Estate Planning Update: Testamentary Trusts Exempt from Proposed 30% Minimum Trust Tax
Recent discussions about the Federal Government’s proposed changes to the taxation of discretionary trusts have led many Australians to wonder whether testamentary trusts are worthwhile.
Today, the Federal Government announced that Testamentary Discretionary Trusts (TDTs) will be exempt from the proposed 30% minimum tax on discretionary trust income. As a result, Testamentary Trusts will continue to offer the tax advantages and asset protection that have made them a leading estate planning tool for Australian families.
This announcement has not only been welcomed by the estate planning sector but has also highlighted a structure that many Australians may not have previously considered.
What is a Testamentary Trust?
A Testamentary Trust is a trust created by a Will, which only begins after the Will-maker’s death.
Instead of assets passing directly to beneficiaries, the assets are held in a trust and managed for the benefit of those nominated in the Will.
Now, if you’re wondering how these trusts work, there are usually three main roles people play when a Testamentary Trust is set up.
First, there are the beneficiaries—people the trust is set up for, who might receive money or other assets from the trust, depending on the rules laid out in the Will.
Then there’s the Trustee. This is the person (or people) who actually looks after the trust, makes decisions about how the assets are managed, and decides when and how to give money or assets to the beneficiaries. They have to follow the trust’s rules and act in the best interests of the beneficiaries.
Finally, there’s the Appointor. This person isn’t usually involved in daily decisions, but they do have the power to hire or fire the Trustee. So, while they don’t hand out the money, they do make sure the right person is in charge.
Sometimes, all these roles might be filled by one person, but not always. The best setup depends on your family and what kind of protection you want to build in.
Why Would You Bother With a Testamentary Trust?
For a lot of families, a Testamentary Trust simply gives you more control and protection than a regular Will ever could.
Asset Protection
One of the big advantages is that what you leave behind doesn’t just land straight into your loved one’s bank account or become something that’s theirs outright.
This means if your child, for example, runs into money problems, gets into debt, or even goes through a messy breakup, the assets in the trust are much harder for outsiders—like creditors or ex-partners—to get their hands on.
Bankruptcy and Creditor Protection
Think of it this way: if your beneficiary owns a business and something goes wrong, or if they ever get sued or go bankrupt, anything they inherit directly could get swallowed up by those problems.
But if those assets are sitting safely in a trust, they’re usually much better protected and can even be passed down to your grandchildren.
Relationship Breakdown and Family Law Risks
It’s the same story if there’s a divorce. If your adult child inherits money in their own name, it can become part of the pool that gets split in a settlement.
But if that inheritance is kept in a trust, it’s often harder for it to be split up or claimed by an ex-partner.
For example, if your child gets divorced and has inherited a lump sum directly, that money might end up being part of the divorce settlement. But if it’s in a trust, there’s a much better chance it stays with your child.
Of course, every situation is different, so it’s always smart to get some legal advice that fits your family.
Tax Effectiveness
Tax is another reason these trusts are popular.
Just like some other trusts, a Testamentary Trust lets you split up income among your family or other beneficiaries in a way that could save on tax. But here’s the really special part:
Special Tax Treatment for Children
If you leave money in a Testamentary Trust for your kids or grandkids who are under 18, they get taxed just like adults, not at the very high rates that usually apply to children.
That means your children or grandchildren can take advantage of the usual tax-free threshold, which can save your family a significant amount of money over the years.
Over time, this can really add up and help your family keep more of what you’ve left them.
And with the latest government changes, these tax benefits will stick around—Testamentary Trusts won’t be hit with the new minimum tax rules.
Don’t Forget Superannuation – Often Your Largest Asset
A lot of people think their Will covers everything they own, but that’s not always the case.
Actually, things like your superannuation don’t automatically get covered by your Will.
For many Aussies, especially if you’ve got a big super fund or life insurance inside super, your superannuation might actually be the biggest thing you leave behind—sometimes even bigger than your home.
