Fixed Trust vs Discretionary Testamentary Trust: Which Is Better for Estate Planning?
When preparing a Will, one of the most important decisions is how your estate should pass to your beneficiaries.
For many people, leaving assets directly to a spouse, child or other beneficiary may be sufficient. However, depending on your circumstances and objectives, particularly where family dynamics are complex or the estate is of significant value, a trust structure may offer substantial benefits.
Two trust structures that are sometimes considered in estate planning are:
- a fixed trust; and
- a discretionary Testamentary Trust.
Although both involve assets being held by a trustee for beneficiaries, they operate very differently. The right structure will depend on your family circumstances, the needs of your beneficiaries, tax considerations, asset protection issues and the level of flexibility you want to build into your estate plan.
What Is a Fixed Trust?
A fixed trust is a trust where the beneficiaries have fixed entitlements to income and capital.
In simple terms, the trust deed or Will sets out exactly who receives what. The trustee does not usually have a broad discretion to decide which beneficiary should receive income or capital, or in what proportions.
For example, a Will might create a trust where:
Beneficiary A is entitled to 50% of the income and capital, and Beneficiary B is entitled to 50% of the income and capital.
In that case, the trustee’s role is largely administrative. The trustee must manage the trust assets and distribute them according to the fixed entitlements.
What Is a Discretionary Testamentary Trust?
A discretionary testamentary trust is a trust created by a Will that comes into effect after the Will-maker dies.
Unlike a fixed trust, a discretionary testamentary trust gives the trustee discretion to decide how income and capital should be distributed among the potential beneficiaries.
For example, the Will might create a testamentary trust for the benefit of a child, that child’s children and future descendants. The trustee may then decide, from year to year, whether income should be distributed to the primary beneficiary, their children, or retained in the trust.
The key point is flexibility. The trustee can respond to changing circumstances after the Will-maker has died.
The Main Difference Between a Fixed Trust and a Discretionary Testamentary Trust
The main difference is certainty versus flexibility.
A fixed trust provides certainty because each beneficiary’s entitlement is defined. A discretionary testamentary trust provides flexibility because the trustee can decide how income and capital should be distributed within a class of beneficiaries.
That difference can have major consequences.
A fixed trust may be simpler and more predictable, but it may offer less protection if a beneficiary later faces bankruptcy, divorce, creditor claims, addiction issues, financial immaturity or family conflict.
A discretionary testamentary trust may be more flexible and protective, but it requires careful drafting, a suitable trustee and proper administration.
Asset Protection: Which Trust Is Better?
One of the main reasons people consider a testamentary trust is asset protection.
A discretionary testamentary trust may provide a layer of protection because the beneficiaries do not necessarily have a fixed entitlement to the trust assets. Instead, they are objects of the trustee’s discretion. This can make it harder for a creditor, bankruptcy trustee or former spouse to argue that the trust assets belong personally to the beneficiary.
That said, asset protection is not absolute. Much will depend on:
- the terms of the Will;
- who controls the trust;
- who is the trustee or appointor;
- how the trust is administered;
- whether distributions have already been made;
- whether the trust is a genuine discretionary structure; and
- the nature of the claim being made.
A fixed trust generally provides less asset protection because the beneficiary has a defined entitlement. If a beneficiary has a fixed right to income or capital, that entitlement may be more vulnerable to claims by creditors or other parties.
Tax Flexibility
Discretionary testamentary trusts have historically been popular because of their tax flexibility.
Income generated from assets inherited through a testamentary trust may, in certain circumstances, be distributed among beneficiaries in a tax-effective way. A common example is income distributed to minor children from genuine testamentary trust property, which may be taxed at ordinary adult marginal rates rather than punitive minor tax rates. The ATO notes that income from a testamentary trust is not excepted income where it is generated from assets acquired by or transferred to the trustee other than from the deceased estate.
This is an important distinction. Not all income in a testamentary trust will necessarily receive concessional treatment.
There have also been recent Federal Budget announcements concerning a proposed 30% minimum tax on certain discretionary trusts. The ATO published information on 12 May 2026 concerning the Government’s proposed minimum tax on discretionary trusts. Given the political and technical uncertainty around the measure, anyone preparing a Will should obtain up-to-date estate planning and taxation advice before relying on any assumed tax outcome.
Importantly, even if tax settings change, testamentary trusts may still remain useful for non-tax reasons, including asset protection, control, succession planning and protecting vulnerable beneficiaries.
Control and Flexibility After Death
A major advantage of a discretionary testamentary trust is that it allows the estate plan to adapt after death.
This can be useful where:
- a beneficiary is going through a separation or divorce;
- a beneficiary is at risk of bankruptcy;
- a beneficiary has a disability;
- a beneficiary has addiction, gambling or financial management issues;
- a beneficiary is in a high-risk profession or business;
- young children are involved;
- there are blended family issues;
- the Will-maker wants to protect wealth across generations; or
- the family’s financial circumstances may change over time.
