Last week brought welcome clarity for the relatively small group of Australians with well-structured estate plans: the government has confirmed that testamentary discretionary trusts (TDTs) will retain their existing tax-advantaged status. The changes floated in earlier budget commentary — which would have significantly weakened one of the most powerful estate planning tools available — have been ruled out.
For families already using TDTs, that’s a straightforward good news story. But for the far larger group of Australians who don’t yet have proper estate plans in place, the recent media coverage may have done some quiet good. It surfaced a structure most people had never heard of — and made it worth asking whether their own arrangements are as effective as they could be.
What a testamentary trust actually is
A testamentary discretionary trust is a trust established by your will. It doesn’t exist while you’re alive — it comes into being when you die and the assets you leave behind flow into it rather than directly to your beneficiaries.
Once it’s operating, a trustee (often a family member or professional) manages the assets and decides how income and capital are distributed among the beneficiaries you’ve named — usually your spouse, children, grandchildren, and sometimes a broader class of family members.
Two things are worth understanding upfront:
- A TDT is set up by your will. It’s part of your estate plan, not something you create during your lifetime. It typically requires specialist estate planning legal drafting — a “$99 will kit” doesn’t include one.
- It’s discretionary. The trustee has flexibility to direct income and capital to different beneficiaries in different years, based on their circumstances at the time. That flexibility is where the tax and asset-protection benefits come from.
The tax advantage that makes TDTs valuable
Under Australian tax law, minors (children under 18) who receive unearned income — like distributions from a family trust — are taxed at penalty rates. The tax-free threshold for these amounts is only $416 per year, and above that, rates escalate quickly to 66% and beyond. The rule is designed to stop parents from splitting their own income to their kids to reduce tax.
Testamentary trusts are the major exception. Income from a TDT paid to a minor is taxed at normal adult marginal rates, including the full $18,200 tax-free threshold and the standard progressive scale above it. This is what tax law calls “excepted trust income.”
The practical difference is significant. Consider a grandparent who leaves $1 million in growth assets to a TDT for the benefit of a young grandchild. If that trust generates $50,000 of income in a year and pays it to the grandchild:
| Structure | Tax on $50,000 income to a minor |
|---|---|
| Distribution from a regular family trust | ~$32,900 (penalty rates) |
| Distribution from a testamentary trust | ~$6,700 (adult marginal rates + LITO) |
That’s a difference of around $26,000 per year in this example — money that stays with the family rather than going to the ATO. Over the ten or fifteen years until the child reaches adulthood, the compounding effect is meaningful.
The concession was tightened in 2020 to close a specific loophole — you can no longer inject new assets into a TDT after it’s established and claim excepted trust income on the earnings of those assets. The excepted trust income concession now applies only to income earned on assets that came directly from the deceased estate. That tightening was sensible; removing the concession entirely, as had been floated, would have been a different matter.
What the ruled-out changes would have meant
The proposals that emerged in recent budget commentary would have removed or substantially cut back the excepted trust income concession for TDTs. In practical terms, that would have meant income distributed from a TDT to minor beneficiaries being taxed at the same penalty rates as any other family trust distribution — eliminating the core reason many families use these structures.
For families with existing TDTs, this created real uncertainty. For families considering setting one up, it made the case harder to justify. The government’s confirmation that the status quo will be retained restores the planning certainty these structures need.
Beyond tax: the other reasons TDTs matter
Tax efficiency is the most visible benefit, but it’s not the only one. Well-drafted TDTs offer several structural advantages that pass directly to your beneficiaries:
- Asset protection. Assets held in a TDT are generally not accessible to a beneficiary’s creditors or trustee in bankruptcy. For beneficiaries in high-risk occupations — surgeons, business owners, directors — this is significant.
- Protection in family law disputes. Depending on how the trust is structured and used, assets in a TDT can carry stronger protection in the event of a beneficiary’s divorce than assets held personally. This is not absolute — the Family Court can look through structures — but it’s a meaningful factor.
- Support for beneficiaries who need it. If a beneficiary has a disability, addiction, gambling issues, or simply lacks the maturity to manage a large inheritance, a TDT lets a trustee provide for their needs without handing them a lump sum outright.
- Multi-generational planning. A TDT can operate for decades, letting income be distributed to children in the early years and grandchildren later. It becomes a wealth transfer vehicle across two or three generations rather than a one-off inheritance event.
Who benefits most from a TDT
TDTs are not for everyone. Setting one up costs more than a standard will, and administering one requires ongoing engagement with a trustee, accountant, and sometimes a solicitor. They make sense when the benefits clearly outweigh the additional complexity.
The typical profile of someone who benefits:
- Estate value above roughly $1 million — the tax efficiency and asset protection benefits need enough underlying capital to justify the setup and administrative overhead
- Beneficiaries who are (or will be) minors — the tax advantage is most valuable when children or grandchildren will receive distributions
- Beneficiaries in high-risk occupations or complicated family situations — the protection features matter
- Business owners, SMSF trustees, or people with concentrated wealth — the flexibility to manage distributions over time is more valuable when the estate isn’t just cash
- Blended families — TDTs can help direct benefits to specific children from prior relationships while still providing for a surviving spouse
If none of those apply and your estate is straightforward, a well-drafted standard will and the other essential estate planning documents may be enough. If any of them do apply, a TDT is worth considering.
What a TDT doesn’t do
It’s worth being clear about the limitations:
- A TDT doesn’t cover your superannuation unless your super death benefit is directed to your estate via a binding nomination. Super sits in trust already and is governed by separate death benefit rules. Combining the two requires deliberate coordination.
- A TDT doesn’t override family provision claims. In every Australian state, eligible people (usually spouses, children, and in some cases financial dependants) can challenge a will if they’ve been left out or inadequately provided for. Sound estate planning can reduce this risk but not eliminate it.
- A TDT is only as good as the trustee you nominate. Choosing the right trustee — someone with the judgment, longevity, and impartiality to run the trust properly — is one of the most important decisions in setting one up.
When to consider one
Any of the following are natural triggers to review whether a TDT fits your circumstances:
- You’ve drafted your first will or updated an old one. If your estate value has grown substantially, or your family circumstances have changed, the plan that worked five years ago may no longer be the right one.
- You’ve had children or grandchildren. The tax advantage is most compelling when minor beneficiaries are in the picture.
- You’re planning intergenerational wealth transfer. If the goal is to move meaningful assets down to the next generation over time — rather than in a single event — a TDT is often central to the strategy.
- You’re a business owner or SMSF trustee. The structural interaction between your business/super and your estate is worth mapping deliberately.
Talk to us before you finalise your estate plan
Getting a TDT right requires coordination between a financial planner, an estate planning solicitor, and often an accountant. Our estate planning and financial planning teams can work through the numbers for your situation, walk you through how a TDT would interact with your super, business interests, and existing structures, and connect you with the right legal expertise to draft the documents themselves.
If the recent media coverage has prompted you to think about this — even if the outcome has restored the status quo — that instinct is worth acting on. Estate planning is one of those areas where the decision to postpone is quietly the most expensive one.