What’s Changing? The 2026 Federal Budget Proposals

What You Need to Know About the Latest Changes

At Eastern Hill Estate Planning, we know that planning for your family’s future is one of the most important decisions you’ll ever make. For many Australians, a testamentary trust has long been a powerful tool to protect assets, provide for loved ones, and manage tax outcomes. But with recent government announcements, you may be wondering: is a testamentary trust still the right choice for your estate plan?

Let’s break down what’s changing, what’s staying the same, and what it means for you.

What is a Testamentary Trust?

A testamentary trust is a trust established by your will, which comes into effect after you pass away. Instead of assets passing directly to your beneficiaries, they are held in trust and managed by a trustee (someone you choose) for the benefit of your loved ones.

Why do people use testamentary trusts?

• Asset protection: Safeguard inheritances from bankruptcy, divorce, or spendthrift beneficiaries.

• Tax flexibility: Distribute income to family members in a tax-effective way (especially to minor children).

• Control: “Rule from the grave” by setting conditions on how and when assets are distributed.

What’s Changing? The 2026 Federal Budget Proposals

The Federal Government has announced major changes to the way discretionary trusts—including testamentary trusts - will be taxed from 1 July 2028:

• Flat 30% Tax Rate: All income earned by discretionary trusts will be taxed at a minimum of 30%, regardless of the beneficiary’s personal tax rate.

It appears that an unintended consequence is that Special Disability Trusts will also be subject to the flat 30% tax rate.

• No Refunds for Lower Taxpayers: If a beneficiary’s personal tax rate is below 30%, they won’t get a refund of the difference.

• Existing Testamentary Trusts Protected: Trusts already in existence (where the will-maker has died before 12 May 2026) will not be affected by these changes.

• Uncertainty for Minors: It’s not yet clear whether the current tax benefits for minor children (who can currently be taxed as adults on trust income) will continue.

What Does This Mean for You?

1. Asset Protection Remains Strong

The good news is that testamentary trusts will continue to offer robust protection for your family’s inheritance. They can help shield assets from relationship breakdowns, creditors, and ensure your wishes are followed—even if your beneficiaries face unexpected life events.

2. Tax Benefits May Be Reduced

The proposed changes mean that, for many families, the tax savings from a testamentary trust may be less significant than before—especially for adult beneficiaries on low incomes or retirees. The big question is whether minor children will still be able to receive income at adult tax rates. If this is preserved, testamentary trusts will remain highly attractive for families with young children.

3. Flexibility is Key

Given the uncertainty, it’s more important than ever to build flexibility into your will. At Eastern Hill Estate Planning, we recommend including optional testamentary trusts—so your executor and family can decide what’s best when the time comes, based on the rules in place.

4. No Need to Panic

There’s no need to rush to change your will right now. The new rules won’t come into effect until July 2028, and there may be further changes or clarifications before then. However, if your will is more than a few years old, or doesn’t allow for optional trusts, it may be a good time for a review.

So, Should You Include a Testamentary Trust?

In most cases, yes—especially if:

• You want to protect your children’s inheritance from life’s uncertainties.

• You have young children or grandchildren who may benefit from tax-effective income.

• You want to provide for vulnerable beneficiaries, such as those with disabilities.

• You value flexibility and control over how your estate is managed.

But:

If your estate is straightforward, your beneficiaries are all adults with stable circumstances, and tax savings are not a priority, a simple will may be sufficient.

Our Advice

Testamentary trusts remain a valuable estate planning tool, even as the tax landscape changes. The non-tax benefits—asset protection, flexibility, and control—are as important as ever.

If you’re unsure what’s right for your family, we’re here to help. At Eastern Hill Estate Planning, we’ll guide you through your options, explain the latest changes in plain English, and help you create a plan that gives you peace of mind.

Contact us today to book your estate planning review.