Federal Budget Proposal Signals Major Changes for Testamentary Trusts
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Federal Budget Proposal Signals Major Changes for Testamentary Trusts
- Key Takeaways
- Discretionary Testamentary Trusts have long been recommended as a prudent estate planning strategy for asset protection and tax-effective distribution of assets to beneficiaries.
- The Government announced, in the latest Federal Budget, a proposal to impose a minimum 30% tax rate on income from discretionary testamentary trusts established from 1 July 2028, significantly changing their future taxation treatment, while fixed testamentary trusts remain unaffected.
- Testamentary trusts established under a Will do not take effect when the Will is signed, but typically arise only after the Will maker’s death and, in most cases, once Probate has been granted and the executor establishes the trusts, which may occur well after 1 July 2028.
- It is important to ensure your Estate Plan remains flexible and aligned with changing taxation and succession planning considerations.
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Discretionary Testamentary Trusts have long formed an important part of many estate plans and we have recommended them to numerous clients over many years. They remain a prudent strategy for asset protection and tax effective distribution of assets to beneficiaries under the law as it has stood for many decades.
As part of the Federal Budget released this month, the Government announced a proposal to impose a minimum tax rate of 30% on the income of discretionary testamentary trusts established from 1 July 2028. This represents a significant change in the law on the future taxation treatment of discretionary testamentary trusts. The change does not apply to other forms of testamentary trusts, including fixed testamentary trusts.
At this stage, the legislation has not yet been finalised or passed by Parliament. Accordingly, the information in this update is subject to the final form of the legislation as passed by Parliament.
It is important to note that the testamentary trusts created under a Will do not actually come into existence when the Will is signed. Rather, testamentary trusts generally only come into existence upon the death of the Will maker at the earliest and, more commonly, shortly thereafter when the executor of the estate establishes the testamentary trusts after Probate is granted. Accordingly, testamentary trusts contemplated under a Will may not come into existence until well after 1 July 2028.
In most cases, our Wills include a provision allowing a beneficiary to direct the executor not to transfer some or all of their entitlement under the Will into a testamentary trust. This clause provides beneficiaries with flexibility to decide at the relevant time whether establishing the testamentary trust remains appropriate, taking into account the taxation and other implications applying at that time.
In some circumstances, clients have instructed us not to include this flexibility. This may occur, for example, where a beneficiary is considered too young or inexperienced to manage an inheritance independently, or where the client specifically wishes to ensure assets remain protected within a Testamentary Trust structure regardless of the beneficiary’s preference. Under the proposed changes, discretionary testamentary trusts of this nature established after 1 July 2028 may become subject to the proposed minimum 30% tax rate.
In light of this significant proposed change to the taxation treatment of discretionary testamentary trusts, now may be an opportune time to review your Wills and broader estate planning arrangements. We have reviewed many Wills that require assets to be transferred into a discretionary testamentary trust and therefore may not provide the same degree of flexibility under the proposed regime.
If you are uncertain whether your current arrangements may be affected, we would be pleased to review your Will and advise whether any changes should be considered. Once the proposed legislation is finalised, we will also be able to provide more specific recommendations as to whether amendments to your Estate Plan or Will may be desirable or necessary.
Key Takeaway
While the proposed changes are not yet law, they highlight the importance of ensuring your Estate Plan remains flexible and aligned with evolving taxation and succession planning considerations. Reviewing your arrangements now may help avoid unintended outcomes for beneficiaries in the future.
To arrange a confidential review or discuss your Estate Planning arrangements, please contact Anna Huang and our Wills & Estates team on (07) 3220 1144 or via email at email@hillhouse.com.au.
