Testamentary Trusts & the 2026 Federal Budget - What does it all Mean?

The 2026–27 Australian Federal Budget has announced significant proposed changes to the taxation of discretionary trusts.

The proposed changes have important implications for testamentary trusts and estate planning strategies.  While the measures are not yet law, they represent one of the most substantial trust taxation reforms in decades.

What are the Proposed Changes?

At the centre of the reforms is the proposed introduction of a 30% minimum tax on discretionary trust income from 1 July 2028.  

Under the proposal, trustees would pay tax at the trust level, with individual beneficiaries receiving non-refundable tax credits for tax already paid.  The government says the reform is aimed at reducing income-splitting arrangements and aligning trust taxation more closely with wage earners.  

What does it mean for Testamentary Trusts? 

For testamentary discretionary trusts (TDTs), commonly established under Wills for asset protection and family wealth management, the impact could be significant.  The reforms may influence future estate planning decisions and the ways Wills are structured  

Traditionally, these trusts have offered flexibility in distributing income among beneficiaries, often resulting in tax efficiencies.  The proposed minimum tax may reduce these advantages, particularly where lower-income adult beneficiaries previously received distributions taxed at marginal rates below 30%.  

Some exemptions May Apply

Importantly, the budget papers and subsequent commentary indicate that some exclusions may apply.  Income generated from assets already held in testamentary discretionary trusts at the budget announcement date (12 May 2026) may be grandfathered and excluded from the new regime.  Fixed testamentary trusts and special disability trusts also appear likely to remain outside the scope of the proposed measures. 

What should you do?

At this stage, the proposals remain subject to consultation and legislation.  Will Makers should avoid making rushed changes solely in response to the budget announcement.  Until draft legislation is released, many of the details — including transitional rules, grandfathering provisions, and possible exemptions for testamentary trusts — remain uncertain. 

Nevertheless, the 2026 Federal Budget signals a major shift in the taxation landscape for discretionary and testamentary trusts, making proactive estate planning and professional advice more important than ever.

It’s not all about Tax

It’s important to remember that the flexible tax planning offered by a TDT is only one of the benefits of the structure.  The asset protection benefits and the  advantages they afford for vulnerable beneficiaries and those facing family law uncertainty still remain. 

In the meantime, if you haven’t reviewed your Wills recently or you have not yet prepared Powers of Attorney, now is a good time to do so.

21 May 2026