Testamentary Trusts and the 30% Minimum Tax Exemption: An Estate Planning Guide for Australians 2026

The 2026-27 Federal Budget introduced one of the most significant changes to trust taxation in a generation: a 30 per cent minimum tax on income distributed by discretionary trusts, effective from 1 July 2028. For many Australian families who have relied on family trusts for tax-effective wealth management, this reform represents a fundamental shift in planning strategy. However, one critical exemption has preserved a powerful estate planning tool: testamentary trusts — trusts established through a will — are explicitly excluded from the new minimum tax. A financial planner can help you understand how to structure your estate to take full advantage of this exemption and protect your family's wealth for generations to come.

Understanding the 2026 Discretionary Trust Reforms

The 2026-27 Federal Budget announced that from 1 July 2028, trustees of discretionary trusts will be required to pay a minimum 30 per cent tax on trust income. This policy targets the long-standing practice of distributing trust income across multiple beneficiaries — including adult children and related entities — to take advantage of lower individual marginal tax rates and reduce the overall family tax burden.

The reform applies to inter vivos discretionary trusts — those established during a person's lifetime, commonly known as family trusts. These structures have been a cornerstone of Australian tax planning for decades, and the new minimum tax will significantly reduce their effectiveness for income splitting purposes from 2028 onwards.

Following significant public concern and industry consultation, the government confirmed on 18 June 2026 that testamentary trusts — trusts created by a will that take effect upon the death of the will-maker — are exempt from the 30 per cent minimum tax. This exemption applies to both existing testamentary trusts and those established in the future, providing long-term certainty for estate planning.

What Is a Testamentary Trust?

A testamentary trust is a trust created by the terms of a will. Unlike a family trust established during your lifetime, a testamentary trust only comes into existence upon your death, when the assets of your estate are transferred into the trust structure rather than being distributed directly to beneficiaries.

The trustee — who may be a family member, a professional trustee, or a corporate trustee — manages the trust assets and distributes income and capital to beneficiaries in accordance with the terms of the trust deed. Beneficiaries typically include a surviving spouse, children, and grandchildren, though the specific terms can be tailored to your family's circumstances.

A key advantage of testamentary trusts is that income distributed to minor beneficiaries (children under 18) is taxed at adult marginal tax rates rather than the punitive penalty tax rates that normally apply to minors receiving investment income. This can result in significant tax savings where a deceased estate includes income-producing assets such as investment properties, shares, or business interests.

Why Testamentary Trusts Have Become More Valuable in 2026

The 2026 discretionary trust reforms have elevated the strategic importance of testamentary trusts in several ways. With standard family trusts facing a 30 per cent minimum tax from 2028, testamentary trusts remain one of the few vehicles offering meaningful income-splitting advantages for Australian families.

Tax Flexibility After Death

A testamentary trust allows the trustee to distribute income to beneficiaries in the most tax-effective manner each year, taking into account each beneficiary's individual tax position. For example, if a surviving spouse has significant other income and is in a high marginal tax bracket, the trustee can direct income to adult children or grandchildren who may have lower taxable income in a given year.

The ability to distribute income to minor beneficiaries at adult marginal tax rates — rather than the 66 per cent penalty tax that normally applies to minors receiving investment income — is a particularly valuable feature that is not available through direct inheritance or standard family trusts.

Asset Protection

Testamentary trusts provide robust protection for inherited assets against risks that beneficiaries may face during their lifetimes. Assets held in a testamentary trust are generally protected from family law property settlements in the event of a beneficiary's divorce or separation, creditor claims if a beneficiary becomes insolvent or bankrupt, and the financial consequences of a beneficiary's poor financial decisions.

This protection is particularly valuable for families with significant wealth, where the risk of assets being dissipated through relationship breakdown or financial difficulty is a genuine concern.

Superannuation Death Benefits

Superannuation does not automatically form part of your estate and is not governed by your will. This means that simply having a testamentary trust in your will is not sufficient to capture your superannuation death benefits within the trust structure. A financial planner can help you coordinate your superannuation death benefit nominations with your testamentary trust to ensure that your super is directed in the most tax-effective and protected manner.

The definition of "dependant" for superannuation purposes differs from general expectations, particularly regarding adult children. Misunderstandings in this area can result in significant tax consequences if death benefits are paid to non-tax dependants. A financial planner working alongside your estate planning lawyer can help you navigate these complexities.

