How does the 2026 Budget affect your discretionary testamentary trust?

The 2026 Federal Budget flagged significant changes to discretionary testamentary trusts. Accredited Specialist Wills & Estates and Principal Lawyer Gabrielle McManus explains what's actually proposed, who it affects, and why most people don't need to panic.

One of the most common questions we've been asked since the Federal Budget was handed down is whether the proposed changes to the taxation of discretionary testamentary trusts mean people need to update their wills.

The short answer is: probably not.

While the Budget foreshadowed significant changes to the tax treatment of discretionary testamentary trusts, those changes do not diminish the asset protection and succession planning benefits that have long made discretionary testamentary trusts a valuable estate planning tool for Australian families. In many cases, depending on beneficiaries’ personal tax circumstances, the proposed changes may have little practical impact on the overall taxation of trust distributions.

This article explains what has been proposed, who may be affected, and whether you should consider reviewing your estate planning arrangements.

Important note: This article is based on the Federal Budget announcement made on 12 May 2026. The proposed changes have not yet become law and the Government has not released draft legislation. Until legislation is introduced, there remains uncertainty as to how the changes will operate in practice and whether they will proceed in their current form.

What is a discretionary testamentary trust?

A discretionary testamentary trust is a trust created under a will that comes into effect after the will-maker's death.

Rather than beneficiaries receiving their inheritance directly, assets are held by trustees and managed for the benefit of a primary beneficiary and usually their surrounding family, usually including children, grandchildren and other family members.

For many families, the primary attraction of a discretionary testamentary trust is asset protection.

Under a simple will, beneficiaries generally become the legal owners of their inheritance once the estate has been administered. Those assets may then be exposed to claims by creditors, bankruptcy trustees or former spouses in the event of a relationship breakdown. In addition, any income generated from the inherited assets is added to the beneficiary’s personal taxable income and taxed at their marginal tax rate. 

By contrast, assets held within a discretionary testamentary trust are generally owned by the trustee rather than the individual beneficiary, providing an additional layer of protection and flexibility. Discretionary testamentary trusts also offer significant tax advantages due to the trustee's ability to distribute income amongst beneficiaries taking into account their respective marginal tax rates. 

One of the key tax advantages currently available to discretionary testamentary trusts, compared with family trusts established during a person's lifetime, is that distributions to minor children are taxed at ordinary adult marginal tax rates rather than the penalty rates that typically apply to children. As a result, each child beneficiary of a discretionary testamentary trust can receive income up to $18,200 (the tax-free threshold) before incurring income tax, whereas in a family trust a minor beneficiary can only receive up to $416 per year before penalty tax applies. 

For example, where a beneficiary has three minor children, a discretionary testamentary trust currently allows up to $54,600 of income each year to be distributed amongst those children without any income tax being payable.

This favourable tax treatment has long been one of the reasons discretionary testamentary trusts have been attractive to families with younger children and substantial income-producing assets.

What did the 2026 Budget propose?

On 12 May 2026, the Federal Government announced its intention to introduce a new minimum tax rate of 30% on distributions from discretionary trusts from 1 July 2028. The tax would be payable by trustees, with the beneficiary receiving the income in a distribution to receive a non refundable credit for the tax paid.

This change would particularly affect distributions to minor beneficiaries and other beneficiaries on lower incomes. Under the current rules, these beneficiaries may receive distributions up to the tax-free threshold without paying income tax, with a marginal tax rate of only 16% applying to income between $18,201 and $45,000.

This foreshadowed change represents a significant departure from the current taxation of discretionary trusts. For those whose decision to establish a testamentary trust was driven primarily by the tax advantages available where minor children are beneficiaries, it may be appropriate to review their estate planning strategy.

However it is important to remember that, at the time of writing, these changes have only been announced and have not yet been enacted by Parliament. The final legislation may differ substantially from the proposal contained in the Budget papers.

For now, we are waiting to see the detail of the proposed legislation before drawing any firm conclusions. In the meantime, for most people, the broader asset protection and succession planning benefits of discretionary testamentary trusts remain unchanged.

Got questions about whether your will remains appropriate in light of the proposed changes? Book an appointment with our team.

How does this affect existing discretionary testamentary trusts?

In our view, a discretionary testamentary trust will only be "existing" for the purpose of the proposed Budget changes if the will-maker had already died, the estate administration had been completed, and the estate assets had been transferred to the discretionary testamentary trust before 12 May 2026.

Based on the Budget papers, "income from assets of discretionary testamentary trusts existing at announcement" will be exempt from the proposed changes.

Some commentators have expressed concern about the wording of the proposed exemption. In particular, the reference to "income from assets" existing at the time of the announcement may mean that the exemption only applies to assets already held by a grandfathered discretionary testamentary trust as at 12 May 2026. On that interpretation, if those assets are later sold and replaced, income generated from the replacement assets may not continue to qualify for the existing favourable tax treatment.

Until draft legislation is released, the precise operation of these provisions remains uncertain.

What do the proposed changes mean in practice?

Some of the commentary following the Budget has suggested discretionary testamentary trusts will become obsolete.

We consider this to be very unlikely. For most people, the dominant driver behind establishing discretionary testamentary trusts is the desire to protect their loved ones’ inheritance, rather than solely to access tax benefits for minor children.

Even if a 30% minimum tax rate is ultimately introduced, discretionary testamentary trusts will continue to provide valuable asset protection and succession planning benefits.

Further, many beneficiaries already pay income tax at rates of 30% or more. For these individuals, the proposed changes may have little or no practical impact.

Consider a will-maker with two children aged in their mid 20s, with each child earning approximately $50,000 per year.  Those children already fall within tax brackets where a 30% tax rate aligns with their existing marginal tax rates. In that scenario, the proposed changes may not materially alter the family's overall tax position, while the trust structure continues to provide significant asset protection and flexibility.

If, however, the predominant reason for your discretionary testamentary trust will was to access tax savings for your minor children, then it would be worth reviewing your will after any legislation resulting from the proposed changes has passed Parliament.

If you already have a testamentary trust will

If your will already contains discretionary testamentary trust provisions, there is no need to panic.

The proposed changes do not affect the asset protection benefits of your trust. Nor do they mean your estate planning strategy is no longer appropriate.

Many modern discretionary testamentary trust wills, including those we prepare, contain flexibility provisions allowing beneficiaries to receive assets outright if maintaining the trust structure is no longer beneficial or necessary.

Importantly, the proposed tax changes are not yet law. There are already reports suggesting aspects of the proposal may be reconsidered before legislation is introduced.

For now, the most sensible approach is to stay informed and seek advice if your circumstances have changed.

Should you review your will?

The Budget announcement is a useful reminder to review your estate planning generally, but it does not necessarily mean your discretionary testamentary trust should be removed.

The right structure will depend on factors such as:

• The age of your beneficiaries;

• Whether asset protection is important;

• The size and nature of your estate;

• The likelihood of future relationship breakdowns or creditor issues; and

• Your family's taxation circumstances.

For many families, discretionary testamentary trusts will continue to provide significant advantages, even if some of the historical tax benefits are reduced.

Considering a discretionary testamentary trust?

Every family is different.

If you would like to understand whether a discretionary testamentary trust remains appropriate for your circumstances, or whether your existing will should be reviewed in light of the proposed Budget changes, we would be happy to assist.

Contact our team to arrange a will review and discuss the options available to your family. Book a will review with our team.