Australia’s proposed changes to discretionary trust taxation have raised questions for families preparing or reviewing their estate plans.
One question is whether a testamentary trust should still form part of a will.
For many families, a testamentary trust remains worth considering. However, the proposal has evolved since the initial Budget announcement, and understanding the proposed exclusions is essential.
What is a testamentary trust?
In estate planning, a testamentary trust is commonly established under a will and takes effect following the will-maker’s death.
Instead of a beneficiary receiving their inheritance outright, a trustee holds and manages the assets for beneficiaries under the terms of the will.
A discretionary testamentary trust gives the trustee flexibility to decide which eligible beneficiaries receive income or capital, and in what amounts, subject to those terms.
Depending on its structure and administration, a testamentary trust can help:
- Manage inheritances for children or beneficiaries who need assistance with financial decisions;
- Provide ongoing support for vulnerable beneficiaries;
- Preserve assets for future generations;
- Respond to beneficiaries’ changing circumstances; and
- Achieve tax efficiencies where the applicable rules allow.
What is the latest position on the proposed tax changes?
The Government announced a proposed minimum tax of 30% on certain discretionary trust income from 1 July 2028. Exposure draft legislation was released on 3 September 2026, with consultation closing on 18 September 2026.
The proposal has developed since the original Budget announcement. Under the September 2026 exposure draft, qualifying income from discretionary testamentary trusts, including future trusts, may be excluded from the proposed minimum tax. This is a conditional exclusion for particular income, rather than a blanket exemption for the trust itself. The source of the income, the relevant beneficiary and the anti-avoidance provisions must all be considered.
Broadly, under the exposure draft:
- Qualifying income connected with assets inherited from the deceased estate, including relevant accumulations and replacement assets, can be excluded;
- Income from unrelated assets injected after 7.30 pm ACT time on 12 May 2026 would generally fall outside that exclusion;
- For trusts established on or after 1 July 2028, the relevant beneficiary must be an individual or an income tax-exempt entity for the exclusion to apply; and
- Anti-avoidance provisions can deny the exclusion for certain arrangements designed to obtain it.
An exclusion from this proposed minimum tax does not mean the income is tax-free. The ordinary tax rules remain relevant.
What does this mean for your will?
The proposed changes do not, by themselves, mean that a discretionary testamentary trust should be removed from your will or replaced with another structure.
They do reinforce the importance of reviewing how the trust would operate, including its beneficiaries, funding arrangements and distribution powers.
Signing a will containing testamentary trust provisions does not itself establish the trust during your lifetime. Any rules linked to when the trust is established therefore need to be considered separately from the date you sign your will.
The drafting should also reflect practical questions: Who will manage the inheritance? Who can replace the trustee? How much control should a beneficiary have? What should happen if their circumstances change?
Can a testamentary trust protect an inheritance?
A properly structured testamentary trust may offer greater protection than an outright inheritance in some circumstances. However, protection is not absolute.
In family law proceedings, trust arrangements can be scrutinised, including the parties’ interests and powers under the trust. A testamentary trust should not be treated as a guarantee that an inheritance will be excluded from consideration following separation or divorce.
Similarly, creditor and bankruptcy outcomes depend on the beneficiary’s rights and the circumstances. Holding assets in a trust does not automatically place every interest or payment beyond creditors’ reach.
Careful trustee selection, appropriate control provisions and proper administration are central to achieving the intended benefits.
What about tax benefits for children?
Under existing rules, qualifying testamentary trust income benefiting a minor may be taxed at ordinary individual rates rather than the higher rates that generally apply to minors’ unearned income.
These concessions are subject to conditions, including rules connecting the income to assets of the deceased estate and relevant accumulations. They do not apply automatically to all income received through a testamentary trust.
Tax advice should therefore consider both the existing rules and the proposed minimum-tax provisions.
Is a testamentary trust right for every family?
No. Its benefits should be weighed against the size and nature of the estate, the beneficiaries’ needs and the ongoing costs of administration.
Relevant considerations include:
- Whether beneficiaries need ongoing support or assistance managing an inheritance;
- Who is available and suitable to act as trustee;
- The desired balance between beneficiary control and protection;
- Annual accounting, tax and administration costs; and
- How the trust fits with the family’s broader succession arrangements.
A simpler arrangement may suit some families. Others may benefit from the flexibility and continuing management a testamentary trust can provide.
Should you consider another structure?
Alternative arrangements may be appropriate, but each involves different consequences for control, taxation, administration and succession.
There is no reason to assume that a fixed trust or company is automatically a better option. Any proposed restructuring should be considered with legal and tax advisers before action is taken.
Now is the time to review your estate plan
Changes to tax law are one reason to review your estate plan, but changes within your family can be just as significant.
If your will was prepared several years ago, or your assets, relationships or beneficiaries’ needs have changed, a review can help ensure your arrangements continue to reflect your wishes.
The focus should be on an estate plan that works for your family, with tax considerations assessed alongside control, flexibility, cost and the support your beneficiaries may need.
How Madison Marcus can help
Our Wills & Estates team assists individuals, families and business owners to develop estate plans tailored to their circumstances and objectives.
We can review your existing will, advise whether a testamentary trust is appropriate, and work with your accountant or tax adviser to consider the tax implications alongside your succession and asset-protection goals.
If you are preparing a will or reviewing existing arrangements, contact our team to discuss the options available to you.
This article reflects the September 2026 exposure draft and information reviewed as at 1 October 2026. The proposed measures remain subject to the legislative process. This article provides general information and is not a substitute for advice about your circumstances.
