Testamentary Trusts and the “Death Tax” Debate: Where Things Stand Now

Recent Federal Budget announcements about discretionary trusts have caused confusion for many families, particularly those who have a testamentary trust included in their Will or are considering one as part of their estate plan.

Some commentary described the proposed changes as a “death tax”, while others suggested testamentary trusts could lose some of their tax advantages. Since then, the Federal Government has clarified that income from genuine testamentary trusts is expected to be exempt from the proposed minimum tax.

So, where do things stand now and should families still review their estate planning?

What was announced?

As part of the 2026–27 Federal Budget, the Federal Government announced a proposed 30% minimum tax on discretionary trusts, intended to apply from 1 July 2028.

Discretionary trusts are commonly used by families, business owners and investors for a range of reasons, including asset protection, succession planning and flexibility in distributing income. The proposed reform is aimed at changing how income from certain discretionary trusts is taxed.

Importantly, this measure is not yet law. The final position will depend on the legislation that is introduced and passed by Parliament.

Why did testamentary trusts become part of the debate?

A testamentary trust is a trust created under a Will. It does not usually operate while the Will-maker is alive. Instead, it comes into effect after death and can be used to manage and protect inherited assets for beneficiaries.

Testamentary trusts are often used in estate planning to provide flexibility and protection, particularly where beneficiaries are young, vulnerable, going through relationship difficulties, at risk of bankruptcy, or not yet ready to manage a large inheritance.

After the Budget announcement, concerns were raised that testamentary discretionary trusts could be caught by the proposed 30% minimum tax. This led to public debate and claims that the measure could operate like a “death tax”.

The Government has since confirmed that income from all types of testamentary trusts is expected to be exempt from the proposed minimum tax, provided the trust is established for genuine testamentary purposes.

Does this mean testamentary trusts are unaffected?

Not necessarily.

While the Government’s clarification is reassuring, the details still matter. The exemption is expected to apply to genuine testamentary trusts, but integrity rules and implementation details are still to be developed.

This means families should avoid relying on headlines alone. A testamentary trust may still be a valuable estate planning tool, but whether it is suitable will depend on the family’s circumstances, the assets involved, the beneficiaries’ needs and the final form of the law.

What is a “genuine testamentary purpose”?

The phrase “genuine testamentary purpose” is likely to be important.

In broad terms, this means the trust should be created as part of a legitimate estate plan and should relate to the administration and protection of assets passing from the deceased estate.

Arrangements that attempt to use a testamentary trust for broader tax planning purposes, or that involve adding non-estate assets in a way that does not reflect genuine estate planning, may be treated differently once the rules are finalised.

Until the legislation is available, families should treat this as an area where legal and tax advice will be important.

Should you still include a testamentary trust in your Will?

For many people, a testamentary trust can still be worth considering.

A testamentary trust may assist where:

• you have young children or grandchildren;
• you are part of a blended family;
• a beneficiary has a disability or vulnerability;
• a beneficiary is going through, or may later go through, separation or divorce;
• a beneficiary is exposed to business or creditor risk;
• you want to give your executor or trustee flexibility in how assets are managed after your death; or
• you want to provide for loved ones while reducing the risk of future disputes.

However, a testamentary trust is not necessary for every estate plan. For some families, a simpler Will may be more appropriate. The right structure depends on your family, your assets and what you want to achieve.

Why estate planning should still be reviewed

Even though the Government has clarified its position on testamentary trusts, the debate is a useful reminder that estate planning is not something to “set and forget”.

You should consider reviewing your Will and estate planning arrangements if:

• your Will contains testamentary trust provisions;
• your family circumstances have changed;
• you have separated, remarried or entered a new relationship;
• you have children from a previous relationship;
• your assets, business interests or superannuation have changed;
• a beneficiary’s circumstances have changed;
• you have concerns about disputes after your death; or
• your Will has not been reviewed for several years.

It is also important to remember that superannuation, jointly owned property, family trusts, companies and business structures may not automatically be dealt with by your Will. These assets and structures need to be considered as part of a broader estate planning review.

The key takeaway

The proposed discretionary trust tax changes have not yet become law, and the Government has confirmed that genuine testamentary trusts are expected to be exempt from the proposed minimum tax. However, the final details are still important.

For families with existing testamentary trust Wills, blended family arrangements, business interests, family trusts or significant assets, now is a good time to review whether your estate plan still reflects your wishes and whether the structures in place remain appropriate.

Getting advice early can help ensure your estate plan is practical, current and designed to protect the people you care about.

If you need help with your Estate Plan or Will please click here to contact us or call 9525 8688.