Testamentary Trusts in Australia and the 2026 Tax Changes
Quick Answer
A testamentary trust is a trust written into your Will that does not exist until you die. Instead of your assets passing directly to your beneficiaries, they pass into a trust that a trustee you have chosen controls on their behalf. The two reasons Australians use one are asset protection, because assets held in the trust are harder for a beneficiary’s creditors or a divorcing spouse to reach, and tax, because income distributed to a beneficiary’s children under 18 is taxed at ordinary adult rates rather than penalty rates. The 2026-27 Federal Budget announced a 30% minimum tax on discretionary trusts from 1 July 2028, and the government has since proposed carving testamentary trusts out of it. That carve-out is a consultation paper, not law.
If you are reading this because someone has suggested a testamentary trust for your Will and you want to know whether it is worth the money, skip to “Who actually needs a testamentary trust“. Most people who ask that question do not need one.
If you already have a Will containing a testamentary trust clause, read the 2026 Budget section. The proposed exemption is drafted around trusts in existence, and a clause sitting in an unsigned-into-effect Will is not a trust in existence. That distinction has not been settled.
Key Takeaways
- A testamentary trust is created by your Will and does not exist until you die. It is not a family trust, and it is not your deceased estate.
- Income distributed to a beneficiary under 18 is taxed at ordinary adult rates, including the tax-free threshold, instead of penalty rates. This is the main tax reason people use one.
- The 2026-27 Federal Budget announced a 30% minimum tax on discretionary trusts from 1 July 2028. The government has proposed exempting testamentary trusts, but that sits in a consultation paper released on 8 July 2026 and is not law.
- Fewer than one in a hundred Australian estates use a testamentary trust. Around 10,000 to 10,500 are currently operating.
- A testamentary trust protects a beneficiary from their own creditors and relationship breakdowns. It does not protect your estate from a family provision claim.
- Legal123 drafts a Will with a testamentary trust for a fixed $1,899 +GST. Expect an annual tax return and accounting costs for every year the trust runs.
Legal issues covered in this guide
What is a testamentary trust and how does it work?
A testamentary trust is a trust created by your Will that comes into existence only on your death. It is not the same thing as your deceased estate, and it is not a family trust set up while you are alive.
The mechanics are simple. Your Will names a trustee, names the beneficiaries, and says which assets go into the trust. When you die, your executor administers the estate as normal. Once the estate is settled, the assets you nominated pass into the trust rather than into your beneficiaries’ own names. The trustee then decides, year by year, how much income or capital each beneficiary receives.
Most testamentary trusts in Australia are discretionary. That means the trustee has a choice about who receives what, within the class of beneficiaries you named, rather than fixed shares written into the document.
Did you know?
Around 10,000 to 10,500 testamentary trusts are currently operating in Australia. That is about 1% of all trusts and roughly 0.1% of taxpayers. Against 200,000 to 220,000 deaths a year, it means fewer than one estate in a hundred uses one. (ATO and Treasury data, reported by ABC News, 7NEWS and SBS, 2026.)
What did the 2026 Federal Budget change for testamentary trusts?
On 12 May 2026, as part of the 2026-27 Federal Budget, the government announced a 30% minimum tax on the income of discretionary trusts, applying at the trustee level from 1 July 2028. Beneficiaries who are presently entitled to trust income will be able to claim a non-refundable credit for tax the trustee has paid. A temporary restructure rollover is proposed from 1 July 2027 and will run for three years.
Testamentary trusts were caught by the original announcement. After public pressure, the government proposed exempting them, subject to conditions: the trust must be established for genuine testamentary purposes, the income must derive from deceased estate assets, and for trusts established on or after 1 July 2028 the beneficiaries must be limited to individuals and tax-exempt entities. The ATO released a consultation paper on 8 July 2026.
None of this is law. The ATO’s own page on the measure states plainly that it is not yet law, and the testamentary trust exemption sits at the consultation stage without final government approval. Anyone telling you the position is settled is guessing.
Warning
On 8 July 2026 the Treasurer confirmed the government will “exempt income from all types of discretionary testamentary trusts from the minimum tax provided they are established for genuine testamentary purposes” (Consultation on discretionary trusts reform implementation). That is a broad commitment and, on its face, it covers Wills already drafted. Two things are still open: the exemption is an announcement attached to a consultation paper rather than legislation, and “genuine testamentary purposes” has not been defined. If your Will contains a testamentary trust clause there is nothing you need to do today, but it is worth a review once draft legislation appears.
In our experience working with Australian families on estate planning, this is the first change in a decade that has made existing testamentary trust Wills worth re-reading, even though the announced exemption is a reassuring one. Figures and status in this section are current as at 31 August 2026. Because the measure is still moving, check the ATO’s page on the minimum tax on discretionary trusts for the current position before you act.
Who actually needs a testamentary trust?
