Avoid an Estate Planning disaster

Originally published 22 May 2024 · Updated June 2026

In this update, we discuss estate planning. Whilst we cannot control the forma, you do have some input and control on the later through decisions and strategies implemented in our lifetime.

A common fear in estate planning, is that your estate may be eroded by taxes or worse still not end up in the hands of your loved ones.

Estate losses can take many forms: taxes, a beneficiary with poor financial habits, a beneficiary pursued by creditors, or a beneficiary caught up in family court proceedings. Relationship breakdowns are not limited to your children either. A surviving spouse moving into a new relationship that later fails can put your estate assets at risk too.

KEY CONSIDERATIONS: SUPERANNUATION
Super does not automatically follow your will. Your superannuation is not automatically dealt with through your will. It only forms part of your estate if you direct it there through your super fund, or if your fund's rules send it there because you do not have a valid death benefit nomination in place.

Make your intentions clear. Do not assume your super will be paid according to the wishes set out in your will. A valid death benefit nomination helps ensure your super is paid to the people you intend, in the way you intend.

Understand the tax traps. Australia does not have death taxes, but superannuation can still create tax issues. Superannuation is comprised of two "components" — Taxable and Tax-Free. The taxable component, when left to someone who is not a tax dependant (such as an adult child after your spouse has already died), can be taxed at up to 17% including Medicare levy.

There are super contribution strategies to minimise the taxable components in super and still maintain the tax benefits of holding assets inside the preferential superannuation environment.

Consider timing where health is a factor. For those with a limited prognosis, withdrawing super before death and passing the funds on outside the super system can be a powerful tax-saving strategy, as amounts paid to beneficiaries from outside super are generally not taxed.


KEY CONSIDERATIONS: YOUR WILL
There are two common ways to structure a will.

SIMPLE WILLS

Assets pass directly to beneficiaries in their own names. A simple will is often appropriate when:

• the estate is modest and a more complex structure is not warranted (nor cost effective);
• the beneficiaries have low risk profiles (family law, creditors, financial literacy); and
• tax planning is not a priority. Any income earned from inherited assets is taxed at the beneficiary's marginal rate.

WILLS THAT INCLUDE A TESTAMENTARY DISCRETIONARY TRUST

Your assets flow into a trust (or trusts), which is managed for the benefit of a defined group of beneficiaries. A Testamentary Trust may be appropriate where:

• the estate is large enough to justify protecting it from third parties and from the beneficiaries themselves;
• one or more beneficiaries have a medium to high risk profile; or
• the beneficiaries would benefit from tax planning flexibility.

The right choice depends on your circumstances, so the structure of your will should always be based on personal professional advice.


EXAMPLE TESTAMENTARY TRUST IN ACTION
It's not all about the tax… Usually, the primary goal when establishing a Testamentary Trust is asset protection.

John and Elizabeth are financially comfortable with three young children. John passes unexpectedly and leaves Elizabeth $2M in investment and life insurance. The funds are directed by John's will to be held in a Testamentary Trust, which Elizabeth controls jointly with another trusted relative. Elizabeth continues to work part time.

Tax outcome: Under current law, Elizabeth can direct around $60,000 of trust income to her children ($20,000 each) tax free. This is because income paid to minors from a testamentary trust qualifies as excepted trust income under section 102AG of the Income Tax Assessment Act 1936, so it is taxed at adult marginal rates with access to the tax free threshold, rather than at the punitive minor rates that apply to ordinary family trust distributions. The result is far better than the same income sitting on top of Elizabeth's salary.

Family law protection: Elizabeth later enters a new relationship that fails and ends in the family courts. Because she is not the sole controller of the trust, the Testamentary Trust creates a hurdle for her former partner to access the funds set aside for her and the children she had with John.

Creditor protection: Elizabeth works as an environmental consultant. A developer challenges her advice and brings an economic loss claim. Once again, the Testamentary Trust helps shield the estate from creditors.

Different strategies suit different families, so seek tailored advice before deciding which approach is right for you.


2026 FEDERAL BUDGET: WHAT'S CHANGING FOR TRUSTS
Since this article was first published, the Federal Government's 2026–27 Budget (handed down on 12 May 2026) has proposed significant changes to how discretionary trusts are taxed. The measures are not yet law, but they are likely to influence how families think about testamentary trusts in the years ahead.

1. 30% minimum tax on discretionary trusts (from 1 July 2028)
The Budget proposes a 30% minimum tax on the taxable income of discretionary trusts, payable by the trustee. Non-refundable credits will flow through to individual beneficiaries. Corporate beneficiaries will not receive credits, reducing the appeal of "bucket company" strategies.

2. Changes to the CGT discount (from 1 July 2027)
A separate measure replaces the 50% CGT discount for individuals, trusts and partnerships with cost base indexation, alongside a 30% minimum tax on net capital gains.

3. Testamentary trusts carved out (confirmed 18 June 2026)
After significant industry concern, the Prime Minister and Treasurer confirmed on 18 June 2026 that income from all testamentary trusts, existing and future, will be exempt from the proposed 30% minimum trust tax. Further detail will follow through consultation.

In practice, the John and Elizabeth example above should continue to work as described, even if the new regime is legislated. The section 102AG concession for minors is also expected to be preserved.

4. A word of caution
None of these measures have passed Parliament, and the final detail will depend on the exposure draft and consultation process. Important questions remain, including how the testamentary trust carve-out will interact with new assets acquired by the trust after death and how it sits alongside the broader CGT changes.

We will continue to monitor the legislation and update our guidance as the position becomes clearer. In the meantime, if you have an existing will that includes a testamentary trust, or you are considering one, now is a sensible time to review your estate plan with your adviser.

SPEAK WITH AN ADVISER
Different strategies benefit individuals differently, depending on their circumstances. 

If you have questions about your estate plan, your superannuation nominations or how the proposed changes may affect you, please contact Financial Adviser Graham Southgate or your principal adviser.

Graham Southgate Associate Director and Financial Adviser gsouthgate@prosperity.com.au