Business Succession Planning Using Trusts: The Complete 2026 Guide for Australian Business Owners

Why Business Succession Planning Cannot Wait

Every year in Australia, thousands of business owners retire, become incapacitated, or die — and only a fraction have a written, legally documented succession plan in place. According to ASIC data, small and medium businesses account for approximately 97% of all businesses in Australia. Of these, family businesses dominate the landscape, yet research consistently shows that fewer than 30% successfully transfer to a second generation.

The reasons for failure are often preventable: no documented plan, poor trust deed drafting, failure to obtain key man insurance, and underestimating the tax consequences of an unplanned transfer. In 2026, with the May federal budget potentially altering the capital gains tax discount and the ATO intensifying its trust compliance program, the cost of procrastination has never been higher.

This guide walks through how Australian business owners can use trust structures to plan, protect, and execute a successful business succession — in an orderly way that preserves the value they have built.

The Succession Problem: What Happens Without a Plan

Death or Incapacity of a Key Owner

If a key business owner dies without a succession plan:

• Sole trader: The business assets form part of the estate. The executor may have no authority (or expertise) to continue operating the business. The business may need to close or sell at a discounted price to a competitor.
• Partnership: The partnership is dissolved by operation of law on the death of a partner. The surviving partner must deal with the estate, which may include buying out the deceased’s interest — but at what price, and with what cash?
• Company: Shares in the company form part of the estate. The executor may become a shareholder but cannot necessarily direct the business. Existing shareholder agreements may create problems.
• Trust: Depends entirely on the trust deed. If no successor trustee is named and the trustee was the deceased individual, the trust may be left without a valid trustee — requiring Supreme Court intervention.

The Tax Time Bomb

Without planning, business assets passing through an estate may trigger significant CGT events — and the estate (not the beneficiaries) pays the CGT at the deceased’s marginal tax rate in the year of death. Small business CGT concessions that could eliminate or reduce this tax bill may be unavailable if the right conditions are not in place before the event occurs.

Example: A business owner holds shares in a family company (through a family trust) with a cost base of $50,000 and a current market value of $2 million. If the shares are sold in the estate without planning:

• Capital gain: $1.95 million
• After 50% individual discount (if held >12 months): $975,000 taxable
• At 47% top marginal rate: approximately $458,000 in CGT

With proper small business CGT concessions applied (assuming the business qualifies), the entire gain could be reduced to zero or near-zero, with proceeds going to superannuation tax-free. The difference between planning and not planning could be nearly $500,000 in this example alone.

Trust Structures in Business Succession

The Discretionary (Family) Trust

A discretionary trust is the most commonly used succession structure for Australian family businesses. The trustee holds business assets on behalf of a class of beneficiaries, with discretion to decide how much of the income or capital is distributed to each beneficiary in each year.

Key advantages for succession:

1. Trust continuity across generations

The trust itself is a legal structure that does not die. When properly structured, ownership and management of the trust can transfer through:

• Changing the trustee (via the deed’s trustee succession provisions)
• Changing the appointor (the power to remove and replace the trustee)
• Clear provisions in the will regarding who gains control of the appointor role

A family business held through a discretionary trust can be passed to the next generation through a change of trustee and appointor — without triggering CGT on the underlying assets (subject to conditions).

2. Income splitting and tax efficiency

During the transition period (when a business owner is winding back involvement but not fully retired), a discretionary trust allows income to be distributed to the incoming generation (children or grandchildren who are now adults working in the business) at lower marginal rates, while the principal retains control as trustee or appointor.

3. Asset protection

Business assets held in trust are generally protected from the personal creditors of the trustee and beneficiaries. During a succession, when the outgoing owner might be entering retirement (and thus less able to recover from a financial setback), this protection is particularly valuable.

The Unit Trust

A unit trust divides ownership into fixed “units” held by unitholders, similar to shares in a company. Unlike a discretionary trust, unit trusts have fixed entitlements — each unitholder receives income and capital in proportion to their units.

