Most of us spend years focused on building our wealth, but far fewer spend the same amount of time planning how that wealth will be passed on.
Whether you’ve built wealth through your family home, super, investments or a business, you’ve spent years working towards financial security. Taking the time to protect what you’ve built and ensure it passes to the right people can be just as important as creating that wealth.
That’s where a testamentary trust may come into the picture.
Recent Federal Budget changes have also brought testamentary trusts into the spotlight, with many Australians seeking clarity about the proposed 30% minimum tax on discretionary trusts and what it could mean for their estate planning.
So, how does a testamentary trust work, and where does it fit into your broader financial plan? In this blog, we’ll explain the latest changes to testamentary trusts and what they could mean for your estate planning. We’ll also explore how a testamentary trust fits into a broader financial plan, when it may be worth considering, and why its value extends well beyond tax.
What Is a Testamentary Trust?
A testamentary trust is a trust created under your Will that only comes into effect after your death.
Instead of assets passing directly to beneficiaries, they are transferred into the trust and managed according to the instructions set out in your Will.
Unlike a family trust or other trusts that are established during your lifetime, a testamentary trust doesn’t exist until your estate is administered. This makes it a unique estate planning tool, designed specifically to manage and distribute assets after your passing.
It’s also important to distinguish a testamentary trust from your Will itself. A Will outlines who should receive your assets, whereas a testamentary trust sets out how those assets should be held, managed and distributed over time. Depending on how it’s drafted, the trust can continue operating for many years after your estate has been finalised.
Testamentary Trust Tax: What Has Changed After the Federal Budget 2026?
One of the biggest questions Australians have recently asked is whether testamentary trusts will be affected by the Government’s proposed 30% minimum tax on trusts.
The Government has since confirmed that genuine testamentary trusts established for genuine testamentary purposes will be exempt from the proposed 30% minimum tax.
However, there is an important limitation. The exemption only applies to income generated from assets that form part of the deceased estate. If assets are later introduced into the trust from outside the deceased estate, the exemption generally won’t apply to the income generated from those additional assets.
This means the existing tax treatment of genuine testamentary trusts remains unchanged. In other words, the 2026 Federal Budget did not introduce new testamentary trust tax rates.
How Testamentary Trusts Continue to Be Taxed
Testamentary trusts continue to be taxed under the existing rules, which may provide concessional tax treatment for beneficiaries in certain circumstances.
For example, let’s say your testamentary trust distributes investment income to an eligible grandchild (under the age of 18).
With a genuine testamentary trust:
- The beneficiary is taxed at ordinary adult marginal tax rates.
- The beneficiary can access the $18,200 tax-free
- If eligible for the Low Income Tax Offset (LITO), they may receive a tax offset of up to $700, meaning they could effectively receive around $22,500 before income tax becomes payable under the current tax rules.
- Any income above this amount is taxed at the applicable ordinary adult marginal tax rates.
With a standard family discretionary trust
- Only the first $416 is generally tax-free.
- The remainder is generally taxed at much higher rates.
This is a simplified example for illustrative purposes only. Tax outcomes depend on the beneficiary’s individual circumstances and the tax rules applying at the time.
While the 2026 Federal Budget provides greater certainty that the existing tax treatment of genuine testamentary trusts will continue, tax should be viewed as just one part of the decision. Whether a testamentary trust is right for you should also depend on your broader financial plan, family circumstances and long-term estate planning objectives.
How a Testamentary Trust Fits into Your Financial Plan
A testamentary trust isn’t something you decide on in isolation. Like any financial strategy, it should support your broader financial plan and the outcomes you want for yourself and the people you care about.
One of the biggest misconceptions is that a testamentary trust is either something everyone should have or simply a way to reduce tax. In reality, neither is true. A testamentary trust isn’t the right solution for every family, and while tax benefits may be an advantage, they should never be the sole reason for establishing one.
