In a recent case handed down by the Nebraska Supreme Court (the “Court”), In re Robert L. McDowell Revocable Trust, the Court considered the validity of the exercise of a limited testamentary power of appointment in favor of the powerholder’s own revocable trust, ultimately finding the exercise to be ineffective and void. In addition to providing a thoughtful lesson on powers of appointment, the Court’s holding serves as a cautionary tale to trustees who are required to act on purported exercises and underscores the importance of careful draftsmanship.
Robert and Betty Dowell, husband and wife, executed revocable trusts in 2001. Robert predeceased Betty, to whom he granted a limited testamentary power of appointment over assets remaining in a subtrust established upon his death (the “Power”). Permissible appointees included one or more of Robert’s descendants, the spouses of any descendants and tax-exempt organizations. To the extent any remaining assets were not effectively appointed by Betty through a last will, the remainder would be divided equally among Robert and Betty’s two surviving daughters, Jane O. Hornung (“Jane”) and Sandra K. Stockall (“Sandra”).
Through a last will executed subsequent to Robert’s death, Betty exercised the Power, or so she thought. Betty attempted to exercise the Power in favor of her own revocable trust, the terms of which excluded Jane as a beneficiary. Upon Betty’s death, the trustee of Robert’s subtrust, acting in compliance with the Power, distributed all of its assets to Betty’s trust. Jane filed suit in county court requesting instructions and declaration of beneficiaries’ rights pursuant to Robert’s trust. Jane alleged the exercise of the Power was invalid and as a result, the remaining assets in Robert’s subtrust should have been divided equally between her and Sandra. Sandra counterclaimed, requesting the court to enter an order validating Betty’s exercise and approving the distribution to Betty’s trust. The court found that Betty’s exercise was invalid because it exceeded the scope of the limited Power insofar as it commingled Robert’s subtrust’s assets with Betty’s trust’s assets, potentially benefiting Betty, her estate and its creditors – none of which were permissible appointees of the Power. Sandra appealed, and the Court granted her petition to bypass the Nebraska Court of Appeals.
In its opinion, the Court espoused the cardinal principal of the construction of powers of appointment, namely that the donor’s intention is controlling. The Court found that in the clear and unambiguous terms of the Power Robert granted to Betty, he limited the class of appointees. Betty purported to exercise such Power in favor of the trustee of her own revocable trust, to be held and administered as part of its property. The Court acknowledged that the remainder beneficiaries of Betty’s trust were Sandra and several of Robert’s grandchildren, all of whom were permissible appointees of the Power. To this end, Sandra argued that because the subject property would ultimately pass to individuals who were permissible appointees, the Power should be given effect. Meanwhile, Jane argued that an appointment to Betty’s trust – an impermissible appointee – rendered the appointment ineffective, regardless of whether the underlying beneficiaries of Betty’s trust were permissible appointees of the Power.