You have not provided enough facts to answer your original question. Depending upon whether it is a revocable trust or an irrevocable trust... the tax consequences to both the sister grantor and the beneficiary mother will be different.
Additionally as indicated prior, the trust document should have language about:
- who is to trustee, and successive trustee's
- who are the beneficiaries, and when or under what circumstances 'can' (or possibly 'should') distributions be made (or not made)
- how long the trust will remain in effect, whether it is irrevocable or revocable, and when it can/should be dissolved/end.
What you are asking about, should be already specified and controlled by the trust document.
You indicate that the sister is the trustee, which can't typically happen in irrevocable trusts (grantor can't be trustee). That leads me to think the trust is either a revocable trust (grantor can be and often is trustee), or there is someone else (or some company) who is actually the trustee of an irrevocable trust. Yet you also indicate that gifts have been made to the trust, which would tend to suggest that it is an irrevocable trust, unless the sister is using the word gift to just separate monies that she wants in an account to live on, versus money that she is trying to set aside to pass on to the mother in a revocable trust. She technically hasn't really gifted it if she still controls it as trustee, if this is the case.
The sister needs to have a lawyer review the details of the trust document, to get the actual facts of this situation and to provide accurate trust and estate planning guidance. At this point, you don't have enough facts. You have to understand and establish the facts of the trust, before any questions about possible tax consequences can really be answered. Making the wrong decision could ultimately cost the grantor some gift tax (yielding less $$ to pass on to others), and/or your mother the step up basis of assets (which might mean an unnecessary hit in taxes on the value of the assets, and less after tax $$'s in mothers pocket).