# The "death tax" that wasn't: Government exempts testamentary trusts from the new 30% minimum tax

What the 18 June announcement means for families planning to pass wealth to the next generation --- When the Federal Budget landed on 12 May 2026, it delivered a package of trust and capital gains tax changes that, in our view — and in the view of much of the business community — are poor policy that we don't support.

The centrepiece was a new 30% minimum tax on the taxable income of discretionary trusts, due to start from 1 July 2028, sitting alongside a separate overhaul of the capital gains tax discount. For the many business owners and families who use a discretionary (family) trust entirely legitimately — to manage how and when tax is paid, protect hard-won assets, and provide for the next generation — the trust measure landed as a serious and unwelcome change, and the pushback from the business community has been loud and, frankly, justified.

Within that broader package sat a sharper, more specific alarm: what the change might do to the discretionary testamentary trust, one of the most common and useful tools in a well-drafted will. That is the part the Government has just moved on — a rare piece of good news in a package we'd otherwise be glad to see rethought — and it's the focus of this article. On Thursday 18 June 2026, the Government moved to settle that concern. Following consultation after the Budget, the Prime Minister 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. In his words, the Government wanted to put it "beyond doubt" that there is no tax on inheritances or deceased estates.For our clients who are thinking about how their wealth passes to children and grandchildren, this is welcome news. But it is not the end of the story, and the detail matters.

Here is what actually happened, what it means, and what you should — and shouldn't — do about it.

First, what is a testamentary trust, and why do families use them? A testamentary trust is simply a trust that is created by your will and comes into existence when you die. Instead of your assets passing directly to a beneficiary as a lump sum, they pass into a trust that a trustee (often the beneficiary themselves, or a trusted family member) controls for the benefit of your chosen beneficiaries.Think of it as a protective wrapper around an inheritance.

Families use them for reasons that have very little to do with tax:- Protecting a beneficiary who is young, vulnerable, going through a relationship breakdown, or not great with money.- Asset protection — keeping an inheritance out of reach if a child is later sued or runs into financial trouble in business.- Keeping wealth in the bloodline across divorces and second marriages.- Flexibility in how income is shared among children and grandchildren.

There is also a long-standing tax feature: income from a testamentary trust distributed to a minor (for example, your grandchildren) is taxed at normal adult rates rather than the punitive minor's tax rates that normally apply. That's a genuine benefit, but for most families it sits well behind the protection and control reasons above.

What the Budget originally proposed — and the problem it created

The Budget's headline measure was a 30% minimum tax, paid at the trustee level, on the income of discretionary trusts from 1 July 2028. A number of trust types were carved out from the start — fixed and widely held trusts, complying super funds, special disability trusts, deceased estates and charitable trusts. The problem was in the fine print. The original carve-out for testamentary trusts was narrow: it only covered income from the assets of discretionary testamentary trusts that already existed at the time of the announcement (12 May 2026).Read that carefully, because the gap was significant. If you had already died and your testamentary trust was up and running, you were protected. But if you were still alive — which describes almost everyone with a testamentary trust clause sitting in their will — your trust didn't exist yet.

On the Budget wording, a testamentary trust created after 12 May 2026 looked like it would be fully exposed to the 30% tax. In practical terms, that meant millions of Australians with perfectly ordinary wills containing testamentary trust provisions faced the prospect of either rewriting their estate plans or leaving their families with a future tax problem. Understandably, the estate-planning and advice community pushed back hard, and a Senate inquiry took submissions.

What the Government announced on 18 JuneThe Government listened, at least in part. The revised position is considerably more generous:-

• All types of discretionary testamentary trust will be exempt from the 30% minimum tax — not just those existing on Budget night — provided they are established for genuine testamentary purposes.

• The exclusion is limited to income from the assets of the deceased estate — that is, the wealth that actually came from the person who died.

• For testamentary trusts established on or after 1 July 2028, the exemption will only apply to trusts that can only benefit individuals and income-tax-exempt entities (for example, charities) — a guard against the structure being used to funnel income to companies to dodge the tax.The Prime Minister framed it plainly: there is no tax on inheritances or deceased estates, and this step makes that explicit.

The important caveats — this is not yet locked in - We always tell clients to separate an announcement from the law, and this is a textbook case for that discipline. It's still a proposal. Unlike the small business CGT change announced the same day — which the Treasurer said is ready to be legislated and folded into the Bill currently before the Senate — the testamentary trust exemption is not in that first tranche. The Government will release a separate consultation paper on the trust legislation, with the integrity rules to be worked through. In other words, the principle is settled but the drafting is not."Genuine testamentary purposes" is undefined. This is the phrase that will do a lot of heavy lifting, and right now nobody knows exactly where the line sits. The ordinary, sensible reasons families set up testamentary trusts — protecting children, asset protection, keeping wealth in the family — should comfortably qualify, but until we see the legislation, that is an expectation rather than a guarantee.

• It only covers estate assets.

• The exemption applies to income from the assets that came from the deceased estate. If a testamentary trust later has other money injected into it, or builds up its own separate assets, the treatment of that income is a question the consultation will need to answer.

• Capital gains are a separate issue.

• This exemption is about the 30% minimum tax on trust income. Sitting alongside it is a completely separate Budget proposal to replace the 50% CGT discount with cost-base indexation, plus a 30% minimum tax on net capital gains, from 1 July 2027.

That change affects how inherited assets — investment properties, share portfolios — are taxed when they are eventually sold, whether or not a testamentary trust is involved. The testamentary trust exemption does not switch that off.

What this means for you, and what to do now

If you have a will with testamentary trust provisions — or you've been told you should consider one — here is the calm, sensible response.

Don't panic-restructure. The single worst outcome would be tearing up a sound estate plan in reaction to a measure that has now been substantially wound back and isn't yet law. The protective and asset-protection benefits of testamentary trusts haven't changed.

Do make sure your will is flexible. The trusts that will weather this transition best are the ones drafted with flexibility — giving executors and trustees room to respond to the final rules once we see them. A modern, well-drafted testamentary trust clause is more valuable now, not less.

Do think about timing and structure together. With the testamentary trust exemption, the broader trust minimum tax, and the separate CGT changes all moving at once, the interactions matter. The right structure for one family is the wrong structure for another, and getting it wrong is expensive.

Do keep your estate plan and your financial plan talking to each other. Your will, your superannuation death benefit nominations, your insurance and your investment structures all need to point in the same direction. This is exactly the kind of moment where they drift

out of alignment.

How we can help

At Wealth Effect Group, intergenerational wealth transfer is core to what we do for families in the second half of their working lives and into retirement. We work alongside your estate-planning lawyer and accountant to make sure your structures are sound, your wishes are protected, and your plan is built to flex as these reforms are finalised. If you'd like us to review how these changes interact with your situation, get in touch for a conversation.---

Book a 15 min Consult

*This article is general information only and was prepared on 20 June 2026 based on Government announcements made on 18 June 2026. The measures described are proposed and not yet law, and the detail may change through consultation and the legislative process. It does not take into account your personal objectives, financial situation or needs, and it is not personal financial, tax or legal advice. You should seek advice tailored to your circumstances before acting.**Wealth Effect Group — Andre Dirckze is an Authorised Representative (AR 395157) of Boston Reed Ltd (AFSL 225738).*