Why Testamentary Trusts Remain One of Australia's Most Effective Estate Planning Strategies
The 2026 Federal Budget reignited debate about trusts, tax planning and wealth structures.
With proposed changes targeting certain trust arrangements, many Australians began asking whether testamentary trusts still offer meaningful benefits or whether they have become less effective as an estate planning tool.
For most families, the answer remains clear.
Despite the discussion surrounding trust taxation, testamentary trusts continue to be one of the most powerful estate planning strategies available for protecting beneficiaries, preserving family wealth and creating flexibility for future generations.
Importantly, much of the public discussion following the Budget focused on discretionary trusts used during a person’s lifetime. Testamentary trusts, which arise through a Will following death, serve a very different purpose and continue to play an important role in estate planning.
What Is a Testamentary Trust?
A testamentary trust is a trust established under a Will that comes into existence after the death of the Will-maker.
Rather than assets passing directly to beneficiaries, assets are transferred into a trust and managed by a trustee for the benefit of nominated beneficiaries.
The trust can hold a wide range of assets, including:
Investment properties
Share portfolios
Managed funds
Cash investments
Business assets
The trust structure may continue for decades, allowing assets to be managed and distributed according to the family’s circumstances over time.
Why Are Testamentary Trusts So Popular?
Many Australians spend years building wealth but devote little attention to what happens after they are gone.
A simple Will may transfer assets to beneficiaries, but it often provides little protection once those assets are inherited. Families often underestimate how broader financial advice, estate planning and tax planning strategies work together when passing wealth between generations.
A testamentary trust can provide significant advantages, including:
Asset protection
Tax planning opportunities
Protection for children and vulnerable beneficiaries
Greater flexibility in managing inheritances
Family wealth preservation
Succession planning benefits
For many families, these benefits make testamentary trusts an attractive alternative to direct inheritance.
What Changed Following the Federal Budget 2026?
The 2026 Budget created uncertainty by proposing a 30% minimum tax on discretionary trusts from 1 July 2028.
As media attention focused on discretionary trusts and income distributions, many Australians questioned whether testamentary trusts would also be affected, and that uncertainty stemmed from what the budget proposes to change after the Budget.
However, it quickly became apparent that testamentary trusts serve a fundamentally different purpose from many discretionary trusts established during life.
Testamentary and Discretionary Trusts Were Never Just About Tax
One of the biggest misconceptions surrounding testamentary trusts is that they exist primarily to minimise tax.
In reality, most testamentary trusts are established for broader estate planning reasons, including:
Protecting beneficiaries from future risks
Preserving family wealth
Managing inheritances responsibly
Supporting children and vulnerable beneficiaries
Creating flexibility for future generations
Facilitating intergenerational wealth transfer
Following consultation with professional bodies, estate planning practitioners and industry groups, it became increasingly clear that genuine testamentary trusts were not the primary focus of the government’s proposed trust reforms. The emerging integrity measures appear more directed at preserving legitimate estate planning uses while potentially narrowing tax advantages for some discretionary testamentary trusts under the new reforms.
Fixed testamentary trusts appear to be excluded from the new minimum tax, while some existing testamentary trusts, including income from existing discretionary testamentary trusts, may be treated more favourably than new arrangements.
For many advisers and estate planning professionals, this simply reinforced what has always been true: testamentary trusts are first and foremost an estate planning tool rather than a tax planning vehicle.
What Does a Genuine Estate Planning Purpose Look Like?
There is no formal legal test that distinguishes a “genuine” testamentary trust from a “non-genuine” testamentary trust.
However, when considering whether a testamentary trust serves a legitimate estate planning purpose, the focus is generally on the practical objectives being achieved.
Example: Family Wealth Protection
Consider a couple with a $4 million estate comprising investment properties, shares and other investments.
Their Will establishes separate testamentary trusts for their children and future grandchildren.
The trusts are designed to:
Protect inherited assets from future relationship breakdowns.
Preserve family wealth across multiple generations.
Allow assets to continue being professionally managed.
Provide flexibility to support beneficiaries as circumstances change.
In this scenario, the trust serves clear estate planning, asset protection and succession planning objectives.
Example: Why Structure Matters
By contrast, if a trust arrangement appears to exist primarily to generate tax outcomes without meaningful asset protection, beneficiary protection or succession planning objectives, it may attract greater scrutiny under existing anti-avoidance provisions.
Importantly, the overwhelming majority of testamentary trusts established through professionally drafted Wills are implemented for legitimate estate planning purposes.
Asset Protection: One of the Biggest Benefits
For many families, asset protection is the single most valuable feature of a testamentary trust.
If assets are inherited personally, they may become exposed to:
Bankruptcy
Creditor claims
Business failure
Litigation
Divorce and family law proceedings
By contrast, assets held within a properly structured testamentary trust may provide a greater level of protection against these risks.
For business owners, professionals and families with significant wealth, this benefit alone can justify the inclusion of testamentary trusts within a Will.
Protecting Children and Vulnerable Beneficiaries
Many parents worry about leaving substantial assets directly to children or other beneficiaries who may not be ready to manage them.
