Testamentary Discretionary Trust Budget Changes in Australia
Testamentary trusts have long been one of the most effective estate planning tools available to Australian families, offering a mix of asset protection and tax efficiency that an outright inheritance can not match. That effectiveness looked set to change earlier this year, when the Federal Budget proposed folding testamentary trusts into a new 30% minimum tax rate aimed at discretionary trusts more broadly.
The Government has since walked that back. Testamentary trusts will now be exempt from the new minimum tax rate rules, provided they're established for "genuine testamentary purposes." It's a significant reversal, and one that changes how families should think about estate planning as the new rules take effect.
Here's what the testamentary discretionary trust budget changes mean for your will, and what to check if you already have a testamentary trust in place.
What is a Testamentary Trust?
A testamentary trust is a trust created through a person's will, coming into effect only after they pass away. Rather than assets flowing directly to beneficiaries, they're held and managed within the trust, with a trustee distributing income and capital according to the terms set out in the will.
Assets held in a testamentary trust generally sit outside a beneficiary's personal estate, offering a layer of protection from creditors, relationship breakdowns, or bankruptcy. There's also a tax advantage that often matters more in practice: testamentary trust tax rates for minor beneficiaries mirror ordinary adult marginal rates, rather than the punitive rates that usually apply to minors' unearned income. For families with young children or grandchildren, that distinction alone can make a meaningful difference to how an estate is structured.
The Original Budget Proposal
In the Federal Budget, the Government announced a 30% minimum tax rate would apply to the net taxable income of discretionary trusts from 1 July 2028. The stated aim was to close a perceived gap where trust structures were being used to reduce the effective tax rate on income that would otherwise be taxed more heavily in an individual's hands.
Under the original proposal, testamentary trusts weren't automatically carved out. The Government indicated the new rate would extend to testamentary trusts too, unless they already existed as at 12 May 2026. For anyone planning to set up a testamentary trust after that date, or families with wills already drafted to include one, this raised a real concern: the tax efficiency that makes testamentary trusts worthwhile could be significantly eroded just as the changes came into force.
The Reversal: Testamentary Trusts Now Exempt
Following industry pushback, the Government has confirmed it will exempt income from all testamentary trusts from the new minimum tax rate rules, as long as they're established for genuine testamentary purposes. In practice, this means testamentary trusts can continue to offer the tax treatment they always have, including the concessional treatment of income distributed to minors, without being caught by the broader 30% minimum tax aimed at discretionary trusts generally.
These testamentary discretionary trust budget changes are a meaningful win for estate planning. They remove the pressure building on families and advisers to reconsider whether testamentary trusts still made sense, and they preserve one of the more useful mechanisms available for passing on wealth in a tax-effective, protected way.
Beyond the minor-beneficiary concession, it's worth understanding how testamentary trusts are taxed more broadly. Income and capital gains within a testamentary trust are otherwise taxed in largely the same way as any other discretionary trust, distributed to beneficiaries and taxed in their hands at their individual marginal rates, or retained and taxed to the trustee where no beneficiary is presently entitled.
What "Genuine Testamentary Purposes" Actually Means
The exemption isn't unconditional, and this is where the detail matters. The carve-out is limited to income derived from assets of the relevant deceased estate. A testamentary trust that's used purely as a receptacle for outside income or capital unrelated to the estate it was created from won't qualify for the same treatment.
There's also a further restriction for trusts established going forward. For discretionary testamentary trusts set up on or after 1 July 2028, the exemption will apply only where the trust can benefit individuals and income tax exempt entities. Trusts drafted with a broader class of potential beneficiaries, including corporate or other non-individual entities, may fall outside the concession.
For families with existing wills that include testamentary trust provisions, now's a sensible time to have those provisions checked. A testamentary trust drafted years ago, before this distinction existed, may not have been intended to meet these eligibility conditions.
Why This Distinction Matters for Estate Planning
The genuine testamentary purposes test exists to prevent testamentary trusts being used as a general-purpose tax planning vehicle rather than what they're intended for: managing and distributing assets from a deceased estate. Without some form of restriction, there would be little to stop families using testamentary trusts to shelter income streams that have nothing to do with the estate itself, defeating the purpose of the broader 30% minimum tax reform.
For most families using testamentary trusts as intended, holding and distributing genuine estate assets to a defined group of individual beneficiaries, the exemption should apply cleanly. Where things get more complicated is in blended families, estates involving business assets or corporate structures, or wills drafted with wider beneficiary classes for flexibility. These are exactly the scenarios where a review is worthwhile before assuming the exemption will apply as intended.
It's also worth weighing up the disadvantages of testamentary trusts alongside the benefits when deciding how far to lean into this structure. The added administrative cost, trustee obligations, and ongoing compliance of running a formal trust can outweigh the tax and asset protection advantages for smaller or simpler estates, even with the exemption now confirmed.
Practical Steps to Take Now
If you have a testamentary trust in your will already, or you're still putting one together as part of your estate planning, a few practical steps are worth working through given the change:
Review existing will provisions. If your will already includes testamentary trust clauses, check whether the drafting aligns with the genuine testamentary purposes test, particularly around who can benefit from the trust.
Reassess beneficiary classes. For any testamentary trust established from 1 July 2028 onward, confirm the trust deed or will provisions restrict benefit to individuals and income tax exempt entities, to preserve eligibility for the exemption.
Separate estate assets clearly. Since the exclusion only covers income from assets of the deceased estate, make sure record-keeping and asset tracing within the trust is clear enough to demonstrate this if ever questioned by the ATO.
Revisit structures for blended families or business assets. These situations are more likely to involve arrangements that push against the boundaries of what qualifies as genuine testamentary purpose.
Don't wait until 2028. While the minimum tax rate doesn't apply until 1 July 2028, wills and estate plans are often drafted well in advance. Getting the structure right now avoids a scramble later.
What This Means If You're Already a Beneficiary
If you're currently receiving, or expect to receive, distributions from an existing testamentary trust, the exemption is largely good news. Provided the trust was genuinely established from a deceased estate and distributes to individual beneficiaries, the concessional tax treatment you're used to should continue unaffected by the broader 30% minimum tax changes.
The main thing to watch for is any planned restructuring of the trust, or any intention to bring in outside assets or income streams unrelated to the original estate. Doing so could jeopardise the trust's eligibility for the exemption and expose that income to the new minimum tax rate rules instead.
How Cordner Advisory Can Help
Estate planning changes like this tend to sit in a grey area between legal drafting and tax strategy, which is exactly where they're easiest to get wrong. Understanding whether a testamentary trust, existing or proposed, meets the genuine testamentary purposes test is essential to ensuring it delivers the outcome it was designed to achieve.
Our team works with families and their solicitors to review testamentary trust structures and translate these changes into clear, practical steps. In relation to the new rules, we can assist you to:
Review existing will and testamentary trust provisions against the genuine testamentary purposes test
Assess whether current or proposed beneficiary classes will preserve eligibility for the exemption
Advise on record-keeping and asset tracing to support the estate-asset exclusion
Coordinate with your solicitor on drafting future-proofed testamentary trust provisions
Model the tax implications for beneficiaries under the current and revised rules
We focus on practical guidance, not generic advice. If you'd like tailored input on how these changes affect your will or an existing testamentary trust, speaking with an adviser can help you avoid unnecessary complexity or unwelcome surprises down the track.
