Hornung v. Stockall (In re Robert L. McDowell Revocable Trust)

• Decision Date: 05 May 2017
• Docket Number: No. S-16-071,S-16-071
• Citation: Hornung v. Stockall (In re Robert L. McDowell Revocable Trust), 296 Neb. 565, 894 N.W.2d 810 (Neb. 2017)
• Parties: IN RE ROBERT L. MCDOWELL REVOCABLE TRUST. Jane O. Hornung, appellee and cross-appellee, v. Sandra K. Stockall, Trustee of the Betty Jane McDowell Revocable Trust and individually, appellant, and Roger R. Stockall, Trustee of the Robert L. McDowell Revocable Trust, appellee and cross-appellant.
• Court: Nebraska Supreme Court

296 Neb. 565

894 N.W.2d 810

IN RE ROBERT L. MCDOWELL REVOCABLE TRUST.

Jane O. Hornung, appellee and cross-appellee,

v.Sandra K. Stockall, Trustee of the Betty Jane McDowell Revocable Trust and individually, appellant, and Roger R. Stockall, Trustee of the Robert L. McDowell Revocable Trust, appellee and cross-appellant.

No. S-16-071

Supreme Court of Nebraska.

Filed May 5, 2017.

John M. Lingelbach, James Tews, and Minja Herian, of Koley Jessen, P.C., L.L.O., Omaha, for appellant.

Brian S. Koerwitz and Kent E. Endacott, of Endacott, Peetz & Timmer, P.C., L.L.O., and Heidi Hornung-Scherr, of Scudder Law Firm, P.C., L.L.O., Lincoln, for appelleeJane O. Hornung.

Richard A. DeWitt and David J. Skalka, of Croker, Huck, Kasher, DeWitt, Anderson & Gonderinger, L.L.C., Omaha, for appelleeRoger R. Stockall.

Heavican, C.J., Wright, Cassel, Stacy, Kelch, and Funke, JJ.

Stacy, J.

This is a dispute between the adult children of Robert L. McDowell and Betty Jane McDowell, both deceased.The issue presented is whether Betty validly exercised a limited power of appointment given to her by Robert's trust when she appointed the assets in Robert's trust to her own revocable trust.The county court found Betty's appointment was ineffective and ordered that the assets be recovered and distributed through Robert's trust.We affirm as modified.

I.FACTS

Robert and Betty were the owners of McDowell Cattle Company, which consists of farmland and pasture near Arnold.Nebraska.Robert and Betty each owned 270 shares of the company.

In 2001, Robert and Betty drafted wills and revocable trusts with nearly identical language.Robert's trust provided in relevant part:

From and after my death all principal of the trust not allocated to the said Trust shall be administered and distributed as Trust "A" as follows:

....(d) Upon the death of my wife in the event my wife shall survive me, the then principal of Trust "A" shall be distributed to or held in trust for the benefit of such one or more of my issue, the spouses of any such issue, and tax-exempt charitable organizations, in such shares and proportions and subject to such powers, terms and conditions, as my wife shall appoint by will and any principal of Trust "A" not appointed effectively by my wife shall continue to be administered as Trust "A" pursuant to the following provisions of this instrument.

Robert died before Betty.After his death, Betty executed a new will.In this will, she provided:

I hereby exercise any power of appointment given to me under the ... Robert L. McDowell Revocable Trust ... (including Trust "A" ...), and direct that all such property over which I have a power of appointment, together with all of my property, whether real or personal, is hereby devised to the Trustee or Trustees of the [Betty Jane McDowell Revocable Trust], to be administered by the Trustee as part of the property of said ... Trust, and to be held or distributed according to the terms thereof....

Robert and Betty had two children who survived them: Jane O. Hornung and Sandra K. Stockall.Pursuant to the terms of Betty's will, both Robert's 270 shares of McDowell Cattle Company—from his "Trust ‘A’ "(Trust A)—and Betty's 270 shares passed through Betty's trust to Stockall.Hornung received nothing under the terms of Betty's trust, but was a potential beneficiary under Robert's trust.

After at least some of Robert's assets from Trust A were distributed through Betty's trust, Hornung filed suit in the county court for Custer County requesting instructions and a declaration of rights of the beneficiaries of Robert's trust, pursuant to Neb. Rev. Stat. § 30-3812(Reissue 2016).Hornung alleged that "[t]he power of