In re Robert L. McDowell Revocable Trust, 296 Neb. 565

Background

Robert and Betty McDowell executed nearly identical revocable trusts; Robert's Trust A gave Betty a limited power to appoint Trust A property by will to Robert's issue, spouses of issue, or tax-exempt charities.
Robert predeceased Betty. Betty’s will purported to exercise the power by devising all appointive property "together with all of my property" to the trustee of her revocable trust to be administered as part of that trust.
Betty’s revocable trust named their daughter Sandra Stockall (and some grandchildren) as beneficiaries; Jane Hornung (the other daughter) was a potential beneficiary under Robert’s Trust A but received nothing under Betty’s trust.
After some Trust A assets were transferred into Betty’s trust and distributed to Stockall, Hornung sued for a declaration that Betty’s appointment was invalid and for recovery/distribution under Robert’s trust; Stockall counterclaimed defending the appointment.
The county court held Betty’s appointment ineffective because devising Trust A assets to her personal trust commingled them (potentially benefitting Betty, her estate, or creditors) and ordered recovery and distribution under Robert’s trust; the Nebraska Supreme Court affirmed as modified.

Issues

Issue	Plaintiff's Argument (Hornung)	Defendant's Argument (Stockall)	Held
Was Betty’s exercise of the limited power of appointment effective when she devised Trust A assets to her revocable trust?	The appointment was invalid because Betty’s trust is not a permissible appointee under Robert’s trust and commingling made the appointment benefit impermissible persons.	The appointment was effective because ultimately the assets passed to Robert’s issue (permissible appointees) via Betty’s trust.	Held ineffective: appointing to Betty’s trust (not a permissible class) and commingling without segregation rendered the appointment void.
Can doctrines of selective allocation or substantial compliance save the appointment?	N/A (defeat of appointment is Hornung’s position)	Stockall urged selective allocation and substantial compliance to treat appointive property as allocated so only Betty’s owned assets paid estate expenses, preserving appointment.	Court declined to apply selective allocation (not adopted in Nebraska) and rejected substantial compliance because the failure was substantive (appointed to impermissible appointee), not merely formal.
Did the trustee of Robert’s trust breach duties by transferring Trust A assets pursuant to Betty’s ineffective appointment, and could the court order recovery/remedies?	Hornung argued trustee breached by transferring to an invalid appointee and recovery was appropriate.	Trustee initially defended actions as reasonable and not a breach.	Court found (modifying lower court) that the trustee did breach by executing transfers under an invalid appointment and that statutory equitable remedies (recovery, restoration, constructive trust) were available.
Was the county court authorized to void transfers and order redistribution despite finding the trustee acted in good faith?	Hornung: court could remedy breach and recover assets despite good-faith transfer.	Trustee: argued court lacked authority to void transfers if no breach occurred.	Court corrected plain error: the finding of no breach conflicted with invalid appointment; court had authority under trust-remedy statute to compel recovery and distribution.

Key Cases Cited

Applegate v. Brown, 168 Neb. 190 (Neb. 1959) (principle that donee must keep within terms of power and follow prescribed method)
Massey v. Guaranty Trust Co., 142 Neb. 237 (Neb. 1942) (method of executing power must be strictly followed to effect settlor's intent)
In re Family Trust Created Under Akerlund Trust, 280 Neb. 89 (Neb. 2010) (trust interpretation is a question of law)
In re Estate of Reisman, 266 Mich. App. 522 (Mich. Ct. App. 2005) (appointment to donee's trust effective only when assets are segregated so they cannot benefit the donee)