What the 2026 Budget means for your estate plan

Last night's Budget changed the tax settings for testamentary trusts and capital gains simultaneously.

That may not sound like dinner party conversation.

But for many families, the estate plan sitting in the filing cabinet no longer reflects the world it was written for.

That is not a reason to panic. It is a reason to act.

Testamentary trusts: the tax settings shifted, the case for them did not

For years, financial advisers and lawyers have recommended testamentary trusts to clients for two reasons: tax efficiency and asset protection. The Budget has affected the first. It has not touched the second.

From 1 July 2028, discretionary testamentary trusts created after 12 May 2026 will be subject to a 30 per cent minimum tax on income. The trustee pays at the trust level. Beneficiaries receive non-refundable credits.

For clarity, a testamentary trust is not created when the will is signed. It comes into existence when the testator dies. A will written ten years ago that provides for a discretionary testamentary trust offers no protection from the minimum tax if the client dies after last night. The date of the will is irrelevant. The date of death is what determines the tax treatment.

But here is what the minimum tax does not change.

A discretionary testamentary trust remains one of the most effective asset protection structures available under Australian law. A beneficiary's interest is generally not an asset of that beneficiary for bankruptcy purposes. In family law proceedings, a discretionary interest is harder to treat as property of the relationship than a direct inheritance. A child going through a divorce does not automatically bring the trust assets into the settlement.

For families with children in business, in professional practice, or in relationships that carry some risk, this protection is not incidental. It is the point. No other structure delivers the same combination of creditor protection, family law protection, and flexibility to respond to changing circumstances over time.

Fixed testamentary trusts are exempt from the minimum tax. But they are a poor substitute for most families. Fixed entitlements cannot be redirected when circumstances change. The asset protection is weaker because a fixed entitlement is more readily characterised as property of the beneficiary. For most families, a fixed structure trades the most valuable features of a testamentary trust for a tax saving. That is rarely the right exchange.

The income tax advantages of discretionary testamentary trusts are reduced under the new regime. The asset protection advantages are not. For most families who have built something significant, the structure remains worth having.

Not as a tax trick. As a protective structure around inherited wealth.

Capital gains: timing is now a front-line issue

The CGT changes are significant and underappreciated in the early Budget commentary.

From 1 July 2027, the 50 per cent CGT discount is replaced by cost base indexation and a 30 per cent minimum tax on net capital gains. To be clear on what that means: the indexation applies to the cost base going forward from 1 July 2027. Gains already accrued before that date continue to attract the 50 per cent discount under the transitional arrangements.

This applies to individuals, trusts and partnerships, including assets held before 1985.

The death rollover survives intact. Assets passing to beneficiaries on death still roll over at cost base. But beneficiaries who later sell will face the new regime on gains accruing from 1 July 2027. For families with long-held property, farms, business assets, private company shares or trust assets, valuation and timing are now front-line estate planning questions, not afterthoughts.

Pre-CGT assets: a hard deadline

Assets acquired before 20 September 1985 have been exempt from CGT on gains arising before 1 July 2027. After that date the exemption is gone.

For clients sitting on large unrealised pre-CGT gains, 30 June 2027 is a hard planning date. Whether to realise before then, hold and index going forward, or retain the asset for family reasons is a modelling question. It is not a decision to defer.

Lifetime gifting: when the tax conversation becomes a family conversation

The CGT changes will accelerate conversations about giving during life rather than waiting until death. For some clients, realising gains before 1 July 2027 while the 50 per cent discount still applies, and transferring the proceeds to family members now, is a legitimate and timely option.

But lifetime gifting creates an estate planning problem that is often overlooked. If a parent gives $500,000 to one child during life and nothing to another, the will needs to deal with that clearly. Was it a gift? A loan? An advance on inheritance? Should it be equalised later, or deliberately not?

A will that does not address lifetime gifts can create exactly the dispute the parent was trying to avoid. Family memory is unreliable. Estate documents should not be.

Those questions are where tax planning becomes family planning.

Superannuation

Division 296 is now law. For clients with balances above $3 million, estate planning and superannuation planning are inseparable. The will and the death benefit nomination need to be reviewed together.

Who should act now

Any client with a discretionary testamentary trust in their will, pre-CGT assets, significant unrealised capital gains, superannuation above $3 million, children in business or professional practice, or lifetime gifts already made to some children but not others should be reviewing their estate plan against the new settings.

The documents are not invalid. The assumptions behind them may have changed.

If you have clients in that position, now is the time to refer them for an estate planning review.

Rachael Rofe is a wealth transfer lawyer. She advises families and their advisers on wills including testamentary trusts, lifetime giving to family, structured philanthropic giving and succession. rachaelrofe.com.au