There has been a lot of noise about trusts since the 2026–27 Federal Budget.
If you already have a Will with a discretionary testamentary trust (or you have been thinking about including one in your estate plan), you may be wondering whether the proposed changes mean you should reconsider.
The short answer is: not necessarily.
The longer answer is: the tax rules may change, but tax is only one reason people use discretionary testamentary trusts. For many families, the real value of a discretionary testamentary trust is not just tax planning. It’s about flexibility, protection, and giving your loved ones options when life does not go to plan.
So before anyone panic-updates their Will, it’s worth slowing down and understanding what has actually been announced, what we still don't know, and why discretionary testamentary trusts remain a powerful estate planning tool.
What is a discretionary testamentary trust?
A testamentary trust is a trust created by a Will after someone dies; instead of leaving an inheritance directly to a beneficiary, the Will can direct that the inheritance be held in a trust. A discretionary testamentary trust, often called a DTT, is a common type of trust created by a Will where the trustee then has flexibility to decide how income and capital are distributed between a number of eligible beneficiaries over time.
Compared with a basic Will, a discretionary testamentary trust Will can provide extra structure and protection. It can be especially useful where you want to protect young children, adult children, vulnerable beneficiaries or family wealth from future risks.
Under the current tax rules, discretionary testamentary trusts have also been attractive because income from the trust can sometimes be distributed to minor children at adult tax rates, including access to the tax-free threshold. This makes discretionary testamentary trusts extremely tax effective in the right circumstances, particularly where income is distributed to beneficiaries with lower overall income.
But the important point is this: tax efficiency has never been the only reason to use a discretionary testamentary trust.
What did the 2026–27 Federal Budget announce?
As part of the 2026–27 Federal Budget, the Federal Government announced a proposed 30% minimum tax on discretionary trust income from 1 July 2028.
The Budget papers describe the measure as applying at the trustee level, with the trustee paying the minimum tax because the trustee controls distributions.
In broad terms, this means that income distributed from certain discretionary trusts may be subject to a minimum 30% tax rate.
Not all trust income is intended to be captured. Proposed exclusions include primary production income, certain income relating to vulnerable minors, and income from discretionary testamentary trusts already in existence where the Will-maker has already died. Though we currently have limited information, it appears that these categories have protected status and should not be impacted by the proposed changes.
Are discretionary testamentary trusts dead after the Budget?
Definitely not.
That might be the headline some people are worried about, but it’s not the reality.
The proposed changes are about the tax treatment of discretionary trust income. They do not remove the broader estate planning benefits of discretionary testamentary trusts.
Tax planning is only one of the benefits that come with using a discretionary testamentary trust Will over a basic Will.
A discretionary testamentary trust Will can still provide:
flexibility about who benefits and when;
greater protection for children and grandchildren;
asset protection if beneficiaries face family law issues;
protection for beneficiaries in high-risk jobs or businesses;
support for vulnerable beneficiaries;
control over when young beneficiaries receive financial control.
Those benefits remain important, regardless of how the final tax rules land.
What do we know so far?
There are a few important points that are reasonably clear from the announcement and commentary.
The proposed rules are not law yet. The measures were announced on 12 May 2026 and are intended to commence from 1 July 2028, but it remains proposed legislation.
The minimum tax is proposed to be 30%.
Existing DTTs where the Will-maker has already died appear to be protected.
For adult beneficiaries already earning more than $45,000 per year from other income sources, the tax treatment may be effectively similar to the current position. This is because, under current marginal tax rates, income above that level is already taxed at or above 30% when Medicare levy is factored in.
Beneficiaries with low or no other income may be more affected. This could include retirees or adult children at university who are not working. These beneficiaries may pay a higher tax rate under the proposed rules than under current arrangements.
What do we still not know?
A lot.
This is one of the most important takeaways for families right now: the proposed rules are still developing.
There needs to be consultation, drafting and legislation before the proposed rules become law.
One major area of uncertainty is how distributions to minors will be treated.
Under the current rules, discretionary testamentary trusts have historically received special treatment because the trust only exists because someone has died. This has allowed income to be distributed to minor children at adult tax rates in certain circumstances, allowing around $22,000 per child per year to be distributed tax-free.
The Budget materials refer to an exemption for certain income relating to vulnerable minors, but there is still uncertainty about whether existing arrangements for minors will be protected, changed or narrowed.
That detail matters enormously for families with young children.
