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 by will" Trust A assets to his issue, spouses of issue, or 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) to the trustee of her revocable trust to be administered as part of her trust.
- Betty’s trust named their daughter Sandra Stockall (trustee) and several of Robert’s grandchildren as beneficiaries; ultimately Trust A assets, after passing through Betty’s trust, were distributed to Stockall and not to Jane Hornung.
- Hornung sued for a declaratory judgment and recovery of Trust A assets, arguing Betty’s appointment was invalid because Betty’s trust was not a permissible appointee and the appointed property would be commingled and potentially subject to Betty/estate/creditor claims.
- The county court held Betty’s exercise of the limited power of appointment ineffective and ordered recovery and distribution of Trust A assets under Robert’s trust; the court also (erroneously, on review) found Robert’s trustee had not breached the trust.
- The Nebraska Supreme Court affirmed, modifying the judgment to hold that the transfer by Robert’s trustee pursuant to the ineffective appointment was a breach of trust and that remedies to recover Trust A assets were available.
Issues
| Issue | Hornung's Argument (Plaintiff) | Stockall's Argument (Defendant) | Held |
|---|---|---|---|
| Whether Betty validly exercised Robert’s limited power of appointment by devising Trust A assets to her revocable trust | The appointment was invalid because Betty’s trust is not within the limited class and the devise commingled assets and could benefit Betty/her estate/creditors | The appointment is valid because ultimately the assets were distributed to Robert’s issue (a permissible class) via Betty’s trust | Held invalid: devising to Betty’s trust (not a permissible appointee) and failing to segregate appointed assets rendered the appointment ineffective |
| Whether doctrines of selective allocation or substantial compliance save the appointment | N/A (Hornung opposes application) | These doctrines should validate the appointment by allocating liabilities or recognizing substantial compliance with donor’s intent | Court refused to adopt selective allocation judicially and held substantial compliance inapplicable where substance (impermissible appointee) violated the limited power |
| Whether Robert’s trustee breached the trust by distributing Trust A assets following Betty’s ineffective appointment | Trustee’s transfers were improper and assets should be recovered | Trustee argued he acted in good faith and did not breach; thus court lacked authority to void his acts or compel recovery | Court found plain error in the county court’s finding of no breach; transfer pursuant to an invalid appointment constituted a breach and remedies under Neb. Rev. Stat. § 30-3890 apply |
| Remedies available to recover Trust A assets | Hornung sought recovery and distribution under Robert’s trust terms | Stockall opposed unwinding the distributions; contended court lacked jurisdiction or basis to order recovery | Court affirmed authority to compel recovery, restore property, void trustee acts, and otherwise remedy the breach; ordered recovery and distribution under Robert’s trust |
Key Cases Cited
- In re Family Trust Created Under Akerlund Trust, 280 Neb. 89 (2010) (trust interpretation is question of law)
- In re Margaret Mastny Revocable Trust, 281 Neb. 188 (2011) (appellate review standards for trusts/equity)
- Applegate v. Brown, 168 Neb. 190 (1959) (donee must keep within terms of a power of appointment)
- BMO Harris Bank N.A. v. Towers, 43 N.E.3d 1131 (Ill. App. 2015) (appointing to own trust without segregation can be ineffective where it permits benefit to impermissible appointee or creditors)
- In re Estate of Reisman, 266 Mich. App. 522 (2005) (appointment to own trust effective only where trust expressly segregates appointed assets from other trust/estate assets)
- Massey v. Guaranty Trust Co., 142 Neb. 237 (1942) (method of executing a power must be strictly followed)