The Government's backdown on testamentary trusts: good news for families, with one condition to watch

Earlier this year, the 2026 Federal Budget gave many families a fright. Among its tax reforms was a proposed 30% minimum tax on discretionary trusts, and as first announced it would have caught new testamentary trusts which are created through a Will and have long been a cornerstone of estate planning. For families who use them to protect an inheritance and provide tax-effective income for children and grandchildren, that was a serious concern. The Government has now changed course. This article explains the backdown, what it means for you, and the one condition worth understanding. It is general information only and not legal or tax advice.

What the Government has announced

On 18 June 2026, the Federal Government confirmed income from all types of testamentary trusts will be exempt from the proposed 30% minimum tax on discretionary trusts, provided the trust is established for genuine testamentary purposes. This is broader than the limited carve-out in the original Budget, which had only protected testamentary trusts that were already in existence on Budget night, 12 May 2026.

Importantly, this is an announced policy, not yet law. The Government has said the implementation details, including the integrity rules that will sit behind the “genuine testamentary purposes” condition, will be settled through further consultation. So, while the direction is clear and welcome, the fine print is still to come.

Why this is good news

For most families, this restores testamentary trusts to their traditional role. A testamentary trust created through your Will can continue to offer two key advantages: 1) protection of a beneficiary's inheritance from risks such as bankruptcy or relationship breakdown, and 2) tax-effective income for beneficiaries including the long-standing concession that allows minor children and grandchildren to be taxed at ordinary adult rates, with the tax-free threshold, rather than the penalty rates that normally apply to children's income.

Had the original proposal proceeded unchanged, a 30% tax collected at the trustee level would have stripped much of that benefit away for new testamentary trusts. The announced exemption means genuine estate planning can continue largely as before.

The condition to watch: “genuine testamentary purposes”

The exemption comes with a condition in that the trust must be established for genuine testamentary purposes. While the detail is yet to be confirmed, the purpose of the condition is reasonably clear: it will be an integrity measure, designed to stop testamentary trusts being used as a back door to avoid the new tax that applies to ordinary, lifetime family trusts.

In other words, it appears the Government is currently willing to protect testamentary trusts that do what they are meant to do: pass on a deceased person's estate to their family, but not arrangements that dress up lifetime wealth as an estate plan in order to access the lower tax treatment.

This is familiar territory. Australia already has a similar integrity rule for the children's tax concession: since 2019, that concession has been limited to income from the assets of the deceased estate, and does not extend to assets later “injected” into the trust from other sources. The “genuine testamentary purposes” test is likely to operate in a similar spirit.

What might this mean in practice? A few themes are likely to emerge, though all remain subject to the final rules.

Genuine wills should be safe. A testamentary trust created in the ordinary way through your will, holding the assets of your estate, for the benefit of your family should comfortably meet the test. Most families will have nothing to worry about.

Injecting outside assets is the danger zone. Arrangements that channel non-estate assets into a testamentary trust, for example, assets from an existing family trust, or contributions from surviving relatives, are the most likely to fall outside the exemption, or to attract closer scrutiny.

Artificial or tax-driven structuring carries risk. A will designed mainly to capture the tax exemption, rather than to deal with a genuine estate, may not qualify. The more a structure resembles a lifetime trust wearing a testamentary “badge,” the greater the risk.

Certainty is still pending. Because the integrity rules are subject to consultation, it is not yet possible to say exactly where the line will be drawn. That uncertainty is itself a reason to plan with some flexibility.

What you should do now

If you already have a will with a testamentary trust, there is no need to panic. The announcement is positive, and genuine arrangements are intended to be protected. If you are preparing or updating a will, it remains sensible to include a testamentary trust where it suits your circumstances, while keeping the structure genuine and your estate planning reasons clear. Building in flexibility, so your executor or trustee can adapt once the final rules are known, is also worth discussing.

We will continue to monitor the consultation and the eventual legislation closely, and we can help you review your will in light of the changes.

How we can help

If you would like to understand how these changes affect your estate plan, or whether a testamentary trust is right for your family, please get in touch. We can help you put in place a structure that is both effective and genuinely fit for purpose.

This article is general information only, current as at June 2026, and does not take account of your personal circumstances. It is not legal or tax advice. The measures discussed have been announced but are not yet law and may change following consultation. Please obtain advice tailored to your situation before acting.