Last legally reviewed: 17 September 2026.
For most of our clients, testamentary trusts remain a valuable estate planning tool after the 2026 Budget. The Budget proposed a 30% minimum tax on discretionary trust income from 1 July 2028, but testamentary trusts already in existence on Budget night are carved out entirely, and the Government has since said it intends to exclude genuine testamentary discretionary trusts more broadly. None of this is settled law yet, and the precise operation of any exclusion will depend on the trust, its beneficiaries, and the source of the assets and income, which is a matter for individual advice rather than a general rule. Most of what makes a testamentary trust valuable has nothing to do with this tax proposal at all.
Since the Federal Budget on 12 May 2026, we've had a lot of clients ask the same question, and there's been a lot of media commentary about the new tax. Here's the current position, what's still unresolved, and why a TT still earns its place for most of our clients.
What Do We Know?
1. Testamentary trusts already in existence on 12 May 2026 are carved out. If the will-maker has already died and the TT is up and running as at the Budget announcement, the Government has said those trusts are excluded from the proposed minimum tax regime and keep their current tax treatment.
2. The Government has since said it intends to exclude genuine testamentary trusts more broadly. On 18 June 2026, the Government indicated that income from genuine testamentary discretionary trusts, including those established after Budget night, would be excluded from the minimum tax, generally by reference to an "excepted trust income" style test. Based on that announcement, this would generally require the trust to be a genuine testamentary trust and the income to ultimately be distributed to an individual or a tax-exempt entity. This is a significant, favourable development compared to the original Budget proposal, but it is a policy announcement, not enacted legislation, and the exact eligibility criteria have not been finalised.
3. Whether a specific trust qualifies is not automatic. Because the exclusion is expressed in terms of a "genuine" testamentary discretionary trust with income ultimately reaching an individual or tax-exempt beneficiary, how a particular trust is drafted, who its beneficiaries are, and where the underlying assets and income come from can all affect whether it qualifies. This is not a detail to assume away, and it is a reason to have any testamentary trust drafted and reviewed with this test in mind once the legislation is settled.
4. TTs still let you stream income. Regardless of the tax proposal, the trustee still decides 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 unaffected by the Budget proposal.
5. The non-tax benefits are unchanged. Asset protection in family law, protection for vulnerable beneficiaries, protection of minor children from financial immaturity, and protection for adult children in high-risk occupations or business are not affected by this tax proposal at all. For most of our clients, this is why a TT is in their will in the first place.
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 tax rules still being finalised, 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.
What Don't We Know Yet?
1. The new rules are not law. The 30% minimum tax proposal, and the confirmed intention to exclude genuine testamentary trusts, are Government announcements, not legislation. The proposed start date is 1 July 2028, which is more than two years away. A lot has to happen before then: exposure draft legislation, industry consultation, drafting, and the 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 the final eligibility criteria for the testamentary trust exclusion. The 18 June 2026 announcement points toward an "excepted trust income" style test, but the detailed drafting, including exactly what counts as a "genuine" testamentary purpose and how it interacts with the source of the trust's assets and income, has not been released. Until exposure draft legislation is published, we cannot confirm how a specific client's trust would be treated.
3. 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 concessional tax treatment for income distributed to minor beneficiaries of a testamentary trust. We do not yet have confirmed detail on how this will interact with the proposed minimum tax regime once legislated.
What Are 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 proposal is one piece of a much bigger picture, and the confirmed direction of travel (excluding genuine testamentary trusts) is a favourable one. For most of our clients, the reasons a TT belongs in their estate plan have nothing to do with tax in the first place. 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 detailed eligibility criteria for the testamentary trust exclusion have not been released. The way we draft TTs means your family can adapt to whatever the final rules look like, but whether a particular trust will qualify for the exclusion depends on how it is structured, who benefits from it, and where its assets and income come from.
If you've been thinking about your estate plan, or if you have a TT already and want to talk through how the proposal affects you, please get in touch. We're happy to walk through it with you. Nothing in this article is a substitute for advice on your specific circumstances.
Frequently Asked Questions
1. Are testamentary trusts still worth having after the 2026 Budget?
For most of our clients, yes. The tax treatment is only one part of what a testamentary trust does, and the non-tax benefits, including asset protection and control over when beneficiaries receive their inheritance, are unaffected by the Budget proposal. The Government has also confirmed an intention to exclude genuine testamentary trusts from the proposed minimum tax, though this is not yet settled law and eligibility depends on the trust, its beneficiaries, and the source of its assets and income.
2. Does the proposed 30% minimum tax affect existing testamentary trusts?
Testamentary trusts already in existence on 12 May 2026 are carved out of the proposed regime entirely. The Government has also said it intends a broader exclusion for genuine testamentary discretionary trusts generally, but that wider exclusion is not yet finalised in legislation.
3. When would the proposed 30% minimum tax start, and is it law yet?
The proposed start date is 1 July 2028. As at 17 September 2026 this is a Government proposal, refined by a further announcement on 18 June 2026, but it is not yet law. It still needs exposure draft legislation, consultation, and passage through Parliament.
4. What non-tax benefits does a testamentary trust provide?
A testamentary trust can help protect inheritances in family law property settlements, protect vulnerable beneficiaries, shield minor children from receiving a full inheritance at 18, and protect assets from creditors if a beneficiary is sued or in a high-risk profession or business. Whether these benefits apply in a given case depends on how the trust is drafted and used.