Why discretionary testamentary trusts still matter for young children
For parents with young children, a discretionary testamentary trust Will can provide protection that a basic Will usually cannot.
If one parent dies, a discretionary testamentary trust can be structured to help protect the inheritance intended for the children, even if the surviving parent later re-partners or makes a new Will. This means the deceased parent can set the succession plan for their inheritance under their own Will, rather than relying entirely on the surviving spouse’s future Will.
A discretionary testamentary trust can also help protect an inheritance if the surviving spouse later experiences a relationship breakdown and family law property settlement. While nothing is ever guaranteed in family law, holding an inheritance through a discretionary testamentary trust can give the children a stronger protective starting point than a simple gift under a basic Will.
And if both parents die while children are still young, a discretionary testamentary trust can delay when children receive direct financial control of their inheritance. Rather than an 18-year-old receiving a large inheritance outright, the Will-maker can choose an older age (for example 21 or 25) and appoint trusted people to manage the inheritance until the children are ready.
It’s not about controlling children forever; it’s about giving them protection until they are mature enough to manage serious money.
Why discretionary testamentary trusts still matter for adult children
Discretionary testamentary trusts are not just for families with young children.
They can also be extremely useful where you have adult children.
If an adult child receives an inheritance directly and later separates from their partner, that inheritance may become relevant in a family law property settlement. A discretionary testamentary trust can help create a stronger protective structure so the inheritance is not automatically treated in the same way as money received outright.
A discretionary testamentary trust can also help where a child is in a high-risk profession, runs a business, or may be exposed to creditor claims. A discretionary testamentary trust can help protect an inheritance so it stays in the family.
It can also help protect grandchildren. If you leave assets directly to your child, you are then relying on your child’s Will to pass what remains to your grandchildren. With a discretionary testamentary trust Will, your Will can set the succession pathway for your inheritance beyond your child’s death.
That is a powerful planning tool.
The real value is flexibility
One of the most important features of a well-drafted discretionary testamentary trust Will is flexibility.
The legal and tax landscape can change. Family circumstances can change. Beneficiaries’ needs can change.
That is why discretionary testamentary trust Wills should be drafted carefully.
At Nest Legal, we prepare most of our discretionary testamentary trust Wills so that the trusts are optional. This means that loved ones and executors can obtain legal, tax and financial advice after death and decide whether the trust structure is still the most appropriate option at that time. (There are some discrete situations where this is not the case so we will be keeping a look out for the finer details when they are announced. If the laws take a strict approach in relation to office bearers under the vesting age, then some of our advice may change).
This is important.
A good estate plan should not lock your family into one rigid path. It should give them a protective structure and the ability to make informed decisions based on the law and circumstances that exist at the time.
Should you remove a discretionary testamentary trust from your Will?
Not without advice.
If you already have a Will that includes a testamentary trust, the Budget announcement alone is not a reason to remove it.
The better question is whether the structure still makes sense for your family, your assets, and your goals.
For many families, the answer will still be yes.
For others, the drafting may need to be reviewed, especially if the Will was prepared some time ago or if your family circumstances have changed.
But the key point is this: don’t let headlines write your estate plan.
What should you do now?
If your Will includes a discretionary testamentary trust, or you are considering one, now is a good time to review your estate plan.
That review should consider:
who your intended beneficiaries are;
whether you have young children or grandchildren;
whether any beneficiary may be vulnerable;
whether any beneficiary is at risk of relationship breakdown;
whether any beneficiary runs a business or works in a high-risk profession;
whether flexibility is important to you;
how the proposed tax changes may affect your family.
You may also need tax and financial advice, particularly if income-producing assets are likely to form part of your estate.
Final thoughts
The proposed 2026 Budget changes are significant. They may affect how discretionary testamentary trusts are taxed in the future, particularly for low-income adult beneficiaries and potentially minors, depending on the final legislation.
But discretionary testamentary trusts are not dead.
They remain one of the most flexible and protective estate planning tools available to Australian families.
Tax is part of the conversation. It is not the whole conversation.
A properly drafted discretionary testamentary trust Will can still help protect children, adult beneficiaries, vulnerable family members, family wealth and future generations.
The right response to uncertainty is not panic.
It’s review, advice and careful planning.
If you are concerned about how the proposed changes may affect your estate plan, our Wills and Estates team can help you understand your options and decide whether your current Will still gives your family the protection and flexibility you intended.