Andrew HobbsWealth reporter
FINANCIAL REVIEW Updated Jun 19, 2026 – 8.33am,first published at Jun 18, 2026 – 4.27pm
Testamentary trusts will receive favourable tax treatment permanently after Labor caved to pressure to exempt them from a new tax floor of 30 per cent.
These trusts, known as discretionary testamentary trusts, are written into a person’s will and come into force only upon death. They are often used to distribute income to minors while offering asset protection.
Estate lawyer Tara Lucke welcomed the backdown, saying grieving families shouldn’t have to pay a tax penalty.
They differ from fixed testamentary trusts that have no such asset protection powers.
Critics accused Labor of creating a “death tax” after discretionary testamentary trusts were included in plans for a new minimum tax rate of 30 per cent on trust distributions.
On Thursday, the federal government announced that discretionary testamentary trusts would be excluded on the condition that they did not pay any more to corporate beneficiaries—commonly known as “bucket companies”.
“We have been clear that there is no tax on inheritances or deceased estates, but we are taking this step to put this beyond doubt,” said Prime Minister Anthony Albanese.
To get the protections, trusts would need to be established for “genuine testamentary purposes”, he said.
Specialist estate lawyer Tara Lucke said Labor’s change of heart was welcome and paved the way for ordinary families to keep the tax and asset protection benefits of these types of trusts.
“Everyday families who are using a testamentary trust wouldn’t be distributing to companies and other trusts,” she said.
“Orphans, double and single orphans, low-income earners, special needs beneficiaries will be taxed on the income generated from their inheritance as if they had earned that income directly, so they’ll get the full tax-free threshold,” Lucke said. “That basically means the first $22,000 from the income generated by the inheritance will be tax-free, and then standard marginal rates apply from there.”
Wealthy families are more likely to be affected by the ban on distributions to bucket companies from trusts.
They also have bigger problems because distributions from most kinds of discretionary trusts are set to be hit with double taxation under separate yet related changes contained in the budget, said Arnold Bloch Leibler partner and lawyer Christine Fleer.
“The decision to consult and reconsider the announcement in relation to testamentary trusts is a welcome recognition that tax policy works best when informed by those affected,” she said.
“We look forward to that same willingness to listen being applied to the consequences for philanthropy, entrepreneurs and family business.”
Fleer said there was “no issue with a 30 per cent tax rate minimum”. “There’s just an issue with penalty tax rates and the unwinding of things that have existed for good reason for a long time.”
Distributing income to minors
The government’s about-face also preserves the special power of discretionary testamentary trusts to distribute income to minors at adult tax rates – rather than the penalty rates that apply to distributions from other trusts to children. It is a key reason that many people set them up.
Lucke said that concession was important because, in circumstances where both parents died, orphans should not be required to pay penalty tax rates on a measure that was designed to target high-income earners.
“[Testamentary trusts] are a really powerful vehicle if you can actually have the income generated from an inheritance used tax effectively to benefit not only the surviving spouse but the minor children,” she said.
“I would say those types of families do probably need a bit of concessional tax treatment when they’ve lost a breadwinner and are going through the worst time of their lives.”
The backflip was also a win for people on lower marginal tax rates who still wanted to take advantage of the asset protection benefits of testamentary trusts, said Fleer.
“The [budget] announcement really could have hurt the people on marginal tax rates lower than 30 per cent,” she said.
Both Lucke and Fleer said the asset protection qualities of discretionary testamentary trusts were the main reason people set them up.
Lucke said these were used to ensure that inheritances benefited the children of the deceased from that relationship, not a new spouse, as well as preventing minors getting their hands on a large inheritance and frittering it away.
“The proposed minimum tax on testamentary trusts would have meant people were paying a tax penalty for getting that protection, so now we’re going back to not penalising the income on the inheritance,” said Lucke.
The asset protection qualities of discretionary trusts stem from the fact that beneficiaries do not have a legal entitlement to any benefit. That means creditors cannot access the assets in the event of a dispute.
Andrew Hobbs covers self-managed superannuation funds (SMSFs), financial planning, retirement, inheritance, tax, personal finance and, sometimes, the Perth Bears. He has been a financial journalist for 30 years, previously at Bloomberg and AAP.