Following the 2026-27 Federal Budget, the Government has proposed a 30% minimum tax on discretionary trusts from 1 July 2028. Testamentary discretionary trusts (TDTs) have been given a lifeline of sorts, but it comes with conditions.

In particular, for TDTs established on or after 1 July 2028, the exclusion from the new regime applies where the range of beneficiaries is restricted to individuals, income tax-exempt entities or trustees of special disability trusts.

 

an old Will creating a new trust

 

For most existing Wills containing TDTs, particularly those made before this year’s Budget, the range of beneficiaries will not be limited in this way. Because a TDT cannot be established until the Will-maker dies, a TDT arising under such a Will on or after 1 July 2028 will fall within the new regime.

If the Will-maker still has testamentary capacity, the response is relatively straightforward, albeit costly and annoying (to put it mildly): review the Will and, where appropriate, amend its TDT provisions.

But Will-makers who have lost capacity do not have that option.

 

how many people could be affected?

 

There is no reliable data on the number of Australians who lack testamentary capacity, so the size of this group can only be estimated.

One starting point is the number of people living with dementia, which the Australian Institute of Health and Welfare estimates currently to be just over 450,000.

Not all of them will lack capacity, but if we assume that around 150,000 to 250,000 do, and conservatively that between 7% and 14% of those have Wills containing TDTs, somewhere between 10,000 and 35,000 people could be affected.

For these individuals, telling them to ‘review their Will before 1 July 2028’ does not solve the problem.

 

can someone else change the Will?

 

Although having an enduring power of attorney can assist in many instances in allowing for the management of the financial affairs of a person who has lost capacity, an attorney cannot make a new Will.

There is, however, another possibility: a statutory Will.

In Queensland, s 21 of the Succession Act 1981 (Qld) gives the Supreme Court power to authorise the making or alteration of a Will for a living person who lacks testamentary capacity.

Equivalent regimes exist elsewhere in Australia, although the statutory requirements differ between jurisdictions.

The difficulty is that a statutory Will application is very different from an ordinary Will review.

It involves court proceedings, evidence concerning the Will-maker and their estate, their existing and previous testamentary intentions, potential beneficiaries and other interested parties. Inevitably, that means additional complexity and substantial cost.

That makes statutory Wills an uncomfortable solution to a problem potentially created solely by a change in tax law.

 

would a court make the change?

 

There is then a more interesting legal question.

In Queensland, one of the matters the Court must be satisfied about is that the proposed Will or alteration ‘is or may be’ one that the person would make if they had testamentary capacity.

Suppose an existing Will leaves an estate in TDTs for the Will-maker’s children and descendants. Its beneficiary definition also includes companies and trusts, not because the Will-maker specifically wanted those entities to benefit, but because the Will was drafted to give the trustees maximum flexibility.

The proposed statutory Will might leave every substantive aspect of the estate plan unchanged.

The same children benefit. The same trustees control the trusts. The same assets pass into the same TDT structure.

The only change is that companies and ordinary trusts are removed from the class of potential beneficiaries because proposed tax legislation would make their inclusion potentially detrimental.

There is at least a respectable argument that this is not really changing the Will-maker’s estate plan at all.

It is preserving it.

The purpose of the application would be to maintain, as far as possible, the tax-effective TDT arrangements the Will-maker adopted while they still had capacity.

Whether a court will accept that reasoning in the context of these particular reforms remains to be seen. The proposed rules have not yet generated a body of statutory Will jurisprudence dealing with this issue.

The narrower the proposed amendment, however, the stronger the argument may be.

 

is there a better solution?

 

This raises a broader policy issue.

Should families really have to commence Supreme Court proceedings because a Will-maker lost capacity before being able to respond to a proposed change in Commonwealth tax law?

Perhaps the better solution lies in the tax legislation itself.

For example, consideration could be given to grandfathering certain pre-existing Wills or providing a mechanism by which otherwise impermissible beneficiaries can be irrevocably excluded without requiring the Will itself to be amended.

Without some form of transitional relief, there is a risk of producing two quite different outcomes.

A person who retains capacity can amend their Will relatively simply.

A person with an identical Will who has lost capacity may require a Supreme Court application to achieve substantially the same result.

 

what should advisers do now?

 

There are therefore two categories of clients to identify.

1. Clients who retain testamentary capacity

Existing Wills containing TDTs should be reviewed to determine whether their beneficiary provisions are compatible with the proposed rules.

2. Clients who have already lost capacity

The fact that they cannot change their Will should not end the enquiry.

Their advisers should identify any affected TDT provisions, assess the potential tax consequences and determine whether those consequences are significant enough to justify a statutory Will application.

For substantial estates, that may become an important estate planning exercise.

But if significant numbers of Australians ultimately need Supreme Court orders merely to preserve the intended tax effectiveness of Wills they made while perfectly capable, perhaps the real question is whether the legislation should provide a better solution.

 

we’re here to help 

The proposed trust tax changes could have significant implications for existing Wills and testamentary trusts, particularly where the Will-maker has lost capacity.

If you’re concerned about how these changes could affect your estate plan or your clients, our businessDEPOT Legal team can help you understand your options. Give us a buzz on 1300 BDEPOT or email legal@businessdepot.com.au.

 

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general advice disclaimer

The information in this article provides a brief overview of the subject matter and does not constitute any type of advice. While we endeavour to ensure the information is accurate, it may become outdated as legislation, policies, regulations and other circumstances change. You should not rely on this information to make financial, investment or legal decisions. Please consult an appropriate professional for advice tailored to your circumstances before making any decision.