Great News: Testamentary Discretionary Trusts Are Not Losing Their Tax Benefits

The 2026–27 Federal Budget prompted significant discussion — and in some cases, alarm — specifically regarding the future of Testamentary Trusts (also known as Family Will Trusts and Testamentary Discretionary Trusts). The centrepiece of the proposed reforms was a 30% minimum tax on discretionary trust income, including income earned by new Testamentary Discretionary Trusts (TDTs) established after Budget night.

This would have represented one of the most substantial shifts in private‑wealth taxation in decades.

Understandably, clients and advisers alike were forced to question whether Testamentary Trusts are still worthwhile.

This morning, in a joint press conference, the Prime Minister and Treasurer confirmed what many of us in the estate‑planning world were desperately hoping to hear: Testamentary Discretionary Trusts (TDTs) will be completely exempt from the proposed 30% minimum tax on discretionary trusts!

According to reporting in The Sydney Morning Herald, the government has now formally backed away from applying the new minimum tax to TDTs, recognising the important role they play for ordinary Australians — not just high‑wealth families or complex structures.

The announcement means that every TDT, existing or future, should continue to receive the full suite of tax advantages that have always made them so powerful.

What are Testamentary Trusts?

A Testamentary Trust is a trust established by a Will which only comes into effect after your death.

Instead of beneficiaries receiving their inheritance directly, the assets are placed into the trust and administered according to the terms set out in the Will.

A Testamentary Trust has three (3) key roles which we nominate in the terms of the Will – the beneficiary, the Trustee, and the Appointor.

The beneficiary is the person (or group of people) the trust is designed to benefit. They do not own the trust assets directly but they are entitled to receive income, capital, or both, depending on the terms of the Will.

The Trustee is the person or entity legally responsible for managing the trust and making decisions about distributions.

The Appointor is the person with the power to hire and fire the Trustee. They usually do not control distributions directly, but they control who controls the trust.

With Testamentary Trusts, is it not uncommon for the beneficiary to also be a Trustee and/or Appointor for their respective trust.

What are the benefits associated with having Testamentary Trusts in your Will?

In contrast to ‘standard’ Wills, Wills which incorporate Testamentary Trusts can offer significant asset protection and taxation advantages, depending on your circumstances.

Asset protection:

When an inheritance passes into a Testamentary Trust, it does not pass into a beneficiary’s personal name.  The Testamentary Trust can then protect an inheritance from being lost to creditors in bankruptcy or an ex-partner if a beneficiary is involved in family law proceedings.

Example 1:   If your child owns a business which suffers financial hardship and, as a result, your child becomes bankrupt, any inheritance they receive in their personal name can be lost.  If their inheritance passes into a properly structured Testamentary Trust, their inheritance can be preserved for their benefit.

Example 2:   If your child has separated from their partner and is in the process of a family law property settlement, any inheritance they receive in their personal name can be considered as part of their marital pool.  Alternatively, if their inheritance passes into a Testamentary Trust which is not within their sole control, that financial resource may not be considered as part of the marital pool and lost to or shared with the former partner.

Tax Minimisation:

Testamentary Trusts can be used to minimise tax by streaming income made by the trust to beneficiaries who may have lower incomes and therefore lower tax rates.

While this can be said of any discretionary family trust, Testamentary Trusts are particularly effective from a tax perspective where there are beneficiaries under the age of 18 years, such as grandchildren.  This advantage comes from the special treatment given to Testamentary Trusts which applies the adult tax-free threshold ($18,200 – indexed annually) to these minor beneficiaries, instead of the significantly lower threshold used for distributions to minors from other types of trusts.

The proposed minimum tax regime had created real anxiety for clients and practitioners alike. Many families were worried they would lose access to income‑splitting for minors, or that the trust structure would become too costly or complex to justify.

Vulnerable Beneficiaries:

Testamentary Trusts can also provide you with confidence that the inheritance you leave is secure and protected, particularly where your beneficiaries:

• Have a history of mismanaging their finances (for example, if they are inclined towards gambling or frivolous with spending);
• Have an alcohol or drug dependency; or
• Are otherwise vulnerable or at risk of financial or personal hardship.

If these circumstances apply, Testamentary Trusts can be structured in a way which ensures the beneficiary is not left in sole control of their Trust, which will ensure the funds held therein are preserved for their long-term benefit.

What next?

Testamentary trusts are suddenly on the radar of everyday Australians.

You might never have heard of them before. You might have assumed trusts were “only for the wealthy.” In reality, Testamentary Trusts can be a very practical, accessible way to protect your children or other vulnerable family members, safeguard assets from risks like bankruptcy or relationship breakdown and manage tax in a sensible, long‑term way for your family.

With the government now confirming that TDTs are here to stay, this is a good moment to ask a simple question:

“Is a Testamentary Trust right for my family?”

The answer depends on your situation: your assets, your children, your goals, and what you want to happen if something happens to you.

With the exemption confirmed, Testamentary Trusts remain:

• The only structure in Australia that allows minors to be taxed as adults
• A robust asset‑protection mechanism against bankruptcy, relationship breakdowns and financial vulnerability
• A flexible, multi‑generational planning tool

Importantly, for now:

• They are not caught by the new 30% minimum tax
• They retain their existing tax treatment
• They remain the most tax‑effective trust structure available to families

If you have a Will that contains a Testamentary Trust, there is therefore no need to panic. Today’s news is surely a huge relief to thousands of Willmakers across the country. More to come when the consultation paper and ensuing legislation is released.

If you would like to discuss your Estate Planning, please contact our Wills, Estates & Succession Planning team on (03) 5273 5273.