Wills signed decades ago, including by people who have since died or developed dementia, could be caught by Australia’s proposed new tax on family trusts, estate planning lawyers have warned.
The Society of Trust and Estate Practitioners (STEP) Australia told the Senate Economics Legislation Committee on Nov. 5 that more than a million wills may need to be checked unless the law is changed, while some may be impossible to amend.
Trusts created through wills, known as testamentary trusts, are often used to protect inheritances for children or relatives who cannot manage money themselves.
However, under the proposed rules, a testamentary trust established on or after July 1, 2028, would only qualify for the exemption if everyone who could benefit is an individual, a tax-exempt body, or a special disability trust.
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STEP warns that a trust could therefore lose its exemption simply because a family company or another trust is listed as a possible beneficiary, even if no income is ever paid to them.
The government says the restrictions are intended to prevent trusts created through wills from being used to channel income to companies. The broader reform aims to bring the taxation of trust income closer to that of wages.
Old Wills Could Fall Under New Rules
Kimberley Martin, deputy chair of STEP Australia’s policy and advocacy committee, said lawyers had for years named family companies and trusts in these wills “because there was no harm in doing so.”
The problem, she said, is that a testamentary trust may not be treated as established until after the will-maker dies, potentially years after the will was signed.
That means a will signed decades ago could be caught if the trust is established after July 1, 2028, even if the person who made the will dies before that date.
People with dementia who can no longer change their own wills would need a court to approve amendments, a process Martin said could cost between $30,000 to $50,000.
If the person dies before the court decides, the old will stands.
“To put families through the need to go to court or to go to an administrative tribunal to ask for a will to be amended for a person who has lost capacity is outrageous, in my view,” she said.
Martin said six of her clients had died since the Budget, several with these trusts in their wills, while her phone had “rung off the hook” with worried clients asking whether they needed to change their wills.
“My answer to them is, ‘I don’t know,’” she said.
More Than a Million Wills May Need Review
With no national register of wills, Martin estimated the potential scale of the problem.
She said about 13 million Australian adults had a will, and if 8 to 10 percent contained these trusts, between 1 million and 1.3 million wills could need review.
The cost of reviewing and potentially amending each will could range from $1,000 to $10,000, she estimated.
Martin said testamentary trusts were often used to protect children with disabilities, addictions, or mental illnesses.
Although the government plans to exempt special disability trusts, she said these arrangements were suitable for only some families and placed restrictions on spending unrelated to a person’s disability, such as clothing or holidays.
She said the annual limit for such expenses was about $15,000.
STEP Australia Chair Jim O’Donnell called the bill a “nuclear option” that would cause “a lot of collateral damage” to “the vulnerable, those who cannot manage money themselves.”
At a minimum, it wants wills signed before July 1, 2028, protected from the new beneficiary restrictions, and testamentary trusts taxed only on income actually distributed to companies or other trusts.
Martin said independent MP Kate Chaney had moved amendments in the House of Representatives addressing these concerns, but Labor voted them down.
Committee chair Labor Senator Lisa Darmanin asked whether further delay would only prolong people’s uncertainty.
Martin replied that the bill as drafted offered no certainty because it could leave existing wills exposed to the proposed tax.
“It actually says your wills fall outside of the exclusion of this 30 percent tax,” she said.
