The Tax Tail Shouldn’t Wag the Estate Planning Dog

Testamentary trusts, tax reform and the human side of estate planning for a structure that only comes to life after death, testamentary trusts have been having a surprisingly lively moment. Thanks to the recent debate around the taxation of discretionary trusts, they’ve been pulled out of the legal cupboard, dusted off, and discussed everywhere from boardrooms to dinner tables - with, I suspect, more than a few estate planning lawyers on speed dial, fielding calls from understandably anxious clients.

What's the right question?

The question I’ve been hearing most often is: are testamentary trusts still worth it? A better starting point is: what are we actually trying to protect, and for whom? This is what estate planning is really about.

The Federal Budget proposed a 30 per cent minimum tax on discretionary trusts from 1 July 2028. Testamentary trusts were quickly caught up in that conversation, before the Government confirmed that income from all testamentary trusts, will be exempt where established for genuine testamentary purposes, subject to further consultation and integrity measures. That clarification matters. But the reaction to the proposal revealed something interesting: testamentary trusts are often viewed through a very narrow lens- usually a tax one. Tax matters. But it is only one piece of a much bigger picture.

At its simplest, a testamentary trust is created under a Will that comes into effect after death. It can provide flexibility in how an inheritance is managed and distributed. It can assist with asset protection, support for vulnerable beneficiaries and, in the right circumstances, tax effectiveness. But it is not a magic clause that makes a Will “better’. It is not just a tax strategy. It’s a tool. A useful one, often, but only if used for the right job. This is where estate planning is often misunderstood.

ownership & control

For many people, estate planning means “getting a Will done” and perhaps signing a power of attorney while they are there. Tick the box, put it in the drawer, and move on. Those documents matter. But good estate planning is less about the documents themselves and more about the thinking behind them. It requires understanding what someone owns, what they control, who relies on them, and where things might go wrong. Because not everything neatly falls into the estate. Superannuation, jointly owned property, family trusts, companies and SMSFs all have their own rules about how they pass on death or who controls them.

appropriate crafting of the will

A beautifully drafted Will may still miss the mark if those pieces haven’t been considered. And the same is true of testamentary trusts. For some families they make a lot of sense. For young children, they can provide a structure for managing funds until they are older- and depending on the child, perhaps even a little older than that.

For a vulnerable beneficiary, they can allow support to be provided in a protective way. For adult children exposed to business risk, relationship breakdown or financial instability, they may help preserve family wealth. In blended families they can offer flexibility, if approached with care. But they are not always the right answer.

Sometimes a testamentary trust introduces unnecessary complexity: ongoing administration, trustee decisions, accounting costs and, occasionally, fertile ground for disagreement. If the wrong person is appointed as trustee, or no one explains how the structure is meant to work, what was intended as protection can become a source of tension. That is why estate planning requires judgment. Which brings us back to the real skill in estate planning. It’s not just asking, “Can we include a testamentary trust in the Will?” It is asking, “Should we?” That question has no one-size-fits- all answer. It requires judgement, context, and, quite often, uncomfortable conversations.

Future thinking, careful questions

What happens if a child separates from their partner? What if a beneficiary struggles with addiction or mental health issues? What if siblings do not get along? What if the chosen executor is capable on paper, but not the right person emotionally? These are not purely legal questions. They are human ones.

The best estate planning lawyers do not just draft documents. They listen, ask the right questions, and help clients think through scenarios they may not have considered. They know when a simple Will is appropriate, when a more structured approach is worth considering, and when to bring in an accountant, financial adviser or tax specialist. They also know things change. Tax law changes. Families change. Relationships evolve. Asset values shift.

A Will might sit quietly in a drawer for years before it is needed. If an estate plan is built solely around today’s tax settings, there’s a real risk it may not hold up as well as intended. Tax effectiveness is a legitimate part of the conversation. But it should never be the only lens.

The tax tail should not wag the estate planning dog. Estate planning is not a template, a transaction, or just a Will and Power of Attorney. It is a process of understanding people, relationships, risk and responsibility, and then putting a plan in place that can carry weight when it matters most. A Will may be the document. But the estate plan is everything that sits behind it.

Authored by Lisa Hughes of Virago Law

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Lisa has practiced as a lawyer in South Africa, New Zealand, and Australia. Lisa qualified in South Africa and immigrated to New Zealand in 2000 where she worked in the Auckland District Court as a jury trial Court Registrar and with the Crown Solicitors’ office as a jury trial administrator. During this time Lisa requalified to practice in New Zealand and was admitted to the New Zealand High Court in 2006.

Lisa was employed as a crown prosecutor with the Auckland and Rotorua Crown Solicitor’s office in both their tax and criminal teams. She prosecuted

criminal and civil matters in the District Court. Lisa immigrated to Australia in 2007 and was admitted to the Supreme Court of Brisbane. She worked as a Legal Officer and a Crown Prosecutor with the Director of Public Prosecutions and appeared regularly in the Queensland District and Magistrates Court on sentences, committal hearings and jury trials.

Wills and Estates has always been an area of law Lisa has been passionate about. Ensuring clients from all walks of life have an estate plan in place and helping clients understand the complexities of estate planning is incredibly rewarding. Estate planning requires having open and honest and often difficult conversations with clients. To understand a client’s estate planning needs you need to have intimate knowledge of their family structure, financial set up and end of life wishes. Lisa is compassionate and genuinely invested in acting in the best interests of her clients.