When a unit trust makes sense for succession:

• Multiple unrelated business partners (the fixed ownership structure avoids disputes about income distribution)
• Joint ventures between family groups where each family wants a defined share
• When an external investor or employee is to be given an ownership stake (units can be sold or transferred)

Succession via unit trust:

• Units can be gifted, sold, or transferred to successors (may trigger CGT on the transfer, though small business concessions may apply)
• Units can be held by a discretionary trust, creating a layered structure (the unit trust holds the operating business; each family’s discretionary trust holds the units)

The Corporate Trustee Structure: Why It Matters

Whether using a discretionary trust or unit trust, the ATO and succession planning specialists strongly recommend using a company as trustee (rather than individual trustees). The reasons are compelling:

With a corporate trustee, the succession plan involves changing directors and shareholders of the trustee company — a relatively simple ASIC process — rather than replacing a trustee deed, which may require consent from all beneficiaries and notification to all parties dealing with the trust (banks, agents, counterparties).

Cost to establish a corporate trustee company: approximately $500-$1,500 through a business accountant. Cost to untangle a poorly structured trust after a trustee’s death: potentially tens of thousands of dollars in legal fees.

Buy-Sell Agreements: The Practical Cornerstone of Succession

For business owners with partners (whether in a company, partnership, or unit trust arrangement), a buy-sell agreement is the foundational document of succession planning.

What It Covers

A well-drafted buy-sell agreement specifies:

1. Triggering events: What events activate the agreement? Typically: death, total and permanent disability (TPD), critical illness/trauma, bankruptcy, relationship breakdown, loss of professional licence, voluntary exit, and retirement.

2. Valuation methodology: How is the business valued when a trigger occurs? Options include: fixed price (agreed in advance, reviewed annually), formula-based (e.g., 4x EBITDA, or net asset value), or independent valuation by a nominated expert. The valuation methodology must be clearly specified — disputes over business value are one of the most common and destructive events in partnership breakdowns.

3. Funding mechanism: How does the buying owner pay for the departing owner’s interest? The most common mechanism is life and TPD insurance. Each owner takes out insurance on the other owners’ lives, with proceeds used to fund the buyout.

4. Purchase and sale obligations: Is the agreement a “put and call” option (optional), a “cross-purchase” agreement (each owner buys the other’s share directly), or an “entity purchase” (the business itself buys back the interest)?

Insurance Funding in 2026

The typical funding structure for a buy-sell agreement is:

With interest rates elevated and business conditions uncertain in 2026, having certainty about business succession is particularly valuable. An agreed buyout price backed by insurance prevents situations where a surviving partner must borrow at 7-9% interest to buy out a deceased partner’s estate — or where the estate is forced to accept a distressed price.

ATO Considerations: Trust Tax Determinations

The ATO has been increasingly active in reviewing trust arrangements, particularly where distributions are made to reduce tax. Business owners must ensure:

• Trust distributions are genuine and commercial (not artificial arrangements to avoid tax)
• Section 100A (reimbursement agreements) is carefully considered — arrangements where a beneficiary receives a trust distribution but effectively gives the economic benefit back to someone else can trigger ATO scrutiny
• The trust’s 2023 deed update (required by many trusts following ATO guidance) has been completed

The ATO’s 2023 trust tax determination (TD 2023/11) and practical compliance guidelines remain highly relevant for 2026 tax planning.

Small Business CGT Concessions: The Ultimate Succession Tax Tool

The ATO’s small business CGT concessions are among the most generous tax benefits available to Australian business owners. For 2026, the key eligibility requirements are:

Basic Conditions

The business owner must satisfy at least one of:

1. The business has an aggregated annual turnover of less than $2 million, OR
2. The net value of assets owned by the entity and its affiliates (excluding personal use assets like the family home, and superannuation) is less than $6 million

In addition, the asset being sold must be an “active asset” — broadly, an asset used in carrying on a business, or a share in a company or unit in a trust where 80% of the entity’s assets are active assets.

The Four Concessions in Detail

1. 15-Year Exemption (Section 152-B)

• Conditions: Asset held for at least 15 years AND the individual is aged 55+ and is retiring OR is permanently incapacitated
• Outcome: The entire capital gain is exempt from CGT — no tax at all
• Note: This is the most powerful of the four concessions. If you are planning your business exit and meet the 15-year mark, the entire capital gain on the business sale (including goodwill) is tax-free.

