Imagine discovering that your family home, a cherished legacy, could be subject to a stealthy death tax. It’s a startling reality that has sparked debate among legal experts. But here’s where it gets controversial: the Tax Office’s recent draft ruling, TD 2026/D1, has raised concerns about how it interprets the relationship between a deceased’s will and testamentary trusts (TTs), potentially leaving families in a tax quandary. Let’s break it down in a way that’s easy to understand, even if you’re new to estate planning.
Matthew Burgess, director of View Legal, highlights that while TD 2026/D1 offers a useful summary of key rules, its stance on TTs is problematic. The draft ruling narrowly defines the term ‘will’ in subsection 118-195(1) of the Income Tax Assessment Act 1997, excluding TTs from its scope. In simpler terms, the Tax Office argues that a deceased’s will and a TT are distinct entities, even though a TT is created by the will. And this is the part most people miss: this interpretation could lead to unfair tax outcomes for families relying on TTs for estate planning.
Burgess explains that the Tax Office’s logic hinges on the timing of when a deceased estate and a TT come into existence. A deceased estate is formed immediately upon death, while a TT arises only after the estate is administered. However, this distinction feels artificial, as the will remains the ultimate source of authority throughout the process. The executor’s role transitions to that of a trustee, but the legal foundation—the will—stays the same. Here’s the kicker: by separating the will from the TT, the draft ruling risks creating arbitrary differences in how estates are taxed, penalizing common and legitimate planning strategies.
One of the most contentious points is the draft’s failure to recognize that TTs are not standalone instruments but integral parts of the will. Burgess argues that all rights granted through a TT originate from the will itself. For instance, if a TT grants someone the right to occupy a family home, that right is still rooted in the deceased’s testamentary intentions. Excluding such rights from tax concessions feels like a misinterpretation of the law’s purpose, which is to honor the deceased’s wishes.
But here’s where it gets even more complicated: the draft ruling doesn’t address how contemporary wills often incorporate TTs as part of a holistic estate plan. Modern families use TTs for asset protection, especially in complex situations like blended families, vulnerable beneficiaries, or grandparents providing for grandchildren. Treating TTs as separate from the will ignores this reality and could lead to unintended tax consequences.
Another overlooked issue is the lack of guidance on specific scenarios. What happens if a will with a TT was made before 2026, but the willmaker is still alive? Or if the willmaker has lost testamentary capacity? These questions remain unanswered, leaving taxpayers in uncertainty.
Here’s a thought-provoking question for you: Should the Tax Office’s interpretation stand, or does it unfairly penalize families using TTs for legitimate estate planning? Let’s discuss in the comments—do you think this ruling strikes the right balance, or does it need a rethink?
