Nathan Scott
Director
Wills and Estates
Why Testamentary Trusts Matter
Testamentary trusts are an important estate planning tool for many families. Because of their discretionary nature, they are often used not only for potential tax planning benefits, but also for asset protection. In particular, they can help protect family assets as they pass to beneficiaries who may later face divorce or family law proceedings, bankruptcy, addiction, illness, or other vulnerabilities, including where beneficiaries are minors.
A testamentary trust is created under a person’s will and only comes into effect after their death. This is different from a discretionary trust, often referred to as a family trust, which is established and operates during a person’s lifetime. Once created, a trust can generally continue for up to 80 years.
What the Budget Proposal May Mean
Following the Federal Budget announcements, the Government has proposed a minimum 30 per cent tax on discretionary trusts from 1 July 2028. At this stage, the measure is not yet law, and the final detail will matter greatly. Public information released to date suggests that some income from existing testamentary trusts may be excluded, but clarification is still needed before any firm conclusions can be drawn.
Uncertainty Around Minors’ Excepted Trust Income
A further advantage of testamentary trusts is that, in some circumstances, minor beneficiaries can be taxed on trust distributions at ordinary marginal tax rates rather than the higher penalty tax rates that often apply to minors. However, it is presently unclear whether distributions to minor beneficiaries will be subject to the proposed minimum 30 per cent tax rate, or whether the existing ordinary marginal tax rates will continue to apply.
Practical Considerations for Estate Planning
One possible response, if tax outcomes become a stronger focus in estate planning, may be to consider alternative structures such as a fixed testamentary trust. However, this may come at a cost. The flexibility and asset protection benefits often associated with a discretionary testamentary trust may be reduced if a beneficiary’s entitlement is fixed from the outset. For many families, that loss of flexibility and asset protection may be significant.
For now, clarity is still needed, and no one should rush to change their estate planning arrangements based on limited information. If the proposal proceeds, there may be other structuring options available, but any changes should be considered carefully in light of both tax outcomes and asset protection objectives.
We will continue to monitor developments and update our communications as further details emerge. In the meantime, if you would like to discuss these proposed changes and what they may mean for you or your estate planning, please do not hesitate to contact our team on 5445 3333.
