Proposed changes to the taxation of discretionary trusts may affect some Wills containing testamentary discretionary trusts. With legislation now before Parliament, people with a TDT in their Will should consider reviewing the class of potential beneficiaries to determine whether the trust would qualify for the proposed exclusion.
What began as a Budget announcement is now a Bill before Parliament. This is the point at which a policy proposal starts to become something clients should consider planning around, not just watch.
For most families, the practical question is a narrow one: does your Will still do what you intended it to? For many, the answer will turn on a single condition attached to the proposed new regime.
The single condition to review
The reforms would apply a minimum 30% tax to discretionary trust income from 1 July 2028. TDTs established for genuine testamentary purposes are set to be excluded. However, for a TDT established on or after 1 July 2028, the exclusion would only apply where the beneficiaries under the trust instrument are individuals, income tax-exempt entities, or beneficiaries with a special disability.
That condition is easy to miss and easy to trip over. Many Wills deliberately cast a wide net of potential beneficiaries, often including companies or other trusts to preserve flexibility for tax-efficient outcomes.
A Will incorporating a TDT drafted to cast a wide net may sit outside the proposed exclusion and expose the trust to the 30% minimum tax, not because of anything the family did, but because of how the beneficiary class was worded.
If your Will includes a TDT, you should consider reviewing these provisions and seeking advice.
Why the testamentary discretionary trust structure is still worth keeping
None of this changes why TDTs exist in the first place. Their core purpose is wealth protection. They can help shield inherited wealth from relationship breakdowns, creditor claims, and erosion across generations, while providing control over how and when beneficiaries receive assets.
Because a beneficiary holds no fixed entitlement to the TDT’s assets, those assets may be better protected than if they had been given to the beneficiary outright.
The tax treatment that has long made these trusts attractive also remains under the current law: income received by a minor from a testamentary trust is generally taxed at ordinary adult marginal rates, including the tax‑free threshold, rather than the penalty rates applying to other income received by children.
The point of a review is not to abandon the structure, but to make sure it would operate within the proposed rules and continue to preserve the family’s wealth as originally intended.
Timing and other considerations
Three points are worth keeping in mind:
- The Bill is before Parliament and is not yet law. It must still pass both Houses of Parliament, and the details may change during that process.
- The proposed beneficiary restriction would apply to testamentary trusts established on or after 1 July 2028. For the purposes of the proposed exclusion, a testamentary trust would generally be treated as established when property from the deceased estate is transferred to the trustee. This means the timing of the trust’s establishment, rather than simply the date of the Will or the person’s death, may be important.
- The proposed legislation also includes integrity rules. In particular, income derived from property that is introduced into a testamentary trust after 7.30 pm on 12 May 2026 and that is unrelated to the deceased estate may not qualify for the exclusion.
Where to from here?
The move into Parliament is the prompt, not the panic.
The sensible next step is to review any Will that includes a TDT, focusing on the beneficiary class and whether it meets the proposed conditions for the exclusion.
For advice about how these proposed changes may affect your Will or estate plan, contact Barry Nilsson’s Wills & Estates team for a confidential discussion.
Our lawyers can assist in a way that best suits you – whether that’s face-to-face, over the phone, by video conference, or by email.
We provide practical, considered advice on estate planning, including the use of testamentary discretionary trusts, and assist individuals and families across Australia. We can help you review your options and plan with confidence.
