Saltonstall v. Saltonstall

Background

A settlor transferred property into a trust between 1905 and 1907, naming trustees to pay income to him for life and then to his children. The trust reserved to the settlor, with one trustee’s concurrence, the power to change or end the trust. The settlor altered the trust several times and in 1919 ended his income interest, leaving the children to take after his death. Massachusetts later enacted statutes taxing property that passes on failure to exercise a power of appointment and property that takes effect after the donor’s death. Trustees and tax officials asked the state court whether those statutes applied; the state court held the taxes applied to the beneficiaries’ interests.

Reasoning

The key question was whether applying the Massachusetts statutes to the children’s interests violated the federal due process guarantee by reaching interests that the children argue had vested before the statutes were passed. The Court accepted the state court’s reading that the statutes tax the privilege of succession and reach interests created or completed by the settlor’s failure to exercise a reserved power. The Court distinguished cases about taxing outright gifts made long before a tax was passed, noting those involved a different kind of estate tax on donors. Here the tax was on the beneficiaries’ succession when their possession became fixed on the settlor’s death, so the tax did not deny due process.

Real world impact

The ruling lets a state tax trust interests that become possessory because a settlor failed to exercise a reserved power. Beneficiaries whose interests take effect only on a donor’s death can be subject to succession taxes under similar statutes.