Federal Budget Changes & Testamentary Trusts: What Advisers Need to Know

Following the Federal Budget announcement regarding the proposed taxation of discretionary trusts, many advisers and clients have been asking whether testamentary trusts are still worthwhile.  

The short answer is yes.

Given the minimum 30% tax rate will not apply to testamentary trusts (TTs), incorporating TTs into estate planning may become even more valuable.

The Government has announced that, to qualify for the exemption, a TT must be established for "genuine testamentary purposes".

At this stage, however, there is little guidance as to what this will mean in practice. Commentators are suggesting that to be “genuine”, the beneficiaries of the TT must be limited to individuals and income tax exempt entities – and not include companies or other trusts.

Our Current Approach

Pending further details, we are continuing to recommend TTs where they are appropriate, while drafting Wills to provide as much flexibility as possible should the law change.

This includes:

• limiting capital and income beneficiaries to individuals (not companies or other trusts); and
• including a power for the trustee (once the TT is established) to add companies and trusts as beneficiaries, if that is considered appropriate at the time (once the detail surrounding the new rules is known);
• incorporating ‘opt-out’ provisions that allow a beneficiary to elect to receive their inheritance personally rather than through a TT if, at the time the estate is administered, that is their preference based on the law and advice received.

The position is still in a state of flux with no one knowing exactly what the final position will be – but we consider this is the best option at this time.

Opportunity for Reviews

This is an ideal opportunity for advisers to identify clients who may benefit from an estate planning review, particularly those who:

• already have Wills incorporating TTs – to consider whether the trust provisions should be updated in light of the proposed changes (e.g. potentially excluding companies and trusts as beneficiaries and including ‘opt out’ clauses);
• are considering updating their estate planning or have not previously considered incorporating TTs into their Wills.

Importantly, the value of testamentary trusts extends well beyond taxation. They continue to offer significant advantages, including asset protection, flexibility in the management and distribution of wealth, protection for vulnerable beneficiaries, and succession planning benefits across generations.

If you have clients who would benefit from reviewing their estate planning in light of these proposed changes, we would be pleased to assist.

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