Testamentary Trust Changes: What the Federal Budget Means for Your Will
The Federal Government’s 2026-2027 budget has introduced a significant proposed change to the taxation of discretionary trusts, a change that may directly impact many wills incorporating Discretionary Testamentary Trusts (DTTs).
What is changing for Testamentary Trusts?
The Government has announced a proposed 30% minimum tax on discretionary trust income to apply from 1 July 2028.
Currently, discretionary trusts are generally treated as “flow through” vehicles, meaning income is taxed in the hands of beneficiaries at their personal marginal rates.
The proposed reform shifts from this approach by:
- Imposing tax at the Trustee level (a minimum of 30%)
- Providing non-refundable tax credits to individual beneficiaries
- Limiting the effectiveness of traditional income splitting strategies
The clear policy objective is to reduce the tax advantages of distributing income to lower income family members.
Why this matters for your Will
Many modern wills include discretionary testamentary trusts to:
- protect assets
- provide flexibility in distributions
- achieve tax efficiency across family members
However, the proposed changes may reduce one of the key historical advantages – tax effective income streaming.
Importantly:
- existing testamentary trust assets (as at 12 May 2026) may be excluded from the new rules in some cases. Please note this likely refers only to testamentary trusts that are already in operation
- new discretionary testamentary trusts (created under future wills) are likely to be fully subject to the new 30% minimum tax framework.
This distinction means the timing and structure of your estate plan could have real tax consequences.
Should you update your will?
For many clients, the answer is worth considering now – not later.
A review may be appropriate if:
- your will relies heavily on discretionary testamentary trust structures
- your estate plan assumes income will be distributed to lower income beneficiaries
- you have complex family, business or investment structures
- you are planning intergenerational wealth transfers.
Even where tax outcomes change, it is important to remember that discretionary testamentary trusts still offer valuable non-tax benefits, including control, asset protection and flexibility for beneficiaries.
What should you do next?
- review your existing will and estate planning structures
- consider whether your trust provisions remain appropriate
- seek tailored legal and tax advice before making changes
Final word on Testamentary Trust changes
While the legislation is not yet finalised, this is one of the most significant changes to trust taxation in decades, and it has clear implications for estate planning.
Early advice can ensure your will continues to achieve your objectives, not just tax efficiency, but protection and long term family outcomes.
If you would like to discuss how these proposed reforms may affect your estate plan our estate planning team is ready to assist. Click here to contact us now or call 9525 8688.
