even during personal change. They are a family-owned law firm specialising in Wills, Estates, Succession Planning, and Business Law for over 20 years. They work closely with families and business owners to provide practical, tailored legal solutions that protect their interests and secure their future.
Phone: 1300 654 590
Email: wehelp@adlvlaw.com.au
Website: adlvlaw.com.au
ADLV Law offers a full commercial law service to independently minded entrepreneurs, investors and their families. We are ready to guide you to the right solution for your legal issue and have demonstrated expertise in advising on all aspects of commercial and business law, taxation, estate planning and succession, philanthropy, family law, property matters and commercial disputes.
