Protecting Your Legacy: What You Need to Know About the Latest Testamentary Trust Rules
When you sit down to plan for your family’s future, you aren’t just thinking about money or property. You’re thinking about the people you love, their dreams, and how to keep them safe long after you are gone.
For a long time, a Testamentary Discretionary Trust, which is simply a trust set up inside your Will that comes into effect after you pass away, has been one of the best tools to do exactly that. It has always been an incredible way to protect your hard-earned assets and distribute income to your children or grandchildren in a smart, tax-effective way.
You might have heard some noise recently about the government introducing a new 30% minimum tax on trusts, leaving you wondering if your estate plan is still safe. We have some wonderful news to share: the government has listened to the community and confirmed that discretionary testamentary trusts are completely exempt from these new tax changes.
Why This Exemption is a Massive Win for Families
If the government had gone ahead with taxing these trusts at a flat 30%, it would have felt like a hidden penalty on everyday family inheritances. By stepping back and keeping discretionary testamentary trusts exempt, the rules ensure you can still protect your family's future without an unfair tax bill cutting into your legacy.
Because of this decision, the core benefits of a testamentary trust stay perfectly intact:
1. Helping Your Kids and Grandkids Tax-Free
Under current Australian tax laws, children under 18 who receive income from a testamentary trust are treated as adults for tax purposes. This means you can distribute up to $18,200 every single year entirely tax-free to each child or grandchild.
Whether that money goes towards school fees, university costs, or just helping them get a head start in life, it remains a beautifully simple and legitimate way to secure their financial future.
2. Bulletproof Protection for Peace of Mind
While saving on taxes is a fantastic bonus, the real magic of a discretionary testamentary trust is how it safeguards your family. Because the assets sit safely inside the trust rather than in a beneficiary’s personal name, your legacy is protected from things you can't predict, like:
A beneficiary going through a relationship breakdown or divorce.
Creditors or bankruptcy courts if a family member runs a business that faces financial trouble.
Vulnerable loved ones who might need a helping hand managing a large sum of money
The Fine Print: Keeping Things Straightforward
While this exemption is incredible news, the rules do have a few strict boundaries to make sure people are using these trusts for genuine estate planning, rather than as aggressive tax shelters.
To keep your trust safe and tax-exempt, we need to ensure three simple things:
It must come from your estate: The money or property inside the trust has to come directly from your estate assets or the proceeds of selling those assets. You can't use it as an empty shell to dump outside business assets into later on down the track.
It must have a genuine purpose: The trust needs to be set up for authentic family planning and protective reasons, which, for most families, is exactly why they want one anyway.
We need to be precise with the paperwork: The new rules mean that for any trust starting in the future, we need to be very clear about who can receive money from it, ensuring it focuses cleanly on individuals and your favourite charities.
Let’s Take Charge of Your Future
Planning what happens next doesn't have to be overwhelming or dry. The path forward is completely clear, and you can confidently move ahead with building a solid plan that protects the people who matter most.
If it's been a while since you looked over your Will, or if you want to make sure your current estate plan ticks all the boxes under these updated rules, we are here to help. Contact us today, and let’s sit down, chat through your goals, and make sure your family’s future is completely secure.
About the Author: Erin Vassallo
Erin Vassallo is the Principal Solicitor and founder of Law Team, a values-led law firm with a strong reputation across New South Wales and Queensland. With over two decades of experience in commercial, construction, and property development law, Erin is a trusted advisor to developers, landowners, and business owners navigating complex projects and legal risk.
Her hands-on experience includes joint ventures, structuring development deals, contract negotiation, risk mitigation, and project governance across residential, commercial, and mixed-use developments. Erin holds qualifications in law, political science, mediation, and disruptive strategy (Harvard Business School) and is the founder of Certified BCorp Law Team, committed to ethical business practices and social impact.
Frequently Asked Questions
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The government’s new exemption specifically applies to discretionary testamentary trusts. These are structures that give your chosen trustee the flexibility to decide how and when to distribute your estate's income and assets to your beneficiaries, making them the ultimate tool for both tax planning and family protection.
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Yes, absolutely. Because discretionary testamentary trusts are exempt from the new 30% tax floor, you can still distribute up to $18,200 every single year to each child or grandchild under 18 entirely tax-free. It remains a wonderful, legal way to help fund their education and give them a head start.
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No, and this is a really important boundary. To keep its special tax-exempt status, the trust can only hold assets that come directly from your deceased estate. You cannot use it as a shell to inject outside business assets or alternative investments down the track.