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

Background

Robert and Betty McDowell executed nearly identical revocable trusts in 2001. Robert's trust (Trust A) gave Betty a limited power to "appoint by will" Trust A assets to "one or more of my issue, the spouses of any such issue, and tax-exempt charitable organizations."
Robert died first; Betty thereafter executed a will that stated she exercised any power of appointment under Robert’s trust and devised all such property "together with all of my property" to the trustee of her revocable trust to be administered as part of that trust.
Under Betty’s trust, distributions would go to her daughter Sandra Stockall (trustee) and several of Robert’s grandchildren; Betty’s trust did not exclude commingling of appointed assets.
Betty’s trustee (Stockall) caused some of Trust A assets (including Robert’s 270 company shares) to pass through Betty’s trust to Stockall; Jane Hornung (Robert’s other child and potential Trust A beneficiary) sued for instructions and a declaration that Betty’s appointment was invalid.
The county court held Betty’s appointment ineffective because devising Trust A assets to her own trust commingled them and potentially benefited Betty, her estate, or creditors (impermissible under the limited appointment), ordered recovery and distribution under Robert’s trust, and (contrary to its other findings) initially found Robert’s trustee had not breached his duties.
On appeal, the Nebraska Supreme Court affirmed the invalidity of the appointment, rejected arguments invoking selective allocation and substantial compliance, and modified the judgment to find Robert’s trustee did breach the trust and therefore remedial relief (recovery and redistribution) was authorized.

Issues

Issue	Hornung's Argument (Plaintiff)	Stockall's Argument (Defendant)	Held
Was Betty’s exercise of the limited power of appointment valid when she devised Trust A to her own revocable trust?	The appointment was invalid because Betty’s trust is not a permissible appointee and the devise commingled assets, potentially benefiting Betty, her estate, or creditors.	The appointment was effective because ultimate distributions from Betty’s trust went to Robert’s issue (permissible class).	Held: Invalid — devising to Betty’s trust (without segregation) exceeded the limited power and was ineffective.
Should doctrines of selective allocation or substantial compliance save the appointment?	N/A (Hornung opposed)	These doctrines should be applied so owned and appointive property are allocated to effect intent and render the appointment effective.	Held: Rejected — Nebraska has not adopted selective allocation and the trusts’ language is unambiguous; substantial compliance does not apply because the failure was substantive (impermissible appointee), not formal.
Did the trustee of Robert’s trust breach his fiduciary duties by transferring Trust A assets pursuant to Betty’s ineffective appointment?	The trustee breached by transferring assets to an invalid appointee and must recover and redistribute assets under Robert’s trust.	Trustee argued he acted reasonably and in good faith and therefore did not breach; court lacked authority to void transfers.	Held: Trustee did breach; county court’s original finding of no breach was plain error. Remedies under Neb. Rev. Stat. § 30-3890 are available to recover and restore Trust A property.
Are remedies available to recover Trust A assets distributed pursuant to the ineffective appointment?	Remedies (compel performance, restore property, void acts, constructive trust) are appropriate to preserve settlor’s intent.	N/A	Held: Remedies under § 30-3890 are available; court may compel recovery and direct distribution under Robert’s trust.

Key Cases Cited

In re Family Trust Created Under Akerlund Trust, 280 Neb. 89 (discussing trust interpretation as question of law)
In re Margaret Mastny Revocable Trust, 281 Neb. 188 (standards for appellate review of trust matters)
Applegate v. Brown, 168 Neb. 190 (construction of powers of appointment; donor’s intent controls)
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 (requirement that prescribed method of executing a power be strictly followed)
BMO Harris Bank N.A. v. Towers, 43 N.E.3d 1131 (Illinois appellate decision finding appointment to settlor’s own trust ineffective where assets were commingled)
In re Estate of Reisman, 266 Mich. App. 522 (Michigan appellate decision holding appointment effective where trust expressly segregated appointed assets)