Testamentary Discretionary Trusts After the 2026 Federal Budget: Still a Smart Estate Planning Tool
May 13, 2026
The Federal Budget announced on 12 May 2026 introduces a minimum 30% tax on certain discretionary trusts, but Testamentary Discretionary Trusts remain a powerful and practical Estate Planning tool for most families.
What the Budget changed — quickly and clearly
- The Government has proposed a minimum 30% tax on the taxable income of discretionary trusts, to apply at trustee level from the legislation’s effective date as announced in the Budget.
- The measure is designed to limit income-splitting through discretionary trusts and to bring trust taxation closer to the taxation of other entities.
- Certain trusts and types of income are excluded from the measure — including Fixed Testamentary Trusts and Special Disability Trusts created by Wills, and income from assets of Testamentary Discretionary Trusts that existed at announcement time.
The real headline you should read first
- Despite the headlines, Testamentary Discretionary Trusts remain a strong Estate-Planning choice — they still protect inheritances from relationship breakdowns and give your Executor and family the flexibility to manage distributions over time.
- Where a trust already distributes income to beneficiaries who pay tax at 30% or more, there will be no increase in the overall tax paid — the Budget’s minimum tax simply matches what those beneficiaries already pay.
How the new tax will actually affect families
- For families that historically flowed trust income to low‑tax-rate beneficiaries (for example, children with little other income), the trustee-level 30% will increase tax payable unless the family’s overall tax position already sat at or above that rate.
- Non-corporate beneficiaries will receive non-refundable tax credits for tax paid by the trustee, which reduces the risk of double taxation though it does not create a refund if the beneficiary’s personal rate is lower than 30%.
Why you should still consider a Testamentary Discretionary Trust (TDT)
- Protection from relationship breakdowns: A TDT ring‑fences the inheritance and makes it far harder for divorcing spouses or de facto partners to claim those assets directly. This protection is often the primary reason clients choose TDTs, and it is unaffected by the Budget change.
- Control and tailored distributions: TDTs let you set rules for how and when beneficiaries benefit — essential where beneficiaries are young, vulnerable, have special needs, or where blended families require careful balancing.
- Tax planning remains possible: Although some tax advantages may be reduced for low‑income beneficiaries, many families will see no net tax rise because distributions are already taxed at higher marginal rates. Even where there is more tax payable, the trade-off with asset protection and control can still make a TDT the better choice.
Practical next steps for your Estate Plan
- Don’t panic — review, don’t rip up: If you already have a Will with a Testamentary Discretionary Trust, your plan may be unaffected depending on timing and how distributions are made; get tailored advice before taking action.
- If you are planning a new Will, speak to an advisor about how a TDT will sit alongside the announced minimum tax rules, whether rollover relief or restructuring options are relevant to you, and whether a Fixed Testamentary Trust or alternate structure may be preferable.
- Consider cashflow and timing: the trustee will pay tax at the trustee level, so trustees may need to allow for the timing of tax payments and the availability of credits to beneficiaries.
A short illustration
- Family A distributes trust income largely to adult children who already pay tax at 32% — the imposition of a 30% trustee tax will not increase their family’s total tax burden.
- Family B distributes to low‑income minor children who pay little or no tax — Family B may face higher tax under the new rules.
How Crabtree Legal can help
At Crabtree Legal, we continue to recommend Testamentary Discretionary Trusts as a cornerstone of well-structured Estate Plans. If you are reviewing your Will or considering whether a Testamentary Discretionary Trust is appropriate for your circumstances, then we'd be happy to provide you with tailored advice.