Instead, the decision should start with your financial plan. It should take into account the wealth you’ve built, your retirement plan, the assets you own, your family circumstances and how you want your estate to be managed in the future.
As part of our conversations with clients, whether they’re business owners, families, retirees or individuals who have built significant wealth, we encourage them to step back and consider questions like these before making decisions:
- Who do I want to leave my wealth to, and how do I want those assets to support them in the future?
- What assets will form part of my estate, including my home, superannuation, investment properties, shares or business?
- Do my Will, super death benefit nominations and estate planning strategies work together?
- Do I have a blended family or beneficiaries with different financial circumstances that may require greater flexibility or protection when inheriting wealth?
- Am I considering tax as one part of the bigger picture, rather than the main reason for making this decision?
- Does my estate plan still reflect my current financial position, family circumstances and long-term goals?
These conversations aren’t about finding reasons to establish a testamentary trust. They’re about understanding whether it’s the right strategy for your circumstances. When it forms part of a well-considered financial plan, a testamentary trust can provide benefits that support both your financial goals and the people you care about.
The Benefits of a Testamentary Trust as Part of Your Financial Plan
- A coordinated wealth transfer strategy – Rather than making estate planning decisions in isolation, a testamentary trust can help ensure your Will, super, investments and other assets are aligned with your broader financial objectives.
- Greater flexibility for your beneficiaries – Every family is different. When incorporated into your financial plan, a testamentary trust can provide greater flexibility in how inherited assets are managed and distributed, allowing your wealth to support each beneficiary according to their individual circumstances.
- Potential tax efficiencies – Tax is only one part of a good financial plan, but it shouldn’t be overlooked. When considered alongside your broader financial strategy, a testamentary trust may help improve the tax outcomes for beneficiaries while remaining aligned with your overall objectives.
- Protection for the wealth you’ve built – Building wealth takes years of planning. A testamentary trust can help extend that planning by providing additional protection for inherited assets, helping preserve your wealth in line with your family’s circumstances and long-term goals.
Ultimately, the value of a testamentary trust isn’t determined by the trust itself, but by how well it complements your overall financial plan. When all the pieces work together, you’re better positioned to protect the wealth you’ve built and pass it on in a way that reflects your wishes.
Making the Right Decision Starts with the Right Advice
Many people know they need a Will, but they’re often unsure whether strategies like a testamentary trust are necessary. Understanding how a testamentary trust works is one thing; deciding whether it’s right for you is another. That’s where the right financial and legal advice can make all the difference.
A financial adviser helps you understand whether a testamentary trust is appropriate for your circumstances and how it fits within your broader financial plan. They’ll consider your retirement goals, superannuation, investments, business interests, family circumstances and wealth transfer objectives to determine whether it’s the right strategy for you.
Once the strategy has been identified, your solicitor prepares the legal documents. They draft your Will, establish the testamentary trust where appropriate, and ensure your estate planning documents accurately reflect your wishes and comply with the relevant legal requirements.
By working together, your financial adviser and solicitor help ensure your estate planning isn’t just legally structured, it also supports the financial goals you’ve worked hard to achieve and the future you want for the people who matter most.
How Yield Financial Advisors Can Help You
Whether you’re approaching retirement, growing your investments, running a business or planning the transfer of your wealth, we’re here to help you make informed decisions with confidence.
With more than 10 years of experience helping Australians navigate estate planning and wealth transfer, our financial advisers take the time to understand your unique circumstances before recommending any strategy. If a testamentary trust is right for you, we’ll help you understand how it complements your retirement, investment and wealth transfer strategies, while working closely with your solicitor to ensure your financial strategy and legal documents work together.
If you’d like to explore the right estate planning strategy for your situation, reach out to us. First, our Client Concierge team will take the time to understand your goals, answer any initial questions and if we’re the right fit, they’ll arrange a free, no-obligation consultation with one of our financial advisers, who can help you explore the strategies best suited to your long-term financial goals.
