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

Background

Robert and Betty McDowell executed nearly identical revocable trusts. Robert's trust (Trust A) granted Betty a limited power to appoint Trust A assets by will only to (1) Robert's issue, (2) spouses of his issue, or (3) tax-exempt charities.
Robert died first; Betty later executed a new will that purported to exercise the power of appointment by devising all property over which she had a power of appointment, together with all of her own property, to the trustee of her revocable trust to be administered as part of that trust.
Betty’s revocable trust named Stockall (one child) and certain grandchildren as beneficiaries; Hornung (the other child) received nothing under Betty’s trust but was a permissible appointee under Robert’s trust.
After distributions were made to Betty’s trust, Hornung sued for a declaration that Betty’s exercise of the power of appointment was invalid and that Trust A assets should be distributed under Robert’s trust; Stockall (as Betty’s trustee and individually) defended and counterclaimed.
The county court held Betty’s appointment ineffective because devising Trust A assets to her own trust commingled them and potentially benefited impermissible recipients (Betty, her estate, or creditors); the court ordered recovery and redistribution under Robert’s trust.
On appeal, the Nebraska Supreme Court affirmed the county court’s ruling but modified the decision to find that the trustee of Robert’s trust had breached the trust by transferring Trust A assets pursuant to the invalid appointment and remanded with authority to require recovery and redistribution.

Issues

Issue	Plaintiff's Argument (Hornung)	Defendant's Argument (Stockall)	Held
1) Was Betty’s exercise of the limited power of appointment valid?	Betty’s will is ineffective because she appointed to a trust that is not among the permissible appointees.	The appointment is effective because assets passing through Betty’s trust ultimately reached Robert’s issue (permissible class).	Held: Invalid. Devising Trust A assets to Betty’s trust commingled them and potentially benefited impermissible recipients, so the exercise was ineffective.
2) Should doctrines of selective allocation or substantial compliance save the appointment?	N/A (Hornung opposed application).	Stockall: Apply selective allocation or substantial compliance to treat appointed assets as allocated to permissible beneficiaries, validating the appointment.	Held: Doctrines not applied. Court declined to adopt selective allocation; substantial compliance inapplicable because failure was substantive (not formal).
3) Did the trustee of Robert’s trust breach duties by transferring Trust A assets?	Trustee breached by distributing to an invalid appointee and must recover assets.	Trustee argued he acted appropriately in good faith and did not breach, so should not be forced to recover assets.	Held: Trustee did breach by transferring pursuant to ineffective appointment; court may compel recovery and other statutory remedies.
4) Were remedies and jurisdiction appropriate to recover and redistribute Trust A assets?	Court has authority under trust-remedies statute to void acts, impose constructive trust, and order recovery.	Trustee argued court lacked authority to void his transfers given its finding that he acted appropriately.	Held: Court had authority; plain error in earlier finding that trustee acted appropriately—remedies under statute are available and the recovery order stands.

Key Cases Cited

In re Family Trust Created Under Akerlund Trust, 280 Neb. 89 (Neb. 2010) (interpretation of trusts is a question of law and governs appellate review).
Massey v. Guaranty Trust Co., 142 Neb. 237 (Neb. 1942) (where donor prescribes method of execution of a power, it must be strictly followed).
In re Estate of Reisman, 266 Mich. App. 522 (Mich. Ct. App. 2005) (appointment to a beneficiary trust effective only where appointed assets are expressly segregated from trustee’s own assets).
In re Louise V. Steinhoefel Trust, 22 Neb. App. 293 (Neb. Ct. App. 2014) (breach of trust defined as violation of duty to carry out trust terms).