In re Robert L. McDowell Revocable Trust
296 Neb. 565
| Neb. | 2017Background
- Robert and Betty McDowell executed nearly identical revocable trusts; Robert's trust gave Betty a limited power to appoint Trust A assets by will to (1) Robert's issue, (2) spouses of issue, or (3) tax-exempt charities.
- Robert died first; Betty later executed a will that 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 own revocable trust to be administered as part of that trust.
- After distributions, Betty’s trust (via trustee Sandra Stockall) received Robert’s 270 shares in McDowell Cattle Company; Jane Hornung (Robert’s other child) received nothing from Betty’s trust but was a potential beneficiary under Robert’s trust.
- Hornung sued for a declaratory judgment and to require recovery and distribution of Trust A assets under Robert’s trust; Stockall (as trustee and individually) counterclaimed defending Betty’s exercise of the appointment.
- The county court held Betty’s exercise was ineffective because appointing to her revocable trust commingled Trust A assets with property outside the permissible class (thereby potentially benefiting Betty, her estate, or creditors) and ordered the trustee of Robert’s trust to recover and distribute Trust A assets under Robert’s trust.
- The Nebraska Supreme Court affirmed the county court’s judgment but modified it to hold that the trustee of Robert’s trust had breached the trust by transferring Trust A assets pursuant to an invalid appointment and therefore recovery/remedies were proper.
Issues
| Issue | Hornung's Argument (Plaintiff) | Stockall's Argument (Defendant) | Held |
|---|---|---|---|
| Whether Betty’s appointment of Trust A to her revocable trust validly exercised the limited power of appointment | The appointment was invalid because Betty’s trust is not among the permissible appointees and commingling permitted Betty/estate/creditors to benefit | The appointment was effective because Trust A ultimately passed to Robert’s issue (a permissible group) via Betty’s trust | Held invalid: appointment ineffective because it appointed to a nonpermissible appointee and failed to segregate assets, risking benefit to impermissible parties |
| Whether doctrines of selective allocation or substantial compliance save the appointment | N/A for selective allocation; argues allocation would show Trust A assets effectively treated as passing to permissible beneficiaries | Selective allocation or substantial compliance should be applied to give effect to Betty’s intent and preserve the appointment | Rejected: court declined to adopt selective allocation (not Nebraska law) and found substantial compliance inapplicable because failure was substantive (appointed to impermissible appointee), not a formal defect |
| Whether the trustee of Robert’s trust breached duties by transferring Trust A assets pursuant to Betty’s appointment and whether recovery/remedies were available | Hornung: transfer pursuant to invalid appointment created breach; trustee must recover and redistribute | Trustee argued he acted reasonably and in good faith and therefore should not be required to recover/disgorge transfers; court lacked authority to void his acts | Court found plain error in county court’s contrary factual finding and held trustee breached the trust; remedies under Neb. Rev. Stat. § 30-3890 available (recover, compel performance, impose constructive trust) |
| Whether the county court lacked jurisdiction to invalidate Betty’s appointment or order recovery | Trustee contended county court lacked subject-matter jurisdiction to void transfers and compel recovery | Hornung argued the court had authority under declaratory/jurisdiction and remedy statutes | Court affirmed jurisdiction; remedial authority existed and relief ordering recovery/distribution was proper |
Key Cases Cited
- Applegate v. Brown, 168 Neb. 190 (state court principle that donee must follow terms/method prescribed by donor for power of appointment)
- In re Estate of Muchemore, 252 Neb. 119 (definition and limits of special/limited power of appointment)
- Massey v. Guaranty Trust Co., 142 Neb. 237 (method of executing powers must be strictly followed to effect donor’s intent)
- In re Family Trust Created Under Akerlund Trust, 280 Neb. 89 (trust interpretation and appellate review standards)
- In re Margaret Mastny Revocable Trust, 281 Neb. 188 (applicable standards for review where equity issues present)
- In re Estate of Reisman, 266 Mich. App. 522 (appointment to donee’s trust effective only where appointed assets expressly segregated from trustee’s own assets)