2. Retirement Exemption (Section 152-D)

• Conditions: Basic eligibility conditions met; amount elected to the concession must be used in accordance with the exemption (contributed to superannuation if under age 55)
• Outcome: A lifetime CGT-free cap of $500,000 (cumulative across all uses)
• Note: This is a separate exemption from the 15-year exemption and can be used by owners who have not yet held the asset for 15 years

3. 50% Active Asset Reduction (Section 152-C)

• Conditions: Basic eligibility conditions met
• Outcome: Capital gain reduced by an additional 50% (on top of the standard 50% individual/trust discount for assets held >12 months)
• Example: $500,000 capital gain → 50% discount → $250,000 → 50% active asset reduction → $125,000 taxable

4. Small Business Rollover (Section 152-E)

• Conditions: Basic eligibility conditions met; proceeds reinvested in a replacement active asset within 2 years
• Outcome: Capital gain deferred (not eliminated) until the replacement asset is sold
• Use case: Business owner selling one business to buy another

Interaction with May 2026 Budget Changes

The Albanese Government has signalled potential changes to the general CGT discount (which may be reduced from 50% to a lower figure for assets acquired after a future date). However, the small business CGT concessions are separate from the general discount and are expected to remain unchanged. If the budget does reduce the general 50% CGT discount, the small business concessions become even more valuable relative to holding assets personally.

Business owners who believe they may sell in the next 1-3 years should review their eligibility for concessions now, rather than waiting for the budget outcome.

The Testamentary Trust: Protecting Business Wealth Across Generations

A testamentary trust is established through a will and comes into effect only on death. It is particularly powerful for business succession because:

• Minor beneficiaries (children, grandchildren) can receive income from the testamentary trust and be taxed at adult rates — rather than the 47% penalty rate that applies to children receiving unearned income from a standard estate distribution
• Asset protection during a beneficiary’s lifetime — assets held in the testamentary trust are generally protected from a beneficiary’s divorce proceedings and creditors
• Flexibility — the testamentary trust can hold business assets (shares, units) and manage income until beneficiaries are ready to take active control

Practical Application

A business owner with three adult children, two of whom are working in the business and one who is not interested in the business, might structure their estate as follows:

• A testamentary trust holds 100% of the trust’s business interest (shares in the trustee company, or units in the unit trust)
• The two children working in the business are appointed as trustees and given management control
• Income can be distributed to all three children as beneficiaries (including the non-business child)
• The non-business child’s entitlement can be bought out over time as the business generates profits
• Young grandchildren benefit from the adult tax rate on income distributions from the testamentary trust

Building Your Succession Plan: A Practical Checklist

For Australian business owners reviewing their succession planning in 2026:

Structural review:

• Is the business held in the most appropriate structure (trust, company, or hybrid)?
• Is there a corporate trustee (or should individual trustees be replaced with a company)?
• Is the trust deed current and does it include adequate succession provisions (trustee succession, appointor succession, beneficiary definition)?

Legal documentation:

• Is there a current, signed buy-sell agreement with all business partners?
• Is there adequate life and TPD insurance to fund the buy-sell agreement?
• Is there a current will that addresses the business interests?
• Does the will include testamentary trust provisions?
• Are there enduring powers of attorney in place for incapacity scenarios?

Tax planning:

• Has the business been assessed for small business CGT concession eligibility?
• Has the 15-year clock been identified and tracked?
• Is the retirement exemption strategy documented?
• Have recent ATO trust compliance guidance updates been applied to the trust deed?

Timing:

• Is the business owner aware of the May 2026 budget and its potential CGT implications?
• Has the planned exit timeline been reviewed in light of current rates, property markets, and economic conditions?

Work with Specialists Who Understand Business Succession

Effective business succession planning requires a team approach: an accountant who understands trust structures and CGT concessions, a solicitor who can draft watertight trust deeds and buy-sell agreements, and a financial adviser who can structure insurance and superannuation to make the plan work. Finding the right professionals is the first step.

WealthWorks connects Australian business owners with verified accountants, financial advisers, and specialist trust practitioners across Australia.

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