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 Trust A assets "by will" to Robert's issue, spouses of issue, or tax-exempt charities.
- Robert died first; Betty later executed a will that exercised any power of appointment by devising all property over which she had a power (including Trust A assets) to the trustee of her own revocable trust to be administered as part of that trust.
- After transfers, Betty’s trust (as administered) resulted in all Trust A assets passing through Betty’s trust to Sandra Stockall (one child); Jane Hornung (the other child and potential beneficiary under Robert’s trust) received nothing.
- Hornung sued for declaratory relief asking the court to declare Betty’s appointment invalid and to require recovery and distribution under Robert’s trust; Stockall (as Betty’s trustee) counterclaimed seeking validation of the appointment.
- The county court held Betty’s appointment ineffective because devising Trust A to her own trust commingled the appointive assets with assets not in the permissible class (thereby potentially benefiting Betty, her estate, or her creditors), and ordered recovery and distribution under Robert’s trust; the Nebraska Supreme Court affirmed (with modification).
Issues
| Issue | Plaintiff's Argument (Hornung) | Defendant's Argument (Stockall) | Held |
|---|---|---|---|
| Whether Betty validly exercised the limited power of appointment by devising Trust A assets to her own revocable trust | The devise to Betty’s trust was invalid because the trust (and the donee) was not within the limited class; appointment must be to a permissible appointee | The appointment was effective because ultimately the assets were distributed to Robert’s issue (a permissible group) via Betty’s trust | Held: Invalid — devising to Betty’s trust commingled assets and potentially benefited impermissible objects, so the appointment exceeded the limited power |
| Whether doctrines of selective allocation or substantial compliance cure the defective appointment | N/A (Hornung opposes application) | Stockall: selective allocation or substantial compliance should be applied so appointive assets are treated as allocated to permissible beneficiaries, making the appointment effective | Held: Rejected — Nebraska has not adopted selective allocation and the trusts’ language was unambiguous; substantial compliance inapplicable because failure was substantive (benefited impermissible parties), not merely formal |
| Whether the trustee of Robert’s trust breached duties by transferring Trust A assets pursuant to Betty’s ineffective appointment and whether the court could order recovery/remedies | Hornung: trustee breached by transferring pursuant to invalid appointment; remedies (recovery, restore, void act) are available | Trustee argued he acted in good faith and county court erred ordering recovery and breach remedies | Held: Court modified trial court to find the trustee breached the trust; remedies under Neb. Rev. Stat. § 30-3890 available and recovery/distribution under Robert’s trust proper |
| Whether the court had jurisdiction to void earlier transfers and order recovery | Hornung: court has jurisdiction to declare rights and remedy breaches of trust | Trustee contended lack of subject-matter authority to void transfers where he acted appropriately | Held: Court has jurisdiction; plain error corrected where trial court’s finding of no breach was inconsistent with holding the appointment ineffective |
Key Cases Cited
- Applegate v. Brown, 168 Neb. 190, 95 N.W.2d 341 (Neb. 1959) (principle that donee of power must keep within its terms and prescribed method of execution must be followed)
- Massey v. Guaranty Trust Co., 142 Neb. 237, 5 N.W.2d 279 (Neb. 1942) (trust power execution must be strictly followed to effect settlor's intent)
- In re Estate of Muchemore, 252 Neb. 119, 560 N.W.2d 477 (Neb. 1997) (discusses special/limited powers of appointment and permissible appointees)
- BMO Harris Bank N.A. v. Towers, 43 N.E.3d 1131 (Ill. App. 2015) (appointing parents' trust assets to donee’s personal trust that commingles assets is an ineffective exercise of a limited power)
- In re Estate of Reisman, 266 Mich. App. 522, 702 N.W.2d 658 (Mich. Ct. App. 2005) (appointment to donee’s trust effective where the trust expressly segregated appointed assets from other trust or estate assets)