The recent federal budget announcement on trusts left many families asking: do testamentary trusts still have a place in succession planning? Absolutely.
The 2026-2027 Federal Budget prompted concern that testamentary trusts may lose one of their long-standing advantages of tax effectiveness, with the Government initially announcing a proposed 30% minimum tax rate for discretionary trusts from 1 July 2028.
Since then, the Government has announced adjustments that are expected to spare non-fixed testamentary trusts established for “genuine testamentary purposes”. Subject to legislation, the existing concessional tax treatment for testamentary trusts should remain intact, albeit there is uncertainty around what will be considered a “genuine testamentary purpose”.
What is a testamentary trust?
Testamentary trusts are created by a will, commencing after death of the testator. Instead of assets passing directly to a beneficiary, the trustee holds and controls assets under the terms of the trust.
A discretionary testamentary trust gives the trustee flexibility to decide which beneficiaries receive income or capital, when they receive it, and in what proportions. That flexibility can help a family respond to changing needs, manage wealth, protect vulnerable beneficiaries, and preserve assets for future generations.
What has changed after the federal budget announcement?
Under the original proposal, trustees of discretionary trusts would pay tax at a minimum rate of 30% on taxable income. Non-corporate beneficiaries would then receive non-refundable credits for tax paid by the trustee. The measure was designed to limit income splitting where trust income could otherwise be distributed to beneficiaries who pay tax at a rate below 30%.
The later announcement is critical for estate planning. Subject to legislation, the existing concessional tax treatment for non-fixed testamentary trusts should remain intact where the trust has a “genuine testamentary purpose”. That means testamentary trusts may continue to distribute income to minor beneficiaries at adult marginal rates for excepted trust income. This exemption is not expected to apply to arrangements that contribute non-estate assets into a testamentary trust, or try to replicate testamentary trust benefits outside a deceased estate context.
Draft legislation will still matter. It should clarify whether the exclusion applies only to income from assets owned by the deceased before death, or also to assets acquired from the sale proceeds of those assets. The government’s media release suggests testamentary trusts with broader beneficiary classes that include companies and trusts may still be subject to the proposed 30 per cent minimum tax.
Continuing benefits of testamentary trusts
Testamentary trusts are particularly useful for protecting young, vulnerable or financially inexperienced beneficiaries, while allowing assets to be managed by family members or trusted advisors for their benefit.
They can also help to keep assets in the family. The trust terms may limit distributions to bloodline descendants or other intended beneficiaries, preserving wealth within the intended family line across future generations.
Asset protection remains a key reason to use testamentary trusts. Assets held in a trust may be shielded from creditors and may provide some protection in family law disputes. This may assist where a beneficiary faces business risk, bankruptcy, or relationship breakdown.
Tax flexibility also remains relevant. Testamentary trusts have long allowed income distributions to beneficiaries, including minors, while accessing adult marginal tax rates for excepted trust income. The recent announcement means that benefit should remain available for genuine testamentary trusts.
What should families do now?
The best response is to review, not panic. Families with existing testamentary trust arrangements should consider whether the trust has a “genuine testamentary purpose” and whether the beneficiary class, funding pathway, and administration align with that purpose. New wills should be drafted with those requirements in mind.
Documentation, asset tracing, and compliance with the trust’s intention will become increasingly important. Trustees and advisors should be able to identify estate assets, sale proceeds, reinvested assets, and distributions if legislation draws lines between estate and non-estate assets.
Testamentary trusts still matter and remain a key part of estate planning. The budget may change parts of the tax conversation, but it does not dimmish their role in protecting inheritance, managing succession, and preserving wealth. A well drafted testamentary trust remains valuable where it is used for the right purpose and administered with discipline.