Common Mistakes in Estate Planning That a Financial Planner Can Help You Avoid

Estate planning is one of the most complex areas of personal financial management, and the 2026 reforms have added new layers of complexity. A financial planner regularly encounters the same preventable mistakes.

Relying on a Simple Will

Many Australians have a basic will that distributes assets directly to beneficiaries without any trust structure. While this approach is simple, it forgoes the tax advantages, asset protection, and flexibility that a testamentary trust provides. Given the 2026 reforms, the gap in outcomes between a simple will and a well-structured testamentary trust has widened significantly.

Failing to Update Estate Plans After Major Life Events

Wills and estate plans should be reviewed and updated following major life events, including marriage, divorce, the birth of children or grandchildren, significant changes in asset values, and changes in tax law. The 2026 discretionary trust reforms are precisely the kind of legislative change that should trigger a review of your existing estate plan.

Ignoring Superannuation in Estate Planning

Superannuation is often the largest single asset in an Australian's estate, yet it is frequently overlooked in estate planning. Binding death benefit nominations must be valid and current to ensure your super is directed as intended. Lapsed or non-binding nominations can result in the trustee of your super fund exercising discretion over who receives your death benefit, which may not align with your wishes.

Not Coordinating Legal and Financial Advice

A testamentary trust must be established through a will, which requires precise legal drafting by a qualified estate planning lawyer. However, the financial strategy — including how assets should be structured, how superannuation should be nominated, and how the trust should be administered — requires financial planning expertise. The best outcomes are achieved when your financial planner and estate planning lawyer work together as a coordinated team.

Australian Regulatory Context

Financial planners providing estate planning advice in Australia operate within a comprehensive regulatory framework designed to protect consumers and ensure professional standards.

The Australian Securities and Investments Commission (ASIC) regulates financial advisers under the Corporations Act 2001. All financial planners must hold an Australian Financial Services Licence (AFSL) or operate as an authorised representative under a licensee. The Delivering Better Financial Outcomes (DBFO) reforms, which took effect progressively from 2024, have modernised the best interests duty and ongoing fee arrangement obligations that apply to financial planners.

The Financial Adviser Standards and Ethics Authority (FASEA) established the professional standards framework for financial advisers, including minimum education requirements, an ethics exam, and continuing professional development obligations. When selecting a financial planner for estate planning advice, verify their registration on the ASIC Financial Advisers Register and confirm they hold the relevant qualifications and experience in estate planning and superannuation.

The Australian Taxation Office (ATO) administers the tax rules applicable to testamentary trusts, including the minor beneficiary provisions and the interaction with the 2026 discretionary trust reforms. A financial planner with expertise in trust taxation can help you understand how these rules apply to your specific circumstances.

Questions to Ask Your Financial Planner About Testamentary Trusts

When meeting with a financial planner to discuss your estate plan in light of the 2026 reforms, consider asking the following questions.

1. Is a testamentary trust appropriate for my estate, given my assets and family circumstances? — Not every estate benefits equally from a testamentary trust; your planner should assess whether the complexity and cost are justified by the potential benefits
2. How should my superannuation death benefit nominations be structured to work with my testamentary trust? — Coordinating super nominations with your estate plan is essential and requires specialist knowledge
3. How will the 2026 discretionary trust reforms affect my existing family trust and estate plan? — If you currently have a family trust, your planner should assess whether restructuring is appropriate before the 2028 commencement date
4. Who should be the trustee of my testamentary trust, and what are the implications of different trustee choices? — The choice of trustee has significant practical and legal implications that your planner can help you think through
5. How often should I review my estate plan, and what events should trigger a review? — A good financial planner will establish a review cadence and help you identify the triggers that should prompt an update
6. Can you work with my estate planning lawyer to ensure my financial and legal arrangements are coordinated? — Integrated advice from a financial planner and lawyer produces the best outcomes

How MyMoney® Can Help

Estate planning in the context of the 2026 discretionary trust reforms requires specialist financial planning expertise. MyMoney® connects Australians with qualified financial planners who understand the testamentary trust exemption, superannuation death benefit strategies, and the broader estate planning landscape in 2026.

Whether you are reviewing an existing estate plan, establishing a testamentary trust for the first time, or coordinating your superannuation nominations with your will, the right financial planner is available through our marketplace. General information only — this article does not constitute personal financial advice. Please consult a qualified financial planner for advice tailored to your circumstances.

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