Proposed Trust Tax Changes and the Impact on Vulnerable Australians

On 19 May 2026 I featured in The Australian discussing concerns about the Federal Government’s proposed changes to the taxation of testamentary discretionary trusts and the potential impact on vulnerable Australians.

Much of the public commentary surrounding these reforms has focused on high wealth families and tax minimisation. In practice, however, testamentary discretionary trusts have long been used by ordinary Australian families for legitimate estate planning purposes, particularly where there is a need to protect vulnerable beneficiaries after the death of a parent or loved one.

A testamentary discretionary trust is a trust established under a Will. These structures are commonly used because they provide flexibility, asset protection and the ability for a trusted person to make decisions for beneficiaries when the person who would otherwise have made those decisions is no longer alive.

In many cases, these trusts are established for the benefit of minor children, beneficiaries living with disability, low income beneficiaries or young adults who may not yet have the maturity or financial capacity to manage significant inheritances themselves.

Historically, Australian tax law has recognised the unique nature of testamentary trusts by allowing eligible beneficiaries, including minors, to access ordinary adult marginal tax rates. This treatment has reflected the fact that these arrangements often exist to provide long term support and financial security following death.

The concern with broad based reforms is that they may unintentionally capture families who are not engaging in aggressive tax planning. The government’s public policy objective to limit the use of trust structures as tax minimisation vehicles runs a risk that vulnerable beneficiaries become collateral damage in reforms aimed at entirely different outcomes.

One of the greatest practical concerns is that complex changes tend to favour those with access to sophisticated legal and accounting advice. Families with significant resources may be able to restructure affairs or adapt to legislative change. Ordinary families may not.

As a result, reforms designed to improve fairness may ultimately place additional pressure on families already dealing with grief, disability, vulnerability or financial uncertainty.

Importantly, even if tax concessions are narrowed in the future, testamentary discretionary trusts are still likely to remain valuable estate planning tools because of the significant asset protection benefits they provide. These structures can assist in protecting inheritances from bankruptcy, relationship breakdowns, financial exploitation and other external risks affecting beneficiaries.

There is nothing controversial about ensuring Australia’s tax system operates fairly. However, reforms should also recognise the longstanding and legitimate role testamentary trusts play in protecting vulnerable Australians and preserving family stability after death.

This debate should not be framed solely as a discussion about tax revenue. It should also involve consideration of fairness, compassion and the practical realities faced by families trying to provide ongoing support for children and vulnerable beneficiaries long after they are gone.

Stuart Lathan

25 May 2026