A fixed trust does not usually provide the same level of adaptability. Once fixed entitlements are created, the trustee may have limited ability to redirect income or capital in response to changed circumstances.
Certainty and Simplicity
A fixed trust may be appropriate where certainty is more important than flexibility.
For example, a fixed trust may suit a situation where the Will-maker wants to ensure that each beneficiary receives a precise share and there is limited concern about asset protection, tax flexibility or future changes in family circumstances.
Which Structure Is Better for Families?
For many families, a discretionary testamentary trust will be more useful than a fixed trust because it provides greater flexibility.
This is particularly so where parents are leaving assets to adult children who may have their own spouses, children, businesses, creditors or financial risks.
A discretionary testamentary trust can allow an adult child to benefit from the inheritance without necessarily receiving the inheritance personally and outright. This may assist in protecting the inheritance from external risks.
Can Beneficiaries Bypass a Testamentary Trust?
This depends on how the Will is drafted.
Some Wills are prepared so that a beneficiary has the option to take their inheritance through a testamentary trust or receive it personally. This can be useful because it allows the beneficiary to decide, after the Will-maker’s death, whether the trust structure is worthwhile in their circumstances.
For example, a beneficiary may choose to use the testamentary trust if they are exposed to business risk or family law risk. Alternatively, if their circumstances are straightforward, they may prefer to receive the inheritance personally and avoid the ongoing cost and administration of a trust.
This optional structure can be very useful, but it must be carefully drafted.
When Might a Fixed Trust Be Appropriate?
A fixed trust may be suitable where:
- the Will-maker wants fixed and certain outcomes;
- beneficiaries are to receive defined shares;
- there is no need for ongoing discretion;
- asset protection is not a major concern;
- the structure is being used for a specific purpose;
- there are concerns about giving a trustee too much discretion; or
- the Will-maker wants to minimise complexity.
A fixed trust may also be relevant in particular tax, commercial or investment contexts, although specialist tax advice should always be obtained.
When Might a Discretionary Testamentary Trust Be Appropriate?
A discretionary testamentary trust may be suitable where:
- the estate is substantial;
- there are young children or grandchildren;
- beneficiaries may be exposed to family law claims;
- beneficiaries may be exposed to bankruptcy or creditor claims;
- a beneficiary has poor financial management skills;
- a beneficiary has addiction or gambling issues;
- a beneficiary has a disability or vulnerability;
- the Will-maker wants to protect wealth for future generations;
- there is a blended family;
- tax flexibility is desirable;
- the Will-maker wants the estate plan to adapt over time.
Disadvantages of a Discretionary Testamentary Trust
A discretionary testamentary trust can be very useful, but it is not always the right answer.
Possible disadvantages include:
- increased complexity;
- ongoing accounting and tax costs;
- trustee obligations;
- the need for careful trust administration;
- the risk of choosing the wrong trustee;
- possible tax law changes; and
- the need for proper legal and financial advice.
A poorly drafted or poorly administered testamentary trust can create more problems than it solves.
Choosing the Right Trustee
The choice of trustee is critical.
The trustee manges the trust and decides how income and capital are distributed, subject to the terms of the Will.
A trustee should be someone who is responsible, financially competent, independent where necessary and capable of dealing with family conflict.
In some cases, it may be appropriate for the primary beneficiary to control their own testamentary trust. In other cases, especially where there are concerns about bankruptcy, family law risk, addiction or vulnerability, it may be better to appoint an independent trustee or co-trustee.
Which Is Better: Fixed Trust or Discretionary Testamentary Trust?
There is no single answer.
A fixed trust may be better where certainty, simplicity and defined entitlements are the priority.
A discretionary testamentary trust may be better where flexibility, asset protection, tax planning and long-term control are important.
For many estate planning clients, a discretionary testamentary trust offers more practical benefits because life after death is difficult to predict. A beneficiary who is financially secure today may face divorce, bankruptcy, creditor claims or other difficulties in the future.
A well-drafted discretionary testamentary trust can give beneficiaries options and protection when they need it most.
Final Thoughts
Choosing between a fixed trust and a discretionary testamentary trust is not just a technical legal decision. It can affect how your family receives, controls and protects inherited wealth for many years after your death.
A properly drafted Will can give your beneficiaries flexibility, protection and peace of mind. A poorly drafted Will can create uncertainty, unnecessary tax issues and disputes between family members.
If you are considering including a trust in your Will, it is important to obtain estate planning advice tailored to your circumstances.
At PB Ritz Lawyers, we assist clients with Wills, estate planning and estate disputes in NSW. We can help you consider whether a testamentary trust is appropriate for your estate plan and how it should be structured.
Call us on (02) 8066 9990 or send us an email at mail@pbritz.com.au to book an estate planning strategy meeting with our director, Phillip Briffa.
