Beyond tax: Why discretionary trusts still matter in estate planning

MELBOURNE, 26 May 2026

Don't lose sight of your objective, says Teresa Catalano, Managing Principal of iWills Legal, as the Federal Government's proposal to impose a 30% income tax on discretionary trusts (including discretionary testamentary trusts) rattled Australians with estate plans built around discretionary trusts.

Ms Catalano, a Victorian Accredited Specialist in Wills and Estates Law, said many in the process of creating a discretionary trust were questioning if they needed one, while others with existing trusts were considering shutting them down or converting them to fixed trusts. 

In addition, those with discretionary testamentary trusts in their Wills were considering reverting to standard Wills without such structures.

"The focus should be on the key reasons for setting up the discretionary trust or the discretionary testamentary trust," she said.

"The conversation must not be limited to tax minimisation."

"If you wish to safeguard certain assets against risk of attack to the estate, the discretionary trust (i.e., family trust) remains an important vehicle."

Because assets in both discretionary trusts and discretionary testamentary trusts are not held personally by beneficiaries, when structured in a certain manner, they can provide protection to such beneficiaries against family law claims and creditor actions.

"Will contests represent a genuine threat," said Ms Catalano. "We do not want to see beneficiaries exposed to the emotional toll and financial hardship that often accompanies lengthy and expensive will contests."

Protecting inherited assets: the discretionary testamentary trust

"If the focus is on protecting beneficiaries — particularly vulnerable beneficiaries and minors — the discretionary testamentary trust in Wills remains a powerful tool," explained Ms Catalano.

A discretionary testamentary trust can help preserve inherited assets in circumstances such as relationship breakdowns or business failures that lead to creditor disputes.

"Estate planning has never been solely about tax," said Ms Catalano. "It is about protecting families, preserving wealth across generations, and ensuring beneficiaries are supported in the way intended."

The proposed tax on discretionary trusts and discretionary testamentary trusts applies only to income, not to capital.

The importance of keeping calm

As the government deliberates on the details of the proposal, Ms Catalano reiterated some key points to consider:

• Discretionary testamentary trusts are not purely tax-driven vehicles and should continue to be considered within a broader asset protection lens, estate planning, and inter-generational transfer of wealth framework.
• Legislation has not been introduced, and the possible carve-outs to the tax treatment of discretionary testamentary trusts have not been finalised.
• Tax treatments will depend on the law in force at the time of death rather than the date on which the Will is prepared.
• Although proposed changes may reduce some income-splitting advantages, discretionary trust structures may still provide tax benefits where beneficiaries sit across different marginal tax brackets, and the 30% (minimum rate) is still comparatively lower than the personal marginal tax rate.

About iWills Legal

Teresa Catalano is an accomplished Wills and Estates Victorian Accredited Specialist and managing principal at iWills Legal.

Before founding iWills Legal in 2017, Teresa was a partner in a prominent top ten Australian legal firm, where she cultivated and led the Wills and Estates practice. Her vision for iWills Legal was to deliver a specialised Wills and Estates service with transparency and a fixed-rate structure, establishing offices in Brighton and Melbourne CBD.

Teresa possesses extensive expertise in representing high-net-worth individuals in Estate Administration and Litigation, Wills, Powers of Attorney, Estate Planning (including trusts, companies, and superannuation funds), VCAT matters, superannuation matters, applications to remove trustees, and contested Wills.

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Ping Chew

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