Protecting Your Family’s Inheritance Under the 2026 Testamentary Trust Changes
What the proposed 2026 trust tax changes actually mean for your family
Imagine sitting down to finalise your Will, confident that your life’s hard work will give your children and grandchildren a secure head start. Then, you see the media headlines: New Death Tax to Target Family Inheritances. It is enough to make anyone second-guess their estate plan.
Since the May 2026 Federal Budget was handed down, that panic has been rippling through families who have set up, or are considering setting up, a Testamentary Discretionary Trust (TDT). But before you rush to dismantle your estate plan, let's step back from the media commentary and look at what is actually being proposed, who it really affects, and why a TDT might still be the smartest decision you make for your family.
The Essential Terms You Need to Know
Testamentary Discretionary Trust (TDT): A trust built into your Will that only springs into action after you pass away, designed to protect and control how your assets are distributed.
Trustee: The person (or company) you appoint to manage the trust and decide how to distribute the money.
Beneficiary: The family members eligible to receive money from the trust.
30% Baseline Tax: A May 2026 Federal Budget proposal to put a minimum 30% tax floor on trust distributions, potentially starting 1 July 2028.
What are the proposed 2026 tax changes for Testamentary Trusts?
The Australian government’s May 2026 Federal Budget proposes a 30% baseline tax rate on discretionary trust distributions, slated to take effect on 1 July 2028. This targets income-splitting strategies in TDTs used to minimise tax, and specifically impacts distributions given to minors and low-income beneficiaries.
As of now, these changes have not been implemented, and there have only been preliminary budget announcements. This means the government remains entirely open to structural amendments, exclusions, or adjustments before the proposed 2028 enactment date.
Who will be impacted by the new 30% baseline tax rate?
The proposed 30% baseline tax will directly impact minor beneficiaries (like young grandchildren) and adults earning under the $45,000 threshold. Under this proposal, the trustee will pay a 30% tax directly before the money is distributed, giving the beneficiary a non-refundable tax credit. Because that credit cannot be refunded, individuals who usually rely on the $18,200 tax-free threshold will lose that financial benefit.
However, if your beneficiaries are earning over the $45,000 bracket, they will remain practically unaffected. Their existing marginal tax rates meet or exceed the new 30% minimum requirement, so their tax treatment remains unchanged from today.
Quick-Fact Comparison: Testamentary Trust Tax Rules
| Beneficiary Profile | Current Tax Treatment (Pre-2028) | Proposed Rules (1 July 2028) |
|---|---|---|
| Minor Child | Taxed at adult marginal rates (up to $18,200 tax-free) | Trustee pays the 30% baseline tax |
| Adult (Income < $45,000) | Taxed at marginal rates (0% - 19%) | Trustee pays the 30% baseline tax |
| Adult (Income > $45,000) | Taxed at marginal rates (30% - 45%) | Unaffected (minimum 30% threshold met) |
Why do Testamentary Trusts remain a critical estate planning strategy?
When headlines focus exclusively on taxes, it is easy to forget the primary reason these trusts exist: a TDT is the ultimate fortress for your family's wealth. Despite the impending 2028 tax adjustments, Testamentary Trusts remain the gold standard for intergenerational asset protection.
The primary purpose of a Testamentary Discretionary Trust goes far beyond tax minimisation. Establishing a trust ensures your wealth transfers in a highly controlled environment. It shields your beneficiaries from external threats, ensuring that your hard-earned assets aren't lost to a sudden divorce, a family law dispute, or commercial bankruptcy proceedings. Also, with a TDT, if a surviving spouse eventually remarries, your children’s inheritance cannot be absorbed by the new partner.
How can your estate plan remain flexible under the 2028 rules?
Estate planning is about creating legal structures for an uncertain future. The biggest advantage of a TDT is that it is completely optional. If the tax rules change, your beneficiaries can simply choose not to use it.
If you pass away and the 30% tax rule means a TDT is no longer the best financial move for your children, they can simply opt out. With formal trustee consent, the trust can be bypassed entirely. By including a TDT in your Will, you are giving your loved ones a critical tool to evaluate their options and move forward with the best financial path.
Next Steps
Proactive planning is the best way to protect your legacy and your loved ones. If you want peace of mind knowing your Will is prepared for these potential tax changes, get in touch with Law Team. We'll review your estate plan and make sure everything is perfectly in order.
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 May 2026 budget papers indicate that Testamentary Trusts established after Budget Night (12 May 2026) are intended to be caught by the new rules. Because a Testamentary Trust is only legally "established" upon your passing, an existing Will may still be subject to these new rules. It is crucial to have your estate plan reviewed to ensure it is still optimal.
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Under the preliminary announcements, corporate beneficiaries will not receive the non-refundable tax credit for the 30% paid by the trustee. This is deliberately designed by the government to discourage distributing trust income to companies and could result in severe double taxation.
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Under the proposed rules, the trustee must still pay the 30% tax on that trust distribution upfront. The beneficiary receives a tax credit for that 30%, but because the credit is non-refundable, they cannot claim the cash back from the ATO. They effectively lose the benefit of the tax-free threshold on that specific trust income.
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The government intends for the 30% baseline tax to take effect on 1 July 2028. However, the legislation has not yet been drafted or passed by Parliament.