– Why Families Should Not Panic
Following the Federal Budget announcement on 12 May 2026, many clients have contacted us. They have asked whether the proposed taxation changes to discretionary trusts mean they should reconsider having testamentary discretionary trusts included within their Wills.
At this stage, it is important to remember that these measures are only proposals. The legislation has not yet been presented to, let alone passed by Parliament. There is still uncertainty around how the final rules may operate. Amendments to the original proposal are anticipated. How the practical application of the rules will work are yet to be revealed.
For this reason, families should avoid making rushed decisions. They should also avoid significantly changing their estate planning arrangements until the legislation is finalised and further detail becomes available.
What Has Been Proposed?
Under the current proposal, new discretionary testamentary trusts may become subject to a minimum tax rate of 30% on trust income.
The proposal includes a limited exemption for testamentary trusts already in existence before 12 May 2026. However, a testamentary trust only legally comes into existence after a person passes away. Until then, the testamentary trust provisions within a Will are simply instructions that may later establish the trust.
As a result, the exemption is quite narrow and generally only applies where the testator had already passed away prior to that announcement date of 12 May 2026.
This means many clients who currently have testamentary trust provisions within their Wills may potentially fall within the proposed rules. This is the case if the legislation proceeds in its currently announced form.
Testamentary Trusts Still Provide Significant Benefits
Importantly, the proposed changes do not mean testamentary trusts are no longer effective or appropriate.
For most families, the decision to include testamentary discretionary trusts within a Will has rarely been driven solely by tax outcomes. Testamentary discretionary trusts continue to provide important estate planning and asset protection benefits, including:
- Protecting inheritances in the event of relationship breakdowns
- Providing safeguards against creditors or bankruptcy
- Assisting vulnerable or financially inexperienced beneficiaries
- Preserving family wealth across generations
- Providing flexibility where family circumstances change over time
For many families, these protections remain far more important than the potential impact of any additional taxation.
In many cases, testamentary trusts will likely continue to remain one of the most effective structures available for protecting inherited family wealth.
Why Not Simply Switch to a Testamentary Fixed Trust?
The proposed rules currently exclude fixed testamentary trusts. However, changing to a fixed structure is not necessarily a straightforward solution.
Fixed trusts remove much of the flexibility that makes discretionary testamentary trusts valuable. They can force income to beneficiaries on higher marginal tax rates and may significantly reduce the level of asset protection available to beneficiaries.
For many families, maintaining flexibility and protecting inherited assets will continue to outweigh any potential additional tax cost if the proposed rules are implemented.
Further Clarification Is Still Needed
There are still several important unanswered questions surrounding the proposed legislation. These include how the new rules may interact with existing tax concessions available to children receiving income from testamentary trusts.
Until draft legislation and further guidance are released, the full practical impact of these changes remains unclear.
We Will Continue to Monitor the Situation
At this stage, the proposed changes should not be considered a reason for families to abandon testamentary trust structures within their Wills.
For many clients, testamentary trusts will continue to play an important role in protecting family wealth and providing long-term flexibility for beneficiaries.
We will continue to closely monitor the progress of the legislation and provide updates to clients as more information becomes available. As the practical implications become clearer, we will share further details.
If you would like to review your estate planning arrangements or discuss whether your current Will remains appropriate for your circumstances, please arrange a meeting with one of our advisers by –
- phoning our office on 07-3421 3456; or
- use the online Book A Meeting facility at your convenience.
(This article was first posted by us in May 2026. As it is time critical it may not be updated, but a new article posted when the legislation passes the Parliament.)