Can a Trustee be Paid as a Gift and Not Incur Income Taxes?
My wife’s sister is trustee of their deceased dad’s estate which totals about $700,000. There are four equal sibling beneficiaries, including the trustee. The trustee is requesting a $10,000 fee to be be paid by two of the beneficiaries (exempting the trustee and one sibling who is disabled). She would also like to get the fee via gift outside of the trust to avoid taxes. No investment management is involved and the trustee has little expertise on trusts. What do you think? I think it’s insane and possibly illegal from a tax avoidance perspective.
You’re right (at least about the legality; I won’t comment on the sanity). Depending on the amount of work involved, the amount of the fee may or may not be appropriate (though I’m not sure why it shouldn’t be shared by all beneficiaries, working out to $2,500 each). But that’s the rub. The fee is compensation for work and liability taken on. In other words, it must be reported as earned income, just like any other income your sister-in-law may earn.
Your sister-in-law also might want to read up on the concept of fiduciary duty.
What May a Family Trustee Charge for a Very Simple Trust?
Is My Trustee Overcharging?
What is the Tax Treatment of Trustee Fees?
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