Since the Federal Budget on 12 May 2026, we've had a lot of clients ask the same question: are testamentary trusts still worth it?
Short answer — yes. They are as powerful as ever.
If we have either helped you put a testamentary trust (TT) in place, or we've talked about whether one might suit your estate plan, then this article is for you. There's been a lot of media commentary about the new 30% minimum tax on discretionary trusts, and it's understandable to wonder whether TTs still belong in your will. They do. The tax treatment is only one part of what a TT does, and most of what makes a TT valuable hasn't changed at all.
Here's what changed, what didn't, and why a TT still earns its place.
What we know
1. Existing TTs are protected. If the will-maker has already died and the TT is up and running, the Government has said those trusts will not be impacted by the new rules. They keep the tax treatment they have today.
2. The 30% rate only changes the position for some beneficiaries. Income earned by new TTs will be taxed at a minimum 30% when distributed to adults. If a beneficiary is already on a marginal rate above 30% — for example, from salary, business income, or other investment income — the tax outcome is effectively the same as it is now. For most working-age adults, this is the position they're already in.
3. TTs still let you stream income. The trustee will still decide each year which beneficiaries receive trust income and in what proportions. The flexibility to choose where the income goes — to a spouse, an adult child, a grandchild — is still there. The 30% minimum tax sits on top of that flexibility; it doesn't remove it.
4. The non-tax benefits are unchanged. Asset protection in family law, protection for vulnerable beneficiaries, protection of minor children from financial immaturity, protection for adult children in high-risk occupations or business — every one of these benefits still works exactly as it did before the Budget. For most of our clients, this is why a TT is in their will in the first place.
5. The group most affected is low-income beneficiaries. Beneficiaries who earn under $45,000 a year from other sources, and whose main income is from a TT — think retirees, or adult children at university who aren't working — will pay a higher rate of tax under the proposed rules than they would today. This is the group where the tax efficiency rationale narrows.
6. A TT has to be in your will before you die. It's too late to set one up afterwards. If you want the protection, the structure has to be in place. This is one reason we recommend not waiting — even with the rules in flux, the optionality of having a TT in your will is worth more than not having one.
7. We build flexibility into every TT we draft. We know tax and legal rules change. The TTs we prepare are optional — your loved ones and executor can get specific legal, tax and financial advice at the time of your death and decide whether to actually use the TT structure, based on the law as it stands then. If a TT is the right answer, the protection is there. If it isn't, no one is locked in. It's the best of both worlds, and it's the main reason we don't recommend waiting for the legislation to settle before doing your will.
What we don't know yet
1. The new rules are not law. They are a Government announcement. The proposed start date is 1 July 2028, which is more than two years away. A lot has to happen before then — industry consultation, drafting, legislation, parliamentary process. We've been here before. About 20 years ago, the Ralph Review proposed similar changes to trust taxation, and they were ultimately abandoned because the process became too hard. We're not saying the same will happen this time, but it's a reminder that "announced" and "law" are not the same thing.
2. We don't know how income to minor beneficiaries will be treated. Under the current rules, TTs have a special status — historically, because someone had to die for the TT to exist, the law has allowed tax-free amounts of around $22,000 per child per year to be released from the TT. The Budget papers say income to "vulnerable minor" beneficiaries will be exempt from the new rules, but we don't yet have clarity on whether that means the existing arrangements are preserved, whether new ones replace them, or whether the eligibility narrows. If the existing arrangements survive, TTs will become an even more attractive structure compared to family trusts or companies, particularly for clients with young grandchildren.
The benefits of a TT in your will
The tax treatment is only one part of what a TT does. Here's a refresher of how a TT protects what you leave behind, compared to a basic will.
If you have young children
If you're in a couple and one of you dies first: A TT lets your surviving spouse re-partner and move on with their life — after a suitable mourning period, of course — while the inheritance you left for your kids stays protected. Your spouse's new will is irrelevant, because you have set up the succession plan under your own will. Your spouse can enter new relationships, have more children, and the inheritance you left for your kids is not affected. Without a TT, you are relying entirely on your spouse's new will and on them to do the right thing by your children.
If your surviving spouse goes through a relationship breakdown: A TT gives the inheritance much stronger protection if your spouse's new relationship ends and they go through a family law property settlement. Rather than the inheritance being automatically pulled into the property pool, the starting point is that it sits outside it. You can never say never with family law — but a TT gives your kids a fighting chance.
If your surviving spouse is at risk of being sued: If they are in a high-risk profession, or running a business, the inheritance is protected from creditors and preserved for your children.
If you both die together: We've all heard the stories of 18-year-olds working through their inheritance on things they later regret. That's a real risk with a basic will, which hands a young adult the full inheritance the moment they turn 18. A TT lets you choose what age your kids actually get financial control — 25, 30, whatever age you think is right — and lets you appoint someone you trust to manage it in the meantime.
If you have adult children
If your child goes through a relationship breakdown: Leaving the inheritance through a TT gives much stronger protection if your adult child's relationship ends and they go through a family law property settlement. Rather than the inheritance being automatically included in the property pool — and potentially ending up with in-laws — the starting point is that it sits outside it.
If your child is at risk of being sued: If your adult child is in a high-risk profession, or running their own business, the inheritance is protected from those claims so it stays in the family.
A TT lets you "rule from the grave" to protect your grandchildren. If you make a basic will and leave the inheritance directly to your child, you are relying on your child to make their own will to pass what's left down to your grandchildren. With a TT, your child's will is irrelevant — you have set up that succession plan yourself. If passing the inheritance on to your grandchildren matters to you, we can put that in place now.
If your child dies before you, leaving young children: A TT protects your grandchildren from receiving and burning through a large inheritance the moment they turn 18. As with your own children, you choose the age at which they get full control, and you choose who manages it until then.
Where this leaves you
The tax change is one piece of a much bigger picture. For most of our clients, the reasons a TT belongs in their estate plan have nothing to do with tax — they have to do with protecting the people they love.
The new rules aren't law yet. The start date is more than two years away. And the way we draft TTs means your family can adapt to whatever the final rules look like.
If you've been thinking about your estate plan, or if you have a TT already and want to talk through how the announcement affects you, please get in touch. We're happy to walk through it with you.