“So my will sets up a Testamentary Discretionary Trust on my death… what do the Government’s recent announcements mean for my family?”
This is a question we are now increasingly being asked.
Testamentary discretionary trusts (TDTs) have long been considered a gold?standard estate planning tool—providing flexibility, asset protection, and significant tax advantages for families after death.
The Federal Government’s 2026–27 Budget initially proposed a major reform: a 30% minimum tax on discretionary trust income from 1 July 2028. That proposal raised serious concerns about the future of testamentary trusts.
However, following strong industry feedback, the Government made an important announcement on 18 June 2026:
Income from testamentary discretionary trusts will be excluded from the new 30% minimum tax—subject to important conditions.
So where does that leave things?
What Has Actually Changed?
The big shift (in plain English)
Originally, the proposal meant:
- All discretionary trusts (including TDTs) would effectively face a minimum 30% tax
Now, following the 18 June announcement:
- TDTs are carved out of that minimum tax, at least in principle
However, the carve out is not absolute.
The Government has introduced new conditions that fundamentally reshape how testamentary trusts will operate.
How Testamentary Trusts Work (Now vs. Future)
Current position
A typical TDT currently:
- Distributes income to beneficiaries
- Beneficiaries pay tax at their own marginal rates
- Allows flexible income splitting (including to minors)
Position after 1 July 2028 (based on current announcement)
For qualifying testamentary trusts:
- No 30% minimum tax applies
- Existing flow through taxation can continue
But only if certain conditions are met.
The Fine Print - Critical New Limitations
-
“Genuine testamentary purpose” requirement
The exemption only applies where the trust is established for “genuine testamentary purposes”
What this means:
- The Government is targeting artificial or tax driven structures
- It creates a new integrity rule
In practice:
- Standard will-based TDTs should qualify;
- But more complex or “recycled” structures may not.
This introduces a new area of uncertainty and potential ATO scrutiny.
-
Only applies to estate-derived assets
The exemption is limited to income from assets of the deceased estate.
Why this matters:
- If additional assets are later introduced into the trust, those assets may not qualify for the exemption
- Trustees may need to track and distinguish estate vs non-estate assets
This creates real practical complexity in administration.
-
New restrictions from 1 July 2028
For TDTs established after 1 July 2028 the concession will apply only if the trust benefits individuals and tax-exempt entities.
Likely impact:
- Reduced use of corporate beneficiaries (“bucket companies”);
- Less flexibility in income streaming strategies.
So What Does That Mean in Practice?
-
If your will already includes a testamentary trust
This is generally good news.
- The feared 30% tax does not broadly apply;
- Your trust is likely to remain effective;
But:
- Future administration must consider:
- Asset tracing
- Integrity requirements
-
If you are updating your will now
Things are more nuanced.
- TDTs are still worth including;
- But drafting should now consider:
- Ensuring a clear testamentary purpose;
- How assets will be managed and possibly quarantined;
- Future flexibility constraints;
A “standard” precedent may no longer be sufficient.
-
What about children and minors?
One of the major advantages of TDTs remains:
- Minors can still access adult marginal tax rates (subject to existing rules)
Because:
- The 30% minimum tax does not apply (for qualifying trusts)
This means one of the key tax benefits of TDTs is largely preserved.
-
Will testamentary trusts still be worth it?
Yes - very much so.
Even aside from tax TDTs still provide:
- Asset protection (bankruptcy, family law, creditors)
- Control and flexibility
- Intergenerational wealth planning
The recent announcement confirms:
The Government is regulating, not abolishing, testamentary trusts.
What Has Not Changed
It is critical to understand:
- The 30% minimum tax still applies to other discretionary trusts;
- The TDT carve-out:
- Is not yet law;
- Will depend on final legislation.
There is still legislative risk and detail to come.
Key Takeaways for Clients
If your will includes (or is intended to include) a testamentary discretionary trust:
-
Testamentary trusts are still very much alive
The Government has confirmed their continued role in estate planning.
-
But they will be more regulated
New rules around:
- Purpose
- Asset source
- Beneficiary classes
Will shape how they operate.
-
Existing and future trusts need careful structuring
Particularly:
- How assets flow into and within the trust;
- How flexibility is maintained under new constraints.
-
Now is still the right time to review your will
Even though the outcome is more favourable than first proposed:
- The rules have changed;
- Your estate plan should reflect this.
-
Don’t rush unnecessary changes
The announcement is:
- Policy only;
- Subject to refinement.
Premature restructuring could create unintended consequences.
Final Word
The Government’s original proposal suggested a fundamental shift away from the traditional advantages of testamentary trusts.
The 18 June 2026 announcement significantly softens that position.
Testamentary discretionary trusts remain a core and effective estate planning tool—but they are moving into a more structured and regulated environment.
Between now and 1 July 2028, there is a valuable opportunity to:
- Properly consider the proposals when the become law;
- Review existing wills;
- Refine drafting;
- Ensure your estate plan continues to deliver the outcomes your family expects.