Graves v. Elliott

1939-05-29

Headline: New York upholds power to tax a resident’s relinquished right over a Colorado trust, allowing the state to include out-of-state trust securities in the resident’s estate tax at death.

Holding: The Court held that New York may constitutionally tax the value of a resident's relinquished power to revoke a Colorado trust at death, treating the unexercised revocation power as taxable property for estate-tax purposes.

Real World Impact:

Lets a decedent’s home state tax an unexercised revocation power over out-of-state trusts.
Creates risk of estate taxation by both the settlor’s home state and the trust’s state.
Affects people who move states after creating revocable trusts.

Topics: estate taxes, revocable trusts, state taxation, interstate trust rules

Summary

Background

A woman created a trust in Colorado in 1924 and gave Denver National Bank the bonds to hold as trustee. The trust paid income to her daughter for life and then to the daughter’s children, with the remainder reverting to the settlor if the children failed to take. She kept the right to remove the trustee, change beneficiaries, and to revoke the trust. Later she moved to New York and died there in 1931 without revoking the trust. The trustee kept the paper bonds and ran the trust in Colorado. Colorado taxed the transfer at death; New York assessed an estate tax under §§249-n and 249-r, and the New York Court of Appeals had ruled the New York tax unconstitutional as to property having its situs outside the State.

Reasoning

The main question was whether New York could tax the value of the unexercised power to revoke that the decedent had reserved. The Supreme Court’s majority said yes. It treated the reserved power to change or revoke the trust as the equivalent of ownership and a potential source of wealth. Because the decedent was domiciled in New York, the majority held New York could measure and tax the value relinquished at death. The Court reversed the New York Court of Appeals and upheld the tax under prior decisions treating powers of disposition as taxable.

Real world impact

The ruling allows a decedent’s home state to include the value of a reserved but unexercised revocation power over an out-of-state trust in the estate for tax purposes. That can affect people who make revocable trusts and later move states, trustees administering trusts in another State, and state tax authorities. The decision resolves this question nationally by the Court’s reversal of the lower court.

Dissents or concurrances

Chief Justice Hughes dissented, arguing the decision stretches the old rule mobilia sequuntur personam too far and risks double taxation because Colorado also taxed the same trust; Justices McReynolds, Butler, and Roberts joined his view.