The Federal Government has announced a proposed 30% minimum tax on discretionary trust income as part of the 2026 to 2027 Federal Budget reforms. The proposed start date is 1 July 2028, although these measures are not yet law and may change following consultation and the release of draft legislation.
The proposal is aimed at reducing the tax flexibility currently available through discretionary trusts. In particular, it targets the ability to distribute trust income across family members who may be on lower marginal tax rates. For many families, discretionary trusts have historically been used as part of a broader tax planning strategy, allowing income to be distributed between beneficiaries depending on their circumstances each year.
Under the proposed changes, trustees of discretionary trusts would be required to pay a minimum 30% tax rate on the taxable income of the trust, unless a higher tax rate already applies. Beneficiaries would still include trust distributions in their own personal tax returns, but they would receive a non-refundable tax credit for tax already paid by the trustee.
This means the tax outcome may be less flexible than it has been historically. Where income has previously been distributed to beneficiaries on very low marginal tax rates, the benefit of doing so may be reduced. However, this does not necessarily mean discretionary trusts, family trusts or testamentary discretionary trusts are no longer useful. It simply means their role may need to be reconsidered.
For many clients, the value of these structures has never been purely tax driven. Discretionary trusts often sit within a broader wealth planning framework that considers tax, control, asset protection, family succession, investment management and the orderly transfer of wealth between generations.
What does this mean for Wills and testamentary trusts?
A key question for many families is whether these proposed changes reduce the need for testamentary discretionary trusts within their Wills.
The answer will depend on individual circumstances. While the income splitting benefits of testamentary trusts may be reduced under the proposed reforms, the broader estate planning benefits may remain highly relevant. The proposed reforms do not remove the legal and structural advantages that a properly prepared testamentary trust can provide.
A discretionary testamentary trust can still provide flexibility in how inherited assets are managed and distributed. Rather than passing assets directly to a beneficiary in their personal name, assets can be held within a trust structure, with decisions made according to the terms of the Will and the trust deed.
This may be particularly useful where beneficiaries are young, financially inexperienced, in unstable relationships, involved in business, exposed to creditor risk, or may require support managing inherited wealth. It can also be valuable where a family wants to preserve wealth over the long term, rather than having assets pass directly into the personal ownership of the next generation.
Asset protection remains a key benefit
One of the most important reasons to consider a testamentary discretionary trust is asset protection.
Assets held within a properly structured testamentary trust may be better protected from external risks affecting beneficiaries, because those assets are not necessarily owned by the beneficiary personally. This can be particularly important where a beneficiary may be exposed to relationship breakdown, divorce, creditor claims, business failure, insolvency, or other personal financial risks.
For example, where a child inherits assets personally and later goes through a relationship breakdown, those assets may be more exposed. Where assets are instead held within a testamentary trust, there may be greater scope to manage and protect the family wealth, depending on the structure and legal advice received.
Similarly, where a beneficiary owns or operates a business, there may be a risk that personal assets become exposed to creditors if the business experiences financial difficulty. A testamentary trust may help provide a layer of separation between inherited family wealth and the beneficiary’s personal financial risks.
For many families, this asset protection benefit is one of the main reasons testamentary trusts are included in Wills. Even if the tax benefits change, this broader protection may continue to be highly valuable.
Tax planning may still have a role
Although the proposed reforms may reduce the income splitting benefits of discretionary trusts, they may not eliminate them entirely.
A 30% minimum tax rate may still be lower than the highest marginal tax rate for some beneficiaries. This means that, in certain circumstances, there may still be a tax planning benefit where trust income can be distributed in a way that results in a lower overall tax outcome than if assets were held personally by a high-income beneficiary.
The final position will depend on the legislation when it is released. There may also be carve-outs or concessions, including possible special treatment for vulnerable beneficiaries or minors, but these details are not yet known.
This is why it is important not to make rushed decisions based only on the announcement. The proposed rules are not yet final, and the practical impact will depend on the final legislation, the family’s circumstances, the type of trust involved, and the income profile of the beneficiaries.
Family trusts may still remain important
The proposed changes are also relevant for discretionary trusts established during a person’s lifetime, commonly referred to as family trusts or inter vivos discretionary trusts.
These structures are often used for more than income distribution. They can be used to hold investments, protect assets, manage family wealth, support succession planning and provide flexibility across generations.
Family trusts can also be useful where assets are intended to remain outside an individual’s personal estate. This may help reduce the risk of certain assets being exposed to future estate disputes, depending on how the trust is structured and controlled. The source material notes that assets held within trusts are not owned by the deceased personally and may therefore fall outside the pool of estate assets available in a claim for further provision from the estate.
This does not mean family trusts are suitable for everyone. They require proper administration, tax advice, legal advice and ongoing management. However, for families with investment assets, business interests, blended family considerations or a desire to manage wealth across generations, they may continue to play an important role.
Timing is important
One of the most important points is that the proposed reforms are not yet law. Their final form remains uncertain.
This is particularly relevant for people reviewing their Wills. The tax treatment of a testamentary discretionary trust will generally depend on the law in force at the time of death, rather than the law in force when the Will was prepared.
This means existing Wills should not automatically be changed simply because of the proposed tax changes. Removing a testamentary trust from a Will without considering the broader estate planning consequences could result in the loss of important asset protection, control and flexibility.
Instead, Wills and trust structures should be reviewed carefully and in context. The key question is not simply whether the structure produces the same tax outcome as before. The better question is whether the structure still supports the family’s broader objectives.
These objectives may include protecting children, managing wealth for vulnerable beneficiaries, reducing exposure to relationship or creditor risk, supporting intergenerational wealth transfer, and ensuring assets are passed on in a controlled and considered way.
What should clients consider now?
For clients with discretionary trusts, family trusts or testamentary trusts in their Wills, this is an opportunity to review rather than react.
Key considerations may include whether the current structure still reflects the family’s objectives, whether the intended beneficiaries are likely to need asset protection, whether there are business or creditor risks within the family, whether there are blended family or estate dispute risks, and whether the current Will provides sufficient flexibility.
It may also be worth reviewing how investment assets are currently owned. The ownership structure of assets can have a significant impact on tax, control, estate planning and asset protection outcomes. A portfolio held personally may have very different estate planning consequences to a portfolio held in a trust, company, superannuation fund or other structure.
For this reason, estate planning should not be reviewed in isolation. It should be considered alongside investment strategy, superannuation, insurance, debt, tax planning and the broader family wealth plan.
Cadre’s view
At Cadre Capital Partners, we view estate planning as a core part of good financial planning. It is not simply about preparing a Will. It is about ensuring wealth is structured, protected and transferred in a way that reflects the client’s objectives.
The proposed discretionary trust tax changes may reduce some of the historical tax advantages of trust structures. However, they do not remove the need for thoughtful planning. In many cases, the non-tax benefits of trusts, particularly asset protection, flexibility and intergenerational control, may remain just as important.
The key is to avoid making decisions based only on tax headlines. A structure that is less tax effective than it once was may still be valuable if it protects family wealth, supports vulnerable beneficiaries, reduces estate risk or provides greater long-term flexibility.
For clients who already have a discretionary trust, family trust or testamentary trust within their Will, now may be an appropriate time to review how that structure fits within the broader financial plan. For clients who do not yet have these structures in place, it may be worth considering whether they are appropriate, particularly where there are significant assets, business interests, children, blended family issues or asset protection concerns.
If you would like to understand how the proposed trust tax changes may affect your financial plan, investment structures or estate planning arrangements, please contact Cadre Capital Partners. We can work with you and your legal and tax advisers to review your position and ensure your structure remains aligned with your long-term objectives.