A testamentary trust can provide important safeguards where beneficiaries are:
Young children
Individuals with disabilities
Beneficiaries experiencing financial difficulties
Vulnerable family members
Beneficiaries lacking financial experience
Rather than receiving a large inheritance outright, beneficiaries can continue to benefit from trust assets while preserving long-term protection and flexibility. Families using a testamentary discretionary trust to protect vulnerable beneficiaries should review the Will after the Budget to confirm the structure still suits that purpose.
Tax Benefits Can Still Be Significant
Although asset protection is often the primary motivation, testamentary trusts continue to offer important tax planning opportunities, even though under the proposed rules some income may be taxed at the trustee level rather than flowing through entirely at beneficiaries’ marginal rates.
One of the most valuable advantages is that eligible distributions to minor beneficiaries may receive more favourable tax treatment than ordinary family trust distributions.
For families holding income-producing assets such as:
Investment properties
Share portfolios
Managed funds
this can create substantial long-term tax efficiencies.
Beneficiaries may receive non-refundable credits for tax paid by the trustee, which can make tax reporting more complex.
While tax outcomes should never be the sole reason for implementing a testamentary trust, they often form an important part of the overall strategy.
Existing Anti-Avoidance Rules Already Apply
It is important to remember that testamentary trusts remain subject to Australia’s existing tax integrity and anti-avoidance provisions. The practical impact of the Budget changes will depend on the draft legislation. Some proposals may apply at the asset level by reference to when the assets of discretionary testamentary trusts are settled or acquired, so trusts created after 12 May 2026 could face different outcomes from older structures.
This means arrangements that are implemented primarily to obtain unintended tax benefits may still be challenged by the Australian Taxation Office.
For most families, however, the focus should remain on the legitimate estate planning objectives that testamentary trusts were designed to achieve.
When Is a Testamentary Trust Worth Considering?
A testamentary trust may be particularly valuable where:
The estate contains investment assets.
Minor children are involved.
Beneficiaries operate businesses.
Asset protection is a priority.
Blended family arrangements exist.
Family wealth is expected to pass across multiple generations.
Generally speaking, the larger the estate and the more complex the family circumstances, the greater the potential benefits.
Are Testamentary Trusts Still Worth It?
For many Australian families, the answer is yes.
The 2026 Budget may have created uncertainty around trust taxation, but it did not diminish the core benefits that have made testamentary trusts a cornerstone of sophisticated estate planning for decades. Some discretionary testamentary trusts may lose part of their historical tax advantages under the proposed reforms, but that does not remove their broader estate planning value.
When properly structured, testamentary trusts can help families:
Preserve family wealth.
Improve asset protection outcomes.
Create tax efficiencies.
Manage intergenerational wealth transfers.
Provide flexibility long after death. Determining whether a testamentary trust is appropriate often requires personal advice that considers family circumstances, tax outcomes and long-term objectives.
For these reasons, testamentary trusts remain one of the most effective estate planning strategies available.
Frequently Asked Questions
What is a testamentary trust?
A testamentary trust is a trust created under a Will that comes into existence after death and holds assets for the benefit of nominated beneficiaries.
Are testamentary trusts still worthwhile after the 2026 Budget?
In many cases, yes. Testamentary trusts continue to provide significant estate planning, asset protection and tax planning benefits, although the answer may differ between new structures and some existing testamentary trusts, which may be exempt from parts of the new rules depending on the final legislation.
Did the government abolish testamentary trusts?
No. Testamentary trusts remain a recognised and widely used estate planning structure in Australia.
What are the main benefits of a testamentary trust?
Common benefits include asset protection, flexibility, family wealth preservation, beneficiary protection and potential tax advantages. Unlike discretionary structures, fixed trusts give beneficiaries defined interests in income and capital.
Can a testamentary trust protect inherited assets?
Depending on the circumstances and structure used, testamentary trusts may provide a greater level of protection than direct ownership.
Are testamentary trusts only for wealthy families?
No. While larger estates often derive greater benefits, testamentary trusts may be appropriate for a broad range of families depending on their objectives.
Can investment properties be held within a testamentary trust?
Yes. Investment properties are commonly transferred into testamentary trusts and managed for the benefit of beneficiaries.
Should I review my estate plan following the 2026 Budget?
Yes. Significant legislative and taxation developments provide a good opportunity to review your Will and broader estate planning arrangements, and Wills with discretionary testamentary trusts should be reviewed post-budget because the tax treatment of discretionary testamentary trusts may change.
Final Thoughts
Despite the uncertainty created by the 2026 Budget, testamentary trusts remain one of Australia’s most effective estate planning structures.
Their value extends far beyond tax outcomes. They provide families with a flexible framework for protecting beneficiaries, preserving wealth and managing inheritances across generations.
For many Australians, the question is not whether testamentary trusts survived the 2026 Budget. The more important question is whether their current estate plan provides the level of protection their family may need in the future.
At Money Path, we help individuals and families develop comprehensive financial and estate planning strategies designed to protect wealth, support beneficiaries and create lasting financial security across generations.
