Testamentary Trusts and Estate Planning in Australia 2026: A Financial Planner Guide

Estate planning is one of the most consequential financial decisions Australians make, yet it is frequently deferred, oversimplified, or approached without adequate professional guidance. In 2026, the intersection of significant tax reforms, evolving superannuation rules, and an intergenerational wealth transfer of historic proportions has made testamentary trusts one of the most powerful — and most misunderstood — tools in the Australian estate planning toolkit. Understanding how testamentary trusts work, their tax advantages, and the 2026 regulatory changes that affect them is essential for anyone with assets to protect and beneficiaries to provide for.

Understanding Testamentary Trusts

A testamentary trust is a discretionary trust established by a will that comes into existence upon the death of the will-maker (the testator). Unlike a family trust established during a person's lifetime, a testamentary trust only activates after death, with the terms of the trust set out in the will itself.

The trustee — who may be the executor of the estate, a professional trustee, or a trusted family member — has discretion to distribute income and capital among the beneficiaries named in the trust. This discretion is the source of the testamentary trust's primary tax advantage: the ability to split income among beneficiaries in a way that minimises the overall tax burden on the estate's assets.

Testamentary trusts are particularly valuable when the estate includes income-producing assets such as investment properties, share portfolios, or business interests that will continue to generate income after the testator's death. Without a testamentary trust, these assets pass directly to beneficiaries who must pay tax on the income at their own marginal rates — which may be as high as 47 per cent including the Medicare levy.

The Tax Advantages of Testamentary Trusts in 2026

The primary tax advantage of a testamentary trust is the ability to distribute income to minor beneficiaries — children and grandchildren under 18 — at adult marginal tax rates, including the benefit of the tax-free threshold.

Under ordinary tax rules, unearned income distributed to minors from a family trust is taxed at the top marginal rate of 47 per cent (including Medicare levy) above a very low threshold. This is the so-called "kiddie tax" or Division 6AA rules. However, income distributed from a testamentary trust to a minor is specifically exempt from these rules and is instead taxed at adult marginal rates, including the $18,200 tax-free threshold.

This distinction can produce substantial tax savings. A testamentary trust distributing $50,000 per year to each of three minor grandchildren could result in zero or minimal tax on that income, compared to a tax liability of approximately $70,500 if the same income were distributed from a standard family trust.

Beyond the minor beneficiary advantage, testamentary trusts also provide:

• Income splitting among adult beneficiaries — The trustee can distribute income to beneficiaries with lower marginal tax rates, such as a non-working spouse or adult children in lower income brackets.
• Capital gains tax (CGT) management — Assets transferred from a deceased estate to a testamentary trust receive a cost base reset to market value at the date of death, which can significantly reduce future CGT liability when assets are eventually sold.
• Asset protection — Assets held in a testamentary trust are generally protected from the personal creditors of beneficiaries, which is particularly valuable for beneficiaries in high-risk professions or those going through relationship breakdowns.
• Centrelink and aged care planning — Testamentary trust distributions can be structured to minimise the impact on beneficiaries' Centrelink entitlements and aged care means testing, though this requires careful planning with a financial planner.

2026 Reforms Affecting Testamentary Trusts

The 2026 tax environment has introduced several reforms that directly affect the planning and administration of testamentary trusts. A qualified financial planner will help you navigate these changes and ensure your estate plan remains optimal.

The proposed 30 per cent minimum tax on discretionary trust distributions has been a significant area of concern for estate planners. While the final legislative form of this measure continues to evolve, practitioners are monitoring its potential application to testamentary trusts and advising clients to review their existing wills to ensure distribution strategies remain tax-efficient under the new rules.

The CGT reform proposals for 2026–27 represent a fundamental overhaul of capital gains tax rules that will affect how assets are valued and taxed when transferred through deceased estates. Because special CGT rules apply to the transfer of assets from a deceased estate to a testamentary trust, maintaining detailed records of cost bases and understanding the interaction between the estate's CGT position and the trust's future tax obligations is essential.

The Division 296 tax on superannuation balances above $3 million, which applies from 1 July 2025, has significant implications for estate planning. Superannuation assets are generally not part of the estate and cannot be directed into a testamentary trust without careful planning around binding death benefit nominations and the tax treatment of death benefit payments.

