Written

For

The

Australian

-

A

potential

trust

tax

loophole

that’s

survived

Canberra’s

‘death

tax’

U-turn

Could Canberra's backdown on the so-called "death tax" have handed wealthy families a quiet workaround? I think it might have.

When the government caved to public pressure and exempted testamentary trusts from the incoming 30 per cent minimum tax on discretionary trust distributions, it left a curious gap. Testamentary trusts – trusts activated only through a will after death – retain a very generous tax perk dating back to 1980: distributions to minors are taxed at adult marginal rates, meaning up to $22,500 per child per year can flow through tax-free once the Low Income Tax Offset is applied. Compare that to a standard family trust, where a minor pays up to 47 per cent on anything above $416.

Here's where it gets interesting. Picture Tom, mid-40s, high income, three young kids. His elderly mother Kate needs aged care. Tom gifts her $1m to cover the refundable accommodation deposit. Kate keeps her pension (the RAD is exempt from the assets test), and when she passes, the $1m returns to Tom's estate via her will – which conveniently contains a testamentary trust clause. Tom invests the money, generates $55,000 a year, splits it between his three kids, and pays zero tax. Had he kept the money in his own name, he'd have handed nearly half to the ATO. Had he used a family trust, the new 30 per cent rule from July 2028 would bite.

Could this become a widespread strategy? I have my doubts. Part IVA anti-avoidance provisions loom large, especially if the money moves shortly before death and the will is freshly amended. There are also real-world risks – the parent spending the funds, a Family Provisions Act challenge, or pension and aged-care fee consequences from the initial gift.

My honest view? It's unsavoury, the risks are high, and practical use will likely be limited. But the loophole exists – and Canberra should probably close it before someone tests it.