This article was written by Grace Blake Solicitor at W & G Lawyers.
Recent headlines surrounding the federal Budget left many Australian families concerned about the future of their estate planning. With the government proposing a new 30% minimum tax on discretionary trusts, many people questioned whether one of the most powerful protective structures available, the Testamentary Trust, was about to lose its primary financial advantages.
Fortunately, the government has officially confirmed that all types of discretionary testamentary trusts will be exempt from the proposed 30% minimum trust tax.
This announcement is a monumental win for everyday families. It ensures that Testamentary Trusts remain one of the most effective, tax-positive vehicles for protecting and passing down generational wealth.
This article explains how the exemption works, why this structure is uniquely beneficial under Queensland law, and how it can safeguard your family’s financial future.
How a Testamentary Trust Differs from a Family Trust
A common misconception is that all discretionary trusts are treated equally. However, a Testamentary Trust is fundamentally different from a standard family trust set up during your lifetime:
- Lifetime Family Trusts: Established while you are alive, these structures will be subject to the newly proposed trust tax regulations.
- Testamentary Trusts: Created strictly within a person’s Will, a Testamentary Trust only comes into existence after the asset owner passes away.
Because a Testamentary Trust is established via a Will, it retains tax treatment that cannot be replicated by any other legal or financial structure in Australia.
The Key Benefit: Adult Tax Rates for Minors
The most significant financial advantage of a Testamentary Trust revolves around how income is distributed to minors (children or grandchildren under the age of 18).
Normally, if a minor receives investment income from a standard family trust or direct investment, they are subject to penalty tax rates. These penalty rates can climb as high as 66% on any income exceeding a few hundred dollars.
However, under a Testamentary Trust, the tax rules change favourably:
- Income generated by the inherited assets and distributed to minors is taxed at adult marginal rates.
- This allows beneficiaries to utilise the standard adult tax-free threshold.
- In real terms, this means up to approximately $18,200 per child, per year, can flow through to your children or grandchildren effectively tax-free to pay for education, healthcare, and everyday living expenses.
When multiplied across several children or grandchildren, the annual tax savings for a family are substantial.
True Generational Protection
The benefits of a Testamentary Trust extend far beyond immediate tax savings. Testamentary trusts can provide long-term asset protection and wealth management across multiple generations. The duration of a Testamentary Trust depends on its drafting and the applicable perpetuity laws, which vary between Australian jurisdictions.
This extended timeframe allows you to protect your family asset line well into the future, ensuring your great-grandchildren can still benefit from the structure you establish today.
Beyond tax streaming, keeping assets within a Testamentary Trust provides a robust shield against external risks, including:
- Relationship Breakdowns: Protecting an inheritance from being divided in family law property settlements if a beneficiary separates or divorces.
- Bankruptcy and Litigation: Shielding trust assets from business debts, commercial claims, or personal bankruptcy.
- Vulnerable Beneficiaries: Ensuring funds are managed responsibly by appointed trustees if a beneficiary suffers from addiction, mental health challenges, or financial instability.
The Risk of Direct Distribution: Losing Control to the Public Trustee
To truly understand the value of a Testamentary Trust, it is helpful to look at what happens to an inheritance if you don’t have one.
If you leave assets directly to minor children or grandchildren in a standard Will without a trust structure, those minors cannot legally hold or manage substantial property or funds until they turn 18. In Queensland, if a Will does not specify a private trustee or a protective trust structure to manage those funds, the estate’s capital often must be handed over to the Public Trustee to hold on behalf of the minor children.
This can create significant, unintended hurdles for your surviving family, including:
- Loss of Control: Your family loses autonomous control over how, when, and where the funds are invested.
- Strict Disbursement Approvals: Every time money is needed for the children’s expenses, such as private school fees, medical bills, or extracurricular activities, an application must be made to the Public Trustee. They hold the ultimate discretion over whether to release the funds, which can lead to delays and frustration during an already difficult time.
- Mandatory Release at 18: Once the child turns 18, the Public Trustee releases the entire lump sum directly to them. Most parents and grandparents prefer to defer significant wealth distribution until a beneficiary is older and more financially mature.
By implementing a Testamentary Trust, you hand-pick the trustees (such as a trusted family member, partner, or professional) who will manage the wealth seamlessly, ensuring flexible, immediate access to funds for the children’s upbringing without government intervention.
How W & G Lawyers Can Help
With the 30% minimum trust tax exemption locked in, interest in Testamentary Trusts is growing rapidly. Implementing these structures requires precise legal drafting to ensure it achieves your specific family objectives.
At W & G Lawyers, we provide practical, clear advice to ensure your estate plan operates exactly how you intend. We can assist you to:
- Draft or restructure your Will to include a tailored testamentary trust;
- Maximise tax-efficiency for your children, grandchildren, and future generations;
- Establish asset protection mechanisms to shield your estate from family law claims or bankruptcy; and
- Align your superannuation and insurance nominations seamlessly with your broader trust structures.
If you want to ensure your hard-earned wealth is fully protected for the long term, we recommend reviewing your estate planning arrangements early to secure your family’s future.
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Disclaimer
This article is general information only and does not constitute legal advice under Australian law. For advice specific to your situation, please contact W & G Lawyers. For further details, please click here to view our disclaimer.