The 2026–27 Federal Budget has dropped, and buried beneath the headline economic figures are some of the most significant changes to the taxation of trusts and estates proposed in recent years. For families, business owners, and anyone with an estate plan, the landscape will likely fundamentally change.

If your Will includes a Testamentary Trust, or if your family holds long-term assets like property or shares, the traditional tax rules that relate to wealth transfer are proposed to be rewritten. Here is what you need to know about the proposed changes and why a review of your estate plan is necessary.

We note that legislation to enact these changes has not yet passed, but this article will list the likely changes as described in the Federal Budget.

Important: This article is general information only. It describes measures announced in the Federal Budget that are not yet law and that may change before, or if, they are legislated. It is not legal, financial or tax advice, and you should not act on it without obtaining advice specific to your own circumstances.

For decades, Testamentary Discretionary Trusts (TDTs), which are trusts created within your Will when you pass away, have been the gold standard for estate planning. They offered unparalleled asset protection and the ability to legally minimise the tax your surviving family members pay by splitting income among beneficiaries.

Starting 1 July 2028, the Government plans to introduce a 30% minimum tax on discretionary trusts.

What does this mean for your family? The traditional strategy of legally streaming trust income to lower-taxed family members (such as minor children or non-working spouses) would be severely restricted. If income is distributed to someone in a lower tax bracket, the trust would still pay a 30% tax upfront. While the beneficiary gets a credit for that tax, any excess credit is permanently lost, meaning no cash refunds from the ATO.

Case Study:

Bill receives an inheritance from his mother’s Will via a TDT. Prior to the end of the Financial Year, the trust distributes income to Bill in the amount of $25,000. Under the old regime, The Trustee does not pay tax on this income, rather the income is included in Bill’s income tax return (and added to any other income that Bill had accumulated during the previous financial year through his employment or other investments). However, under the new proposed regime, the Trustee would pay a minimum 30% tax on this $25,000; it would still be included as income in Bill’s tax return, and Bill would receive a non-refundable tax credit equal to the 30% tax paid by the Trustee. If Bill’s marginal tax rate for that year is more than 30%, then his tax position is largely unaffected as he would be able to utilise the whole of the tax credit to offset his tax liability (and pay any top-up to his marginal tax rate, if required). However, if Bill’s marginal tax rate is less than 30%, he will not receive any refund for the difference.

Note: If a testamentary trust is already operating (meaning the person has already passed away prior to Budget night on 12 May 2026), it is “grandfathered” and exempt from these new rules. However, if you are currently alive and have a TDT drafted into your Will, your future estate will likely be caught by the new regime.

One of the greatest historical benefits of a Testamentary Trust was the ability to distribute income to minor children or grandchildren (to pay for school fees, for example) at standard adult tax rates. This allowed families to utilise the adult tax-free threshold for kids (currently approximately $18,200 per year).

Under the new 30% tax floor, this benefit is practically neutralised for new trusts. Moving forward, distributions to minors from new discretionary trusts would effectively be taxed at a flat 30%, wiping out the traditional tax-free advantage that helped so many young families get ahead.

Case Study:

Serena receives an inheritance from her father’s Will via a TDT. The Beneficiaries of the trust include Serena, her children, her spouse and related parties. Prior to the end of the Financial Year, the trust distributes income to Serena’s daughter, Kayla (who is 15 years of age and does not work or earn any other income) in the amount of $18,200. Under the old regime, The Trustee does not pay tax on this income, rather the income is included in Kayla’s income tax return and because the income Kayla receives is under the tax-free threshold, Kayla will pay no income tax on this distribution. However, under the new regime, the Trustee would pay a minimum 30% tax on this $18,200 ($5,460 tax payable), it would still be included as income in Kayla’s tax return and Kayla would receive a non-refundable tax credit equal to the 30% tax paid by the Trustee (i.e. a credit of $5,460) Because Kayla’s marginal tax rate is effectively Nil, the credit of $5,460 will not be refunded. Ultimately, this means that the net income retained by the family is $5,460 less than under the previous regime.

Many families use a “bucket company” to cap their tax rate on trust distributions at the corporate tax rate. Under the new budget measures, if a trust distributes income to a corporate beneficiary, the company receives no credit whatsoever for the 30% tax paid by the trust. This results in severe double taxation and effectively ends this popular wealth-retention strategy.

Confirm that corporate beneficiaries receive no credit or franking for the 30% trust tax under the measures as announced.

Effective 1 July 2027, the famous 50% CGT discount is proposed to be abolished. It would be replaced with an inflation-adjusted system and a minimum 30% tax on capital gains.

Even more importantly for legacy planning, assets purchased before 1985, which have historically been completely exempt from CGT, would be brought into the tax net for any future capital growth that occurs after 2027. If you are planning to pass down a family farm, commercial property, or business shares, the future tax bill your children will face when they eventually sell those assets could increase significantly if these measures are enacted.

The era of the discretionary trust (including a TDT) as a pure, hyper-efficient tax vehicle is changing, but that does not mean you are out of options, and it certainly does not mean that a TDT in your Will is no longer beneficial for your family. The asset protection benefits for your beneficiaries of including a TDT in your Will have been unaffected by these changes, and these are quite often the driving factor for considering a TDT in your Will.

We don’t have a crystal ball in relation to the legal or tax landscape of the future. This is the reason why we often recommend flexibility in relation to these TDT structures in your Will rather than rigidity. We now often include the ability for your beneficiaries to “opt out” of the trust structure if (after obtaining legal and financial advice) it is deemed to be not worthwhile in their situation, resulting in your beneficiaries receiving their inheritance directly, as they would under a simple will. The benefit of this structure (as opposed to simply having a simple will) is that if they are in crisis or at the time of your death or likely to be in crisis in the future (family breakdown, bankruptcy, etc.), they have the ability to quarantine their inheritance in a correctly structured TDT to protect it.

The most crucial step you can take right now is to pull your Will out of the drawer. While none of these measures is law yet, the sensible step is to review your plan now so you are ready whichever way they land. Speak to one of our Accredited Specialists about a comprehensive Will and Estate Plan Review. We will look at your current structures and help you prepare for these proposed changes so that your family’s wealth remains protected.

Speak to an Accredited Specialist. Request a confidential review of your Will and estate plan using the form below, or call us on (02) 9523 5535 for a same-day callback. Our Wills and Estates team can see you in Cronulla, Menai or the Sydney CBD.

Disclaimer: This article is general information only and is current as at the date of publication. It describes measures announced in the 2026–27 Federal Budget that are not yet law and that may be amended or may not proceed. It does not constitute legal, financial or taxation advice and must not be relied upon as such. You should obtain advice tailored to your own circumstances before making any decisions about your Will, estate plan or any testamentary trust. Liability limited by a scheme approved under Professional Standards Legislation. © Southern Waters Legal.