The IRS has ruled that a widow made taxable gifts to her children by authorizing payment to them of excessive trustees’ fees. According to the IRS, to the extent the fees were excessive, they will be treated as taxable gifts.

The woman and her husband had created the trust in question and had designated their two children and two unrelated parties as trustees. When the unrelated parties later resigned, the two children became sole trustees. Upon the husband’s death, the trust was split into a QTIP trust and a credit shelter trust.

The QTIP trust paid the children trustee’s fees, which were agreed upon by the children and the mother but never formalized in writing. In each taxable year in question, the trust’s expenses exceeded its income, and the mother received no payments of income or principal from the trust. 

The IRS determined that the trustee’s fees were excessive and would be considered taxable gifts to the extent they were excessive. "We believe the facts (including substantial disparity between a reasonable fee and the fees actually paid) support the conclusion that the excessive fees were intended by all the parties involved to facilitate [the mother’s] estate plan by transferring assets that would otherwise be subject to estate tax in [her] gross estate to [her] children without the payment of transfer tax."

The trust argued unsuccessfully that the trustees had paid themselves the excessive fees, and that the widow, as current beneficiary of the trust, retains an interest in the property transferred, creating a constructive trust. The IRS rejected that argument on the basis that the mother had consented to the fees.