Common Mistakes in Testamentary Trust Planning

Testamentary trusts are powerful but complex instruments. Without proper professional guidance, the following mistakes are common:

• Failing to include testamentary trust provisions in the will — A testamentary trust must be established in the will itself. It cannot be added after death. Many Australians have simple wills that do not include testamentary trust provisions, leaving significant tax planning opportunities unrealised.
• Not reviewing the will after legislative changes — Tax laws change. A will drafted in 2018 may not reflect the optimal distribution strategy under 2026 tax rules. Regular reviews with a financial planner and estate planning solicitor are essential.
• Ignoring superannuation — Superannuation is not part of the estate and does not automatically flow into a testamentary trust. Binding death benefit nominations must be carefully coordinated with the overall estate plan to ensure superannuation assets are directed in the most tax-effective way.
• Choosing the wrong trustee — The trustee of a testamentary trust has significant discretion and responsibility. Choosing a trustee who lacks the financial literacy or independence to exercise that discretion appropriately can undermine the trust's effectiveness.
• Underestimating ongoing administration costs — A testamentary trust must lodge annual tax returns, maintain financial statements, and document trustee resolutions. These ongoing costs should be weighed against the tax savings when deciding whether a testamentary trust is appropriate.

Australian Regulatory Context

Testamentary trusts operate within a regulatory framework that spans tax law, trust law, and financial advice regulation.

The Australian Taxation Office (ATO) administers the tax rules governing testamentary trusts, including the minor beneficiary exemption from Division 6AA, the CGT rules applicable to deceased estates, and the trust tax return lodgement obligations. The ATO has published detailed guidance on estate planning and testamentary trusts, and practitioners are expected to apply this guidance in structuring and administering these arrangements.

The Corporations Act 2001 and the Financial Services Reform Act regulate the provision of financial advice in relation to estate planning. A financial planner providing advice on testamentary trusts must hold an Australian Financial Services Licence (AFSL) or operate as an authorised representative of an AFSL holder, and must comply with the best interests duty and related obligations under the Corporations Act.

The Delivering Better Financial Outcomes (DBFO) reforms, which are being progressively implemented in 2026, are changing the way financial advice is delivered and charged. Under the new framework, financial planners providing estate planning advice must ensure their fee arrangements comply with the reformed ongoing fee consent and disclosure requirements.

State and territory succession laws govern the validity of wills and the administration of deceased estates. The interaction between these laws and the federal tax rules governing testamentary trusts means that estate planning advice must be coordinated between a financial planner and a qualified estate planning solicitor.

Questions to Ask Your Financial Planner About Testamentary Trusts

When engaging a financial planner to review your estate plan and consider whether a testamentary trust is appropriate, use the following checklist:

• Do you have experience advising on testamentary trusts, and do you work with estate planning solicitors who can draft the trust provisions in the will?
• How would a testamentary trust interact with my superannuation, and what binding death benefit nominations should I consider?
• How do the 2026 trust tax reforms and CGT changes affect the optimal distribution strategy for my estate?
• What are the ongoing administration costs of a testamentary trust, and how do these compare to the projected tax savings?
• How often should I review my will and estate plan to ensure it remains optimal under current tax laws?
• How do you charge for estate planning advice, and how does your fee structure comply with the DBFO reforms?
• Can you model the tax outcomes for my beneficiaries under different distribution scenarios?

How MyMoney® Can Help

Testamentary trust planning requires the coordinated expertise of a qualified financial planner, an estate planning solicitor, and in many cases a tax adviser. The quality of this advice will directly determine whether your estate plan achieves its intended outcomes for your beneficiaries — or leaves significant tax savings unrealised.

MyMoney® connects Australians with experienced financial planners who specialise in estate planning, testamentary trusts, and the 2026 tax reform landscape. Our platform makes it easy to compare proposals, assess credentials, and engage the right professional for your specific circumstances.

Post a Brief to describe your estate planning requirements and receive tailored proposals from qualified financial planners. Or Browse Financial Planners to explore professionals with proven expertise in testamentary trusts and estate planning across Australia.