But your super doesn’t just roll into your estate unless you’ve made special arrangements.
Usually, it’s the super fund trustee who decides who gets your super unless you’ve left them a clear, binding nomination telling them exactly what to do.
That’s why you need to think about estate planning as more than just writing a Will.
If you get good advice and set things up properly—with a solid nomination for your super and a Testamentary Trust in your Will—you can make sure your super is protected, managed well, and passed on in a tax-smart way.
Tax is also a big factor here.
A lot of people don’t realise that, if your super goes to someone who isn’t a close dependant (by the tax office’s definition), they might have to pay tax on it.
This usually comes up when adult children inherit super. Depending on how your super is split between taxable and tax-free parts, you could end up with a hefty tax bill.
So, just having a Will isn’t enough if you want to ensure your family gets the best possible result.
Smart estate planning is about looking at your whole picture—your super, your Will, any nominations you’ve made, and how they all work together.
When you get this right, you can be confident that your biggest assets will go to the right people in the best possible way.
Protecting Vulnerable Beneficiaries
There are also times when you might want to make sure someone in your family gets extra support or protection—maybe they’re not great with money, or they have special needs.
This includes beneficiaries who:
- Have difficulty managing money;
- Have gambling, alcohol or substance dependency issues;
- They are vulnerable to financial exploitation;
- Have disabilities or special care requirements; or
- Are you experiencing personal or monetary instability?
A Testamentary Trust can be set up with safeguards to protect a beneficiary, while still allowing them to enjoy the inheritance over their lifetime.
Many parents are surprised to learn just how flexible these trusts can be. You can set them up to give support and protection without making the person feel like they’ve lost all independence.
The Government’s Announcement
Recently, the government floated the idea of a 30% minimum tax on discretionary trusts, which made many people nervous (including us lawyers!).
If those changes had applied to Testamentary Trusts, a lot of their tax benefits would have disappeared. In fact, it would have been the biggest shake-up in the estate planning sector that we would have seen in decades.
But the good news is, the government has now said these trusts are safe in that they won’t be affected by the new rules, so both new and old Testamentary Trusts keep all their current tax perks.
That’s a real relief for many Australian families and lawyers.
Should You Consider a Testamentary Trust for Your Family?
Of course, every family’s situation is different.
Whether a Testamentary Trust is suitable will depend on factors like:
- The value and nature of your assets;
- The size of your superannuation balance;
- The ages of your children or grandchildren;
- Whether beneficiaries operate businesses or carry considerable personal risk;
- Blended family considerations;
- Concerns regarding future relationship breakdowns;
- Whether beneficiaries may require assistance managing an inheritance, and
- The level of control and protection you wish to provide after your death.
The thing to remember is, these trusts aren’t just for the rich anymore.
They’ve become a practical, affordable way for regular families to gain greater flexibility, protection, and tax savings from their estate planning.
Key Takeaways
Testamentary Trusts continue to offer:
- The only structure allowing minors to receive testamentary trust distributions taxed at adult rates;
- A powerful asset protection mechanism;
- An effective tool for protecting vulnerable beneficiaries;
- A useful way to manage superannuation death benefits within a broader estate plan;
- A flexible multi-generational wealth planning strategy; and
- Exempt from the proposed 30% minimum tax on discretionary trusts.
Talk to Lawsworth
When you think about estate planning, it’s really about much more than just who gets what when you’re gone.
It’s about making sure your family is protected, your hard-earned assets are preserved, and that everything you’ve built is handed down as smoothly and securely as possible.
Since super is the biggest asset for a lot of Australians, good planning is essential—otherwise, you might miss out on tax savings or asset protection that your family could really use.
Getting your Will and super nominations set up right with the help of a Testamentary Trust gives you—and your family—peace of mind, flexibility, and protection for the long haul.
If you’re not sure where to start, talk to an experienced estate planning lawyer. They can help you decide whether a Testamentary Trust is right for your family and set up a plan that fits your needs.
It’s never too early to get your estate planning sorted.