## Facts

- Robert L. McDowell and his wife, Betty Jane McDowell, executed revocable trusts and wills as part of an estate plan involving their closely held company interests.
- Robert’s revocable trust created “Trust A” for Betty’s benefit and granted Betty a **limited testamentary power of appointment** over Trust A principal, restricting permissible appointees to Robert’s issue, spouses of issue, and tax-exempt charitable organizations.
- After Robert’s death, Trust A was funded with assets including Robert’s shares in McDowell Cattle Company.
- Betty later executed a will purporting to exercise Robert’s limited power by appointing property subject to the power to the trustee of Betty’s own revocable trust.
- The Betty trust’s terms allowed use of trust assets to pay Betty’s debts and administration expenses and directed distributions primarily favoring one daughter (Sandra) and certain grandchildren, excluding the other daughter (Jane).
- After Betty’s death, the trustee of Robert’s trust treated Betty’s appointment as valid and began transferring Trust A assets to the Betty trust, which made distributions consistent with its own terms.
- Jane sued in county court seeking instructions and a declaration of beneficiaries’ rights under Robert’s trust.

## Issues

1. Whether Betty validly exercised Robert’s limited testamentary power of appointment by appointing Trust A principal to the trustee of her own revocable trust.
2. Whether doctrines such as selective allocation or substantial compliance could render the appointment effective despite exceeding donor-imposed limits.
3. Whether the trustee of Robert’s trust breached fiduciary duties by distributing Trust A assets pursuant to Betty’s attempted appointment.

## Decision

- The Nebraska Supreme Court held Betty’s exercise of the limited power of appointment was **ineffective** because the appointment to her revocable trust was outside the donor’s permitted class and allowed benefits to non-permissible parties (including potential benefit to Betty’s estate and creditors through debt and expense payments).
- The court rejected application of **selective allocation** and **substantial compliance** to save the appointment because doing so would override substantive donor restrictions and require reworking the dispositive scheme.
- The court affirmed the remedy requiring **recovery** of assets transferred pursuant to the invalid appointment and distribution under Robert’s trust’s default provisions for property “not appointed effectively.”
- The court modified the lower court’s decree to hold the trustee of Robert’s trust **breached the trust** by distributing assets under an invalid appointment.
- Disposition: **affirmed as modified**.

## Legal Principles

- Powers of appointment are construed under common-law principles, and the **donor’s intent controls**.
- A donee must act **within the terms** of the power; donor-imposed prohibitions, limitations, and restrictions are enforceable and controlling.
- A **special (limited) power of appointment** restricts appointments to a defined class that does not include the donee; the donee may not structure an exercise that permits benefit to impermissible parties (including the donee, the donee’s estate, or creditors).
- Doctrines such as **selective allocation** and **substantial compliance** cannot be used to cure an attempted exercise that violates **substantive** restrictions on permissible appointees.
- A trustee must administer a trust according to its terms; distributing trust assets based on an **invalid** exercise of a power of appointment constitutes a breach of trust.

## Conclusion

The court enforced the donor’s restrictions on a limited testamentary power of appointment, held that a transfer to the donee’s revocable trust was invalid because it permitted impermissible benefits, required recovery and redistribution under the donor’s default trust provisions, and ruled that the trustee breached fiduciary duties by distributing assets under the invalid appointment.


Hornung v. Stockall (In re Robert L. McDowell Revocable Tr.), 296 Neb. 565, 894 N.W.2d 810 (Neb. 2017)