The Federal Budget 2026-2027 announced that the Government intends to introduce a 30% minimum tax on discretionary trusts from 1 July 2028. There has been a lot of media commentary about this and understandably, if you have a testamentary trust in your will — or have been considering one — you may be wondering whether they are still worthwhile.
The short answer is yes. Testamentary trusts are as valuable as ever for estate planning. Here is what you need to know.
What Is a Testamentary Trust?
A testamentary discretionary trust (TT) is a trust created by your will. It does not exist during your lifetime — it only comes into existence after you die. This makes it fundamentally different from an ordinary family discretionary trust set up during your lifetime.
A TT is commonly used to protect an inheritance for children, a surviving spouse, disabled beneficiaries, and vulnerable adults. It gives the trustee flexibility each year to decide how income from the inheritance is distributed among beneficiaries, and it can be structured to protect the inheritance from family law proceedings, creditors, and financial immaturity.
What Has the Budget Announced?
The Government has announced that from 1 July 2028, a minimum 30% tax rate will apply to income distributed from discretionary trusts to adult beneficiaries, with the trustee paying the tax and beneficiaries receiving non-refundable credits.
This is not yet law. It is a budget announcement. Legislation still needs to be drafted, introduced to Parliament, and passed — a process that involves industry consultation and can take years. In fact, a very similar proposal was announced around 20 years ago under the Ralph Review and was ultimately abandoned because the process became too difficult.
What Do We Know So Far?
- Existing TTs are protected. TTs already in existence where the willmaker has died before 12 May 2026 have been given protected status and should not be impacted by the changes.
- The change does not affect most adult beneficiaries. Any adult beneficiary who is already earning $45,000 or more from other sources — salary, wages, investments — will already be paying tax at 30% or above. For them, the proposed new rules make no practical difference.
- The change does affect lower income beneficiaries. Beneficiaries who earn less than $45,000 from other sources — retirees, adult children at university, carers, and others with reduced income — will pay more tax under the proposed rules than under the current rules. They will lose access to the tax-free threshold and lower marginal rates on income distributed from the TT.
- What happens to distributions to minors is still unclear. Under the current rules, income distributed to minor children from a TT is taxed at adult marginal rates — not at the penalty rates that apply to distributions to minors from an ordinary family trust. This is a longstanding and important distinction that recognises a child is receiving support from an inheritance, not artificial income splitting. The Budget material refers to an exemption for income to “vulnerable minors” but we do not yet know exactly what that means or whether it will preserve the existing treatment for all minors.
- The wills we draft include optional TTs. At Armour-Craig Legal, the TTs we include in wills are optional — meaning your executor and family can get specific legal, tax and financial advice at the time of your death, assess the law as it stands at that point, and decide whether to use the TT structure or not. They are not locked in. This approach gives your family the best of both worlds — the option is there if they need it, and they are not forced into a structure that no longer suits them.
The Tax Benefits Are Only One Part of the Story
Much of the media commentary has focused on tax. But in practice, tax planning is only one of the reasons families use testamentary trusts — and for many families, it is not the primary reason at all.
The non-tax benefits of a TT are not affected by the proposed changes. They include:
If you have young children and your spouse survives you: A TT means the inheritance you leave for your children is protected even if your surviving spouse re-partners, goes through a new relationship breakdown, or is sued. Your spouse’s new will is irrelevant — you have already set up the succession plan for your inheritance through the trust.
If both parents die: Under a basic will, an 18-year-old can demand their inheritance immediately. A TT lets you choose what age your children get financial control — whether that is 21, 25, or 30 — and who manages the inheritance until they are ready.
If you have adult children: Leaving an inheritance through a TT means the starting point in any family law property settlement is that the inheritance is excluded from the property pool. You can never guarantee the outcome, but a TT gives your children a significantly better chance of keeping their inheritance than a basic will does.
If a child is in a high-risk occupation or runs a business: The inheritance held in a TT is protected from claims by creditors, giving the family a better chance of keeping it within the family.
If you have vulnerable or disabled beneficiaries: A TT gives flexibility to support them in a way that a basic will cannot, and without the strict eligibility requirements of a Special Disability Trust.
The Scenario That Concerns Us Most
One of the most troubling consequences of the proposed changes is the impact on young families where one parent dies. Where a surviving spouse is grieving, working, and raising children alone, the ability to distribute some of the inheritance income to the minor children at lower tax rates makes a real practical difference to the family’s finances. This is not a tax rort — it is a recognition that a child has lost a parent, and the income comes from that parent’s inheritance.
The Budget material suggests some exemption for “vulnerable minors” but we do not yet know whether that will cover all minor children in this situation. We are advocating for testamentary trusts to be either excluded from the proposed regime entirely, or at minimum for the existing treatment of distributions to minors, disabled beneficiaries, and low income beneficiaries to be preserved.
What Should You Do?
If you already have a will with a TT — nothing urgent needs to be done right now. The proposed changes are not law and do not take effect until 1 July 2028 at the earliest.
If you are considering whether to include a TT in your will — the protection benefits alone make it worth considering, regardless of the tax position. And because the TTs we draft are optional, your family retains full flexibility to assess the tax landscape at the time of your death.
If you would like to discuss how the proposed changes affect your estate plan, contact Fleur Craig of Armour-Craig Legal on (03) 5636 4986 or fleur@armourcraiglegal.com.au.