Testamentary trusts: the "death tax" is off the table

Testamentary trusts are back on the estate-planning agenda.

In the May 2026 Federal Budget, the Government announced a proposed 30% minimum tax on discretionary trusts from 1 July 2028. This caused understandable concern for people reviewing their Wills, because a common form of estate-planning trust is the testamentary discretionary trust.

On 18 June 2026, the Government confirmed that income from all types of testamentary trusts will be exempt from the proposed minimum tax, including future discretionary testamentary trusts.

That is an important clarification. It does not mean every detail is settled. The proposal still needs to pass through the legislative process, and the implementation details remain subject to further consultation.

What do I need to know?

A testamentary trust is a trust created by a Will. It does not usually operate during the will-maker's lifetime. It comes into effect after death, when estate assets are transferred into the trust for the benefit of the nominated beneficiaries.

A testamentary discretionary trust gives the trustee discretion about how income and capital are distributed among the beneficiaries named in the Will. That flexibility is often the point of the structure.

It can assist with:

• protecting an inheritance from a beneficiary's creditors or bankruptcy;
• protecting assets if a beneficiary later separates or divorces;
• supporting young children or vulnerable beneficiaries;
• allowing income to be distributed in a more flexible way between family members; and
• keeping estate assets controlled under the terms of the Will rather than paid out immediately.

The practical point is simple: for many families, a testamentary trust is not just a tax device. It is a control, protection and succession-planning tool.

What was proposed in the May 2026 Budget?

The May 2026 Budget announced a proposed 30% minimum tax on discretionary trusts from 1 July 2028.

Under the proposed model, the trustee of a discretionary trust would pay 30% tax on the taxable income of the trust. Beneficiaries would still include their trust income in their own tax returns. Non-corporate beneficiaries would generally receive non-refundable credits for tax paid by the trustee.

The stated policy reason was to reduce income splitting through discretionary trusts and better align the tax treatment of trust income with tax paid by wage and salary earners.

The concern for estate planning was that testamentary discretionary trusts are, by definition, discretionary trusts. If they were caught by the new minimum tax, a key tax advantage of using a testamentary trust for children and family succession planning may have been reduced.

Why did people call it a "death tax"?

Strictly speaking, the proposed trust tax was not an inheritance tax on the estate capital itself.

It was a proposed tax on income derived through discretionary trusts. The Government has also stated that there is no tax on inheritances or deceased estates.

However, the label stuck because a testamentary trust only comes into being when a person dies. If the income of a future testamentary discretionary trust had been subject to a new minimum tax, then for many families the tax would only have become relevant after death.

That is why the proposal was viewed by many people as affecting estate planning, even though the technical subject was trust income rather than the transfer of inheritance capital.

What changed on 18 June 2026?

On 18 June 2026, the Government confirmed that income from all types of testamentary trusts will be exempt from the minimum tax, including future discretionary testamentary trusts.

The Government also said the exemption would apply to discretionary testamentary trusts established for genuine testamentary purposes.

There are two important qualifications in the Government's announcement:

1. the exclusion will be limited to income from assets of the deceased estate; and
2. for discretionary testamentary trusts established on or after 1 July 2028, the exclusion will only apply where the trust can only benefit individuals and income tax exempt entities.

These qualifications matter. They suggest the Government still intends to prevent non-estate assets being moved into testamentary trust structures to obtain concessional tax treatment.

Why does a testamentary trust still earn its place?

A well-drafted testamentary trust can still be valuable in the right Will.

1. Income planning for minor beneficiaries

Income from a testamentary trust can often be treated differently from income distributed to a child through an ordinary family trust. In broad terms, income that qualifies as excepted trust income may be taxed at ordinary adult marginal rates rather than punitive minor tax rates.

That can make a material difference where a will-maker wants to provide for young children or grandchildren.

This should not be treated as automatic. The tax treatment depends on the source of the income, the assets transferred into the trust, the terms of the Will, and the tax rules in force at the relevant time.

2. Asset protection

A testamentary trust can make it harder for an inheritance to be exposed to a beneficiary's personal financial risks.

For example, a beneficiary may later face bankruptcy, creditor claims, business failure or relationship breakdown. A properly structured trust may provide more protection than an outright gift.

This is not absolute protection. The result depends on the trust terms, trustee control, the beneficiary's role, the nature of the claim, and the applicable law.

3. Flexibility for changing family circumstances

Families change.

Children become adults. Relationships start and end. A beneficiary may develop a disability, financial difficulty or dependency issue. Another beneficiary may become financially independent and need less support.

A testamentary discretionary trust allows the trustee to respond to those circumstances over time, instead of forcing a fixed distribution immediately after death.

4. Better control over when beneficiaries receive assets

An outright gift gives the beneficiary direct control once the estate is administered.

That may be appropriate in a simple estate. It may be inappropriate where the beneficiary is young, financially vulnerable, in a risky business, in a fragile relationship, or not yet ready to control a substantial inheritance.

A testamentary trust can allow assets to be managed for the beneficiary's benefit without handing over full control at once.

Does everyone need a testamentary trust?

No.

For a simple estate, a simple Will may be enough.

A testamentary trust is more likely to be worth considering where:

• you have children or grandchildren under 18;
• you have a blended family;
• you want to protect beneficiaries from creditors, bankruptcy or relationship breakdown;
• you have a beneficiary with a disability, addiction, dependency issue or financial vulnerability;
• you own a business or investment assets;
• you want flexibility about who receives income and when; or
• you want more control than an outright gift provides.

The question is not whether a testamentary trust is fashionable. The question is whether your estate plan needs flexibility, protection or tax-sensitive structuring.

One caveat: this is still not final law

The 18 June 2026 announcement is important, but it is still an announcement.

The final legal position depends on the legislation that is passed by Parliament and any further consultation details released before implementation.

This means you should not rewrite your estate plan based on headlines alone.

You should review:

• whether your current Will includes a testamentary trust;
• whether the trust is drafted for genuine testamentary purposes;
• who can benefit under the trust;
• who controls the trustee role;
• whether the trust only deals with estate assets; and
• whether your structure still fits your family and asset position.

Conclusion: revisit your Will now

The Government's 18 June 2026 announcement has restored much of the practical case for testamentary trusts in estate planning.

The proposed 30% minimum trust tax created uncertainty. The announced carve-out means testamentary trusts should not be dismissed simply because of the May 2026 Budget.

For many families, they remain worth considering for income planning, asset protection, and flexibility in how an inheritance is managed after death.

The detail still matters. A testamentary trust must be drafted properly, and it must fit your circumstances.

For a free, no obligation review of your current Will or to discuss your estate planning requirements, contact Biz Lawyers & Advisory.

Call us now: 1800-893-836
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Related services: Wills and Estate Planning, Testamentary Trusts, Wills and Probate and Administration

This article is general information only and is not legal or tax advice. Your Will, tax position and estate planning structure should be reviewed according to your personal circumstances.

Sources reviewed

• Treasury Ministers, Tax reform implementation for small business and startups, 18 June 2026
• Australian Government, 2026-27 Budget Tax Explainer, Minimum tax on discretionary trusts
• Australian Taxation Office, Tax reform - introducing a minimum tax on discretionary trusts
• Australian Taxation Office, Your income if you are under 18 years old