The 2026–27 Federal Budget is set to reshape estate planning in Australia, especially those establishing testamentary discretionary trusts in their Wills. The headline proposal is a 30% minimum tax on discretionary trust income from 1 July 2028, including new testamentary trusts.
For Queensland families, that matters because testamentary discretionary trusts have long been used for tax flexibility, asset protection and intergenerational wealth planning. Although the measure is not yet law, the announcement has prompted immediate questions about whether testamentary trusts remain effective and whether existing Wills should now be reviewed.
The Key Budget Announcement
The Federal Government announced that, from 1 July 2028, discretionary trusts will be subject to a proposed minimum 30% tax on trust income. The measure is designed to limit income-splitting strategies commonly used in family trust structures.
Importantly for estate planning, the Budget papers indicate that certain existing testamentary trust arrangements may receive grandfathering protection, particularly income generated from assets held in testamentary discretionary trusts existing at the time of the announcement.
Deceased estates are set to be excluded from the new rules. However, uncertainty remains regarding how the income of future testamentary discretionary trusts will be taxed.
Why This Matters for Testamentary Discretionary Trusts
Importantly, a testamentary discretionary trust is created by a Will and only comes into existence from the date of death. This means that a testamentary trust is only established after the loss of a loved one. It is for this reason that testamentary discretionary trusts have always been afforded some tax advantages over traditional discretionary trusts.
Testamentary discretionary trusts are an attractive option for families as minors who receive income from a testamentary trust can generally take advantage of the tax-free threshold, meaning they can receive income distributions of around $22,000 tax free (including the low-income tax offset). This can go a long way for children who have lost one or both parents, but still have education and living expenses.
Based on the information released so far, existing testamentary discretionary trust assets should receive grandfathering protection, meaning they should retain their current tax status in relation to income distributions.
However, under the new proposal, beneficiaries (including minor beneficiaries) will likely be required to pay a minimum of 30% tax on taxable income.
Should your Will still establish a testamentary discretionary trust?
In our view, probably. Testamentary discretionary trusts are often a good choice because they do more than provide tax planning. They can:
- protect assets from bankruptcy or creditors;
- provide safeguards in the event of family law disputes or relationship breakdowns;
- allow trustees to stay in control of, manage and distribute family wealth (particularly useful for vulnerable beneficiaries, minors and adults with poor financial management);
- preserve wealth across generations;
- provide flexibility in distributing income and capital; and
- manage or defer tax for overseas beneficiaries.
All of these features remain highly relevant for estate planning, even if the tax settings change. For many families, those non-tax benefits will still justify the structure.
Should families review their estate plans and Wills?
Remember, the proposed changes are, at this stage, an announcement. They are not yet law and they do not come into effect until 1 July 2028. As such, in our view, it is premature to be making drastic changes to your estate plan. However, the Budget Papers suggest that the new tax regime will apply to any testamentary trust established after 12 May 2026.¹
With that in mind, it may be time for a review – but probably not for the reasons you think. Given the uncertainty that the proposed changes will bring, it is worthwhile reviewing your Will to see what kind of flexibility will be afforded to your executor, and your beneficiaries, in the event of your death.
Depending on your specific circumstances, it may no longer be appropriate for all of your assets to automatically be transferred to a testamentary discretionary trust on your death. It may be that your beneficiaries should be afforded some flexibility to assess the taxation climate at the time of death, assess their financial needs and risks, obtain financial and taxation advice and then determine how best to proceed. Remember, a Will is drafted with the present and the future in mind.
For some families, a testamentary discretionary trust will still be the best option. For others, alternative structures with greater flexibility may be appropriate.
Estate planning is not simply about minimising tax. Effective planning balances tax considerations with asset protection, succession planning, family dynamics and long-term wealth preservation. If nothing else, these proposed changes should prompt a strategy discussion with your advisers.
Final Thoughts
The 2026 Federal Budget announcement has not removed the usefulness of testamentary discretionary trusts. However, if enacted, it will make estate planning more complex. For Queensland families, business owners and will-makers, the key question is whether a testamentary discretionary trust will still deliver the right mix of tax outcomes, asset protection and control if the proposed trust tax changes proceed. Until draft legislation is released, reviewing your Will and estate plan early is a very sensible next step.
A properly drafted estate plan should remain flexible enough to adapt to future tax changes while continuing to protect beneficiaries and preserve family wealth. It will be more important than ever to ensure you have appropriate advice from a qualified specialist.
Need Advice About Testamentary Trusts or Estate Planning?
If your current Will includes a testamentary trust, or if you are considering implementing one as part of your estate plan, there is never a bad time to reach out for a strategy discussion.
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¹ Budget 2026-27 Budget Paper No. 2, 22. https://budget.gov.au/content/bp2/download/bp2_2026-27.pdf
Get in contact with our experienced estate planning lawyers to discuss the best strategy for you. We are here to help ensure your estate plan remains effective, tax-aware, flexible and aligned with your family’s long-term needs.