A new year is the perfect time to revisit an important question: is your Will still up to date? Many people make a Will once and then leave it untouched for years. But life rarely stays still. Relationships change, children are born, assets are bought and sold, businesses evolve, and family circumstances shift. A Will that once reflected your wishes may no longer do so. For that reason, reviewing your Will regularly is one of the simplest ways to protect the people and assets that matter most. Why people delay updating their Will It is easy to put off Estate Planning. Some people assume their Will is “good enough” because nothing dramatic has happened. Others feel uncomfortable thinking about what happens after they are gone. In practice, the most common reason Wills become outdated is not neglect in a dramatic sense, but everyday change. You may have: Married or separated. Had children or grandchildren. Bought property. Started or sold a business. Gained or lost significant assets. Named an Executor who is no longer suitable or available. If any of these apply, your current Will may need review. What can happen if a Will is outdated An outdated Will can create confusion, delay, and conflict at exactly the moment your family is already dealing with loss. It may also fail to reflect your real intentions. For example, assets may pass to someone you no longer intended to benefit, or a chosen Executor may no longer be the right person to manage the Estate. In some cases, the wording of an old Will can even create disputes that could have been avoided with a simple update. When to review your Will A good rule of thumb is to review your Will after any major life event, and otherwise every few years. You should consider an update if you have experienced: A marriage, divorce, or de facto relationship change. The birth or adoption of children. A death in the family. A major change in assets or liabilities. A move interstate or overseas. A change in your wishes about guardianship for your children, gifts, or Executors. Even if nothing major has changed, a periodic review helps ensure your instructions remain clear and legally effective. A simple process can prevent future problems Updating a Will does not have to be complicated. In many cases, a short review with a lawyer is enough to confirm whether the existing document still works or whether a new will is needed. A proper review can also identify related issues, including: Powers of attorney. Appointment of guardians. Superannuation nominations. Business succession arrangements. Asset ownership structures. These matters often work together, so an estate plan should be considered as a whole rather than as a single document. The takeaway The start of a new year is a useful reminder to get organised, and your Will should be part of that process. If your circumstances have changed, or if it has been several years since your last review, now is a sensible time to take another look. A current, well-drafted Will can save your family stress later and help ensure your wishes are carried out clearly. Contact Crabtree Legal today for practical advice on updating your estate plan and protecting the people you care about most.
As we wrap up the year, we want to extend our heartfelt thanks to everyone who has supported Crabtree Legal since we commenced operations in May 2025. It’s been a privilege to serve our clients, collaborate with our partners, and begin building a legal practice grounded in integrity and community. We wish you and your loved ones a joyful Christmas filled with rest, connection, and gratitude. May the new year ahead be blessed with peace, purpose, and new opportunities. Thank you for being part of our journey. We look forward to supporting you in 2026. Warm regards, Jonathan Crabtree & the Crabtree Legal team
At Crabtree Legal, we understand that protecting your children’s inheritance from potential relationship breakdowns is a crucial concern for many families. The landmark Family Court of Australia decision in Bernard and Bernard [2019] FamCA 421 confirmed that testamentary trust Wills can be an effective tool in safeguarding a beneficiary’s inheritance from being divided upon divorce. Background of the Case In Bernard v Bernard, the husband’s late father created two discretionary testamentary trusts through his Will — one for his son and one for his daughter. The trusts operated as “mirror trusts”: each sibling was the trustee of the other’s trust but had no control over their own trust. The husband was the primary beneficiary of his trust, but the assets were legally owned and controlled by his sister as trustee. When the husband and wife later separated and divorced, the wife sought to have the husband’s inheritance held in the testamentary trust included in the matrimonial property pool for division. However, the husband argued that since he did not legally own or control the trust assets, and his interest was solely as a beneficiary dependent on the trustee’s discretion, the inheritance should be excluded from the property pool. Court’s Decision and Key Findings The Family Court ruled in favor of the husband, finding that the assets in the testamentary trust were not part of the matrimonial pool. The court’s key reasoning was that: The husband was not the settlor of the trust—the deceased father was. The husband had no legal ownership or control over the trust assets. The trustee (the husband’s sister) had complete discretion over income and capital distributions. The husband’s interest was discretionary and not guaranteed, meaning he could not compel distributions. The trust assets were inherited and not acquired during the marriage. This decision confirmed that a properly structured testamentary trust can protect a beneficiary’s inheritance from being divided upon divorce by separating legal ownership and control from mere beneficial interest. Why This Matters for Your Estate Planning Bernard v Bernard highlights how testamentary trust Wills can be used to safeguard your children’s inheritance from future relationship breakdowns, ensuring that inherited assets remain protected within the family and are not treated as divisible property in the event of a divorce. At Crabtree Legal, we specialise in Wills incorporating testamentary trusts and can provide tailored advice and drafting services to help you protect your family’s wealth across generations. Contact Crabtree Legal Today If you want to ensure your children’s inheritance is protected from a future divorce or relationship breakdown, contact Crabtree Legal today. We will guide you through establishing testamentary trust Wills that provide peace of mind and strong asset protection tailored to your family’s needs.