The 2026–27 Federal Budget’s proposed changes to the tax treatment of discretionary trusts have sparked alarm among families who rely on testamentary trusts to protect their loved ones and their hard-earned assets. Legal Practice Director Jeff Garrett explains what has been announced, what remains unknown, and why now is a good time to review your Will regardless of how the reforms ultimately take shape.
UPDATE: Since publishing this blog, the federal government has confirmed it will exclude discretionary testamentary trusts from the proposed 30 per cent minimum tax, provided they are established for “genuine testamentary purposes.” The Prime Minister confirmed the government’s position on 18 June 2026. While this resolves much of the uncertainty discussed below, the benefits of testamentary trusts covered in this article remain unchanged and are well worth understanding regardless of the final tax treatment.
On 12 May 2026, as part of the 2026–27 Federal Budget, the federal government announced it will introduce a 30 per cent minimum tax on discretionary trusts from 1 July 2028. The measure is not yet law. Framed as a fairness reform, the government said its aim is to close the gap between the tax rates paid by trust beneficiaries and those paid by ordinary wage and salary earners.
For estate planning purposes, the key question is how the changes will apply to testamentary trusts – the trusts created within a Will that come into effect after a person’s death. That is where the detail gets complicated and where significant uncertainty remains.
The changes only affect discretionary testamentary trusts and not fixed testamentary trusts, but the reality is most trusts contained in Wills are usually discretionary. This is very important to protect beneficiaries and one of the main reasons these types of testamentary trusts are so popular.
Adding to the uncertainty, Prime Minister Anthony Albanese has since indicated the government may be open to changes to the testamentary trust tax component of the package – with reports suggesting the treatment of discretionary testamentary trusts could be subject to further negotiation before the legislation is finalised.
Since the budget was handed down, the proposed changes have been widely described as a “death tax.” But what is being proposed is not a tax on the act of dying or on the transfer of assets at death. It is a change to how income distributed from discretionary trusts is taxed in the hands of beneficiaries.
For families who have structured their estate plan around a testamentary trust, these changes (if enacted as proposed) could significantly affect the tax treatment of inherited wealth.
We recently discussed this issue on 4BC’s Brisbane’s Legal Lowdown.
What is a testamentary trust, and why do families use them?
A testamentary trust is a trust created by a Will, which comes into effect upon the death of the Will-maker. Generally discretionary in nature, the rules that govern it are set out in the Will itself.
The popularity of testamentary trust Wills has grown in recent years because they allow the Will-maker to exercise ongoing control over how assets are used and protected after death. This is unlike a traditional Will, where assets pass directly to a beneficiary immediately upon the death of the testator, with no safeguards attaching to the bequest.
The key benefits of a discretionary testamentary trust include:
- Asset protection. Assets held in a testamentary trust are protected from a beneficiary’s “predators or creditors”, shielding an inheritance from the consequences of bankruptcy or financial difficulty.
- Family law protection. Testamentary trust assets are protected against Family Law Act property settlement claims, both from a beneficiary’s own spouse and from any future partner the surviving spouse may take after the Will-maker’s death.
- Protection for vulnerable beneficiaries. Where a beneficiary has a disability, addiction, or other vulnerability that could put an inheritance at risk, the trustee can manage or withhold distributions to prevent the inheritance being lost.
- Tax advantages. Income distributed by a testamentary trust to a minor beneficiary is currently taxed at ordinary adult marginal tax rates rather than the higher penalty rates ordinarily applied to minors – a significant benefit for families with young children or grandchildren as beneficiaries.
It is the last of these advantages – the tax treatment – that the proposed budget changes directly target.
What the proposed changes would mean in practice
Under current rules, a beneficiary receiving income from a discretionary trust pays tax at their individual marginal rate. This has allowed families to distribute income to lower-earning beneficiaries (a university student, for example) who would pay little or no tax on amounts below the tax-free threshold of just over $18,000.
The government’s proposal would impose a minimum tax rate of 30 per cent on all distributions from discretionary trusts, which is broadly equivalent to the corporate tax rate and removes much of that income-splitting advantage.
It is important to be clear about what this does and does not change. The asset protection benefits, the family law protections, and the ability to safeguard vulnerable beneficiaries all remain intact regardless of the tax treatment. These are incredibly powerful benefits for estate planning purposes.
Discretionary trusts and testamentary trusts do not become ineffective, they simply become less tax-advantaged than they currently are.
For many families, the non-tax benefits (i.e. the protective elements) alone are reason enough to establish a testamentary trust in their Will. However, the imposition of a minimum 30% tax to vulnerable beneficiaries is something the government has perhaps not thought through properly. The outcries of a ‘death tax’ are sure to send shivers down the spine of the Treasurer.
The critical question no one can answer yet
The most important unresolved issue is whether a testamentary trust in an existing Will would be classified as discretionary and caught by the changes, or as a fixed trust, which the government has indicated would be exempt.
Not all testamentary trusts are structured the same way.
Consider a Will that divides an estate equally between four children at 25% each with the trustee holding some discretion over timing of income payments, but no power to alter the ultimate shares. That arrangement may well be treated as a fixed trust and therefore outside the scope of the reforms. If that interpretation holds, a significant proportion of existing testamentary trust Wills would be unaffected.
If the government takes a broader view and classifies any trust with any element of trustee discretion as discretionary, the implications would be considerably more significant.
It’s important to remember that legislation has not been finalised.
A further unresolved question is timing. The government has indicated only trusts established after budget day will be affected. But what about existing testamentary trusts that were included in Wills created years ago? Will they be grandfathered when a Will-maker dies after the changes take effect? We simply won’t know for sure until the legislation is enacted and the dust settles – the devil will be in the detail.
What should you do now?
As the legislation is still taking shape, what is sensible right now is to understand what your existing Will actually contains.
Do you have a testamentary trust provision? If so, is it discretionary or fixed in nature?
The answer to those questions will determine how closely you need to monitor developments as the reforms progress.
More broadly, this is a timely prompt to review your estate planning documents generally. Many Australians have Wills that are years out of date, or that do not include testamentary trust provisions at all.
Regardless of how the budget changes are ultimately resolved, a testamentary trust remains one of the most effective tools available for protecting beneficiaries whose financial or personal circumstances may be difficult to predict.
If there are pressing personal circumstances, a serious health condition, a complex estate, or trust structures already in operation, earlier advice is warranted rather than a wait-and-see approach.
If you have any questions or wish to review your estate planning , we strongly suggest you do this sooner rather than later. You should always ensure you obtain advice from an experienced estate planning law firm who knows what they are doing in this complicated area of law.
Attwood Marshall Lawyers – experienced estate planning advice when it matters
Our Wills and Estates team is already working with clients to review their estate plans in light of the proposed changes. Whether you need to understand what type of testamentary trust your current Will contains, update an outdated Will, or put a testamentary trust in place for the first time, we can help.
To make an appointment, contact our Wills and Estates Department Manager, Donna Tolley, on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or free call 1800 621 071.
