In re Robert L. McDowell Revocable Trust
296 Neb. 565
| Neb. | 2017Background
- Robert and Betty McDowell created nearly identical revocable trusts; Robert’s trust gave Betty a limited power to "appoint by will" Trust A assets to his issue, spouses of issue, or tax-exempt charities.
- Robert died first; Betty’s will purported to exercise the power by devising all property over which she had a power of appointment (including Trust A assets) to the trustee of her revocable trust to be administered as part of that trust.
- After distributions, Betty’s trust (via trustee Sandra K. Stockall) received Robert’s Trust A assets; Jane O. Hornung (Robert’s other child and potential beneficiary under Robert’s trust) received nothing and sued for instructions and declaration that Betty’s appointment was invalid.
- County court held Betty’s appointment ineffective because devising Trust A to her own trust commingled appointive assets with her estate, potentially benefiting disallowed persons (Betty, her estate, creditors), and ordered recovery and redistribution under Robert’s trust.
- The Nebraska Supreme Court affirmed, but modified the county court’s findings to hold that the trustee of Robert’s trust breached the trust by transferring Trust A assets pursuant to the ineffective appointment and must recover and restore those assets.
Issues
| Issue | Plaintiff's Argument (Hornung) | Defendant's Argument (Stockall) | Held |
|---|---|---|---|
| Whether Betty validly exercised her limited power of appointment by devising Trust A assets to her revocable trust | Exercise invalid because beneficiary (Betty's trust) is not within the permissible class and commingling permitted impermissible beneficiaries (Betty, estate, creditors) | Valid because ultimate distributions from Betty's trust went to Robert’s issue (permissible class) | Held invalid: appointment ineffective because it appointed to an impermissible appointee and permitted commingling/possible benefit to disallowed persons |
| Whether doctrines of selective allocation or substantial compliance save the appointment | N/A for Hornung; argues doctrines should not apply | Argues selective allocation or substantial compliance should treat appointive assets as allocated to permissible beneficiaries, curing defect | Rejected: Nebraska declines to adopt selective allocation; substantial compliance inapplicable because defect was substantive (appointed to impermissible appointee), not merely formal |
| Whether the trustee of Robert’s trust breached duties by transferring Trust A assets to Betty’s trust and whether court could order recovery | Hornung: trustee breached by transferring pursuant to ineffective appointment and should be required to recover assets | Trustee (cross-appellant): argued he did not breach and court lacked authority to void his transfers or compel recovery | Court found plain error in county court’s original finding that trustee did not breach; trustee breached by transferring under an invalid appointment and court may compel recovery and distribution under trust-remedy statutes |
| Appropriate remedies and court authority | Hornung: recovery, restoration, and distribution under Robert’s trust | Trustee/Stockall: transfers were proper; court lacked jurisdiction to void transfers | Court has statutory authority to void acts of trustee, impose constructive trust, trace and recover property, and order other relief; ordered recovery and distribution per Robert’s trust |
Key Cases Cited
- Applegate v. Brown, 168 Neb. 190, 95 N.W.2d 341 (1959) (principle that donee must keep within terms of power of appointment and follow donor-prescribed method)
- Massey v. Guaranty Trust Co., 142 Neb. 237, 5 N.W.2d 279 (1942) (method of executing a power of appointment must be strictly followed to effect donor's intent)
- In re Family Trust Created Under Akerlund Trust, 280 Neb. 89, 784 N.W.2d 110 (2010) (trust interpretation is a question of law)
- BMO Harris Bank N.A. v. Towers, 43 N.E.3d 1131 (Ill. App. 2015) (appointing trust assets to one's own trust without segregation can be ineffective where appointee is not permissible)
- In re Estate of Reisman, 266 Mich. App. 522, 702 N.W.2d 658 (2005) (appointment to grantee's trust was effective only where trust expressly segregated appointive property from other assets)