Very few people. The honest answer is that a testamentary trust earns its cost in four situations; outside them, it is an expensive way to complicate your estate.
- A beneficiary in a risky occupation or business. A surgeon, a builder, a company director. Assets held in trust are harder for a creditor or a professional negligence claim to reach than assets sitting in their own name.
- A beneficiary whose marriage may not last. Inherited money held in a trust is not automatically quarantined in a family law settlement, but it is treated differently from money that has been received and mixed into joint assets.
- Children who will inherit while still young. This is the tax case, and it is covered in the next section.
- A beneficiary who cannot manage money. Disability, addiction, or a gambling problem. The trustee controls the timing, and the beneficiary cannot spend what they have not been given.
If your estate is a house, a superannuation balance and a bank account, and everything goes to your spouse, and then your adult children, a testamentary trust is almost certainly not for you. A properly drafted Will is.
Did you know?
Australians transferred about $1.5 trillion in wealth over the two decades to 2018, and roughly 90% of that was inheritances rather than gifts given during life. The Productivity Commission projects inheritances could rise four-fold in real terms by 2050 as household wealth grows and the population ages. (Productivity Commission, Wealth Transfers and their Economic Effects, Commission Research Paper, 7 December 2021.)
How is a testamentary trust taxed, and what is excepted trust income?
Income distributed from a testamentary trust to a beneficiary under 18 is taxed at ordinary adult marginal rates, including the tax-free threshold. This is the single biggest tax advantage, and it comes from the excepted trust income rules.
Outside a testamentary trust, income distributed to a minor is taxed at penalty rates that begin at a few hundred dollars of income and reach the top marginal rate quickly. Inside one, each minor beneficiary is effectively treated as an adult taxpayer for that income.
The practical effect: a trust distributing income across several grandchildren can use each child’s tax-free threshold rather than paying penalty rates. This is legitimate and long-standing, and it is the reason the 2026 Budget measure caused so much noise.
Since 2019, excepted trust income only applies to income from assets that came from the deceased estate, or from the proceeds of selling those assets. You cannot inject unrelated assets into a testamentary trust to get the concession.
What does a testamentary trust cost in Australia?
Expect to pay more for the Will, and to keep paying every year the trust runs.
| Cost | What it covers |
|---|---|
| Will with a testamentary trust | Drafting the Will and the trust terms. Legal123 charges $1,899 +GST as a fixed fee. |
| Annual tax return | The trust is a separate taxpayer and lodges its own return every year it operates. |
| Accounting and trustee costs | Ongoing administration, distribution minutes, and record-keeping for the life of the trust. |
The ongoing cost is the part people underestimate. A testamentary trust that runs for twenty years needs twenty tax returns. If the trust holds a modest sum, compliance costs can outweigh the tax saved, which is why the four situations above matter more than the tax table.
Testamentary trust vs family trust: what is the difference?
The difference is when the trust starts and where the assets come from.
| Testamentary trust | Family (discretionary) trust | |
|---|---|---|
| Created by | Your Will | A trust deed, during your lifetime |
| Starts | On your death | Immediately |
| Assets | From your deceased estate | Assets you transfer in |
| Minor beneficiaries | Taxed at adult rates on excepted trust income | Taxed at penalty rates |
| 2026 Budget measure | Proposed exemption, not yet law | Caught by the 30% minimum tax from 1 July 2028 |
There are about 1.02 million trusts in Australia, and roughly 840,000 of them are discretionary family trusts holding around $2.9 trillion in assets. Testamentary trusts are a rounding error next to that, which is why most public commentary about “the trust tax” is not about your Will.
What are the disadvantages of a testamentary trust?
- Cost and administration. A separate tax return every year, for as long as the trust runs.
- A trustee with real power. Whoever you appoint decides what each beneficiary receives. If you choose badly, you have created a family dispute with a legal structure attached.
- Beneficiaries who cannot simply take their money. That is the point of the structure, and it is also the most common source of resentment.
- Legislative risk. The 2026 Budget is the clearest demonstration in years that the tax treatment of trusts can change. A structure built for a thirty-year horizon is exposed to thirty years of tax policy.
Does a testamentary trust protect against a family provision claim?
No, and this is the most common misunderstanding we hear.
A family provision claim challenges the distribution of your estate. An eligible person, usually a spouse or child, applies to the court for provision out of the estate. Putting assets into a testamentary trust does not remove them from the pool a court can consider, because the trust is created by the Will that is being challenged.
A testamentary trust protects against a beneficiary’s own creditors and relationship breakdowns after they inherit. It is not armour against someone contesting your Will. If you expect a challenge, the answer is careful drafting, a documented reason for any exclusion, and advice, not a trust structure. Our guide on how to write someone out of your Will covers what actually holds up.
Did you know?
In New South Wales in 2024, there were 996 family provision claims and 464 contentious probate matters filed, against 30,801 uncontested probate applications. Around 74% of family provision claims that reach a final hearing succeed in obtaining some provision. Combined legal costs run from $25,000 to $65,000 if a claim settles at mediation and from $80,000 to $250,000 or more if it is fully litigated. (Supreme Court of NSW Provisional Statistics 2024; White, Tilse, Wilson et al., UNSW Law Journal, 2015; practitioner cost guides 2025-2026.)
How do you set up a testamentary trust?
You cannot set one up with a template. A testamentary trust is drafted into your Will by a lawyer who understands your family, your assets and the tax treatment, and the drafting is where the value sits.
The process with Legal123 is straightforward. You choose the Will writing service testamentary trust option at $1,899 +GST. David Evans, our wills and estates lawyer, takes your instructions by phone or email, drafts the Will and the trust terms, and returns your documents within five working days with signing instructions.
If your situation is simpler than you thought after reading this, that is a good outcome. A straightforward estate is well served by our online Will kit at $99 +GST, or by the fixed-fee lawyer-drafted Will at $699 + GST. Only about 40% to 52% of Australian adults have a valid, current Will at all, so having any properly drafted Will puts you ahead of half the country.
Consider this …
Do not buy a testamentary trust because someone told you it saves tax. Buy it because you can name the beneficiary it protects and the risk it protects them from. If you cannot name both, you do not need one yet.
Other frequently asked questions
Who pays the tax on a testamentary trust?
It depends on who receives the income. Where income is distributed to a beneficiary who is presently entitled, that beneficiary pays tax on it at their own marginal rate, and minors receive the excepted trust income concession. Where income is retained in the trust, the trustee is assessed, historically, at the top marginal rate. The proposed 30% minimum tax from 1 July 2028 would change the trustee-level position for discretionary trusts generally, with a testamentary trust exemption still under consultation.
Can a testamentary trust own a house?
Yes. A testamentary trust can hold real property, shares, cash and other assets that came from the deceased estate. Land tax and stamp duty treatment varies by state and is worth checking before the trust acquires or retains property, because trust ownership is not always neutral.
Can you withdraw money from a testamentary trust?
Not at will. A beneficiary of a discretionary testamentary trust has no automatic right to the funds. The trustee decides what is distributed and when, within the terms of the Will. That mechanism provides the protection, and it is also why the choice of trustee matters more than the choice of structure.
Who owns the assets in a testamentary trust?
The trustee holds legal ownership; the beneficiaries hold a beneficial interest. In a discretionary trust, a beneficiary’s interest is a right to be considered for a distribution, not a fixed entitlement to a share. This is precisely why the assets are harder for a beneficiary’s creditors to reach.
Can a testamentary trust be changed after death?
Generally no. Once you have died, the terms in your Will govern the trust and cannot be rewritten. Some trusts include limited powers of variation, and in narrow circumstances a court can approve a change, but the working assumption should be that the terms are fixed. That is why the drafting matters.
What to do now
If you have a Will with a testamentary trust clause, have it reviewed. The 2026-27 Budget measure and the proposed exemption both turn on details that were not contemplated when most of these wills were drafted.
If you are considering one for the first time, start with the question in the “Who actually needs one” section. Name the beneficiary and name the risk. If you can do both, book a call and we will tell you honestly whether the structure earns its cost in your situation. If you cannot, a properly drafted Will will serve you better and cost you a great deal less.
Further Information
- How to Write a Will in Australia
- Will Writing Service: A Lawyer Writes Your Will
- Can an Executor Be a Beneficiary in a Will?
- How to Leave Specific Assets in Your Will
- How to Write Someone Out of Your Will
References
- Australian Taxation Office, Tax reform: introducing a minimum tax on discretionary trusts (measure announced 12 May 2026, not yet law)
- Australian Taxation Office, Estate planning, tax governance guide for privately owned groups (updated 10 July 2026)
- The Treasurer, Consultation on discretionary trusts reform implementation, 8 July 2026 (consultation paper released, submissions closed 31 July 2026)
- Productivity Commission, Wealth Transfers and their Economic Effects, Commission Research Paper, 7 December 2021
- Supreme Court of New South Wales, Provisional Statistics 2024 (PDF)
- White, Tilse, Wilson, Rosenman, Purser and Coe, Estate Contestation in Australia: An Empirical Study of a Year of Case Law, (2015) 38(3) UNSW Law Journal 880
About the Author: Vanessa Emilio
Need legal documents written specifically for your business? Vanessa and her team draft custom legal documents for Australian online businesses, or you can book a 30-minute call to talk through what you need.
Disclaimer: We hope you found this article helpful, but please be aware that any information, comments or recommendations are general in nature, do not constitute legal advice and may not be suitable for your specific circumstances. Whilst we try our best to ensure that the information is accurate, sometimes there may be errors or new information that has yet to be included. Any decisions you take based on information on this website are made at your own risk and we cannot be held liable for any losses you suffer. Contact us directly before relying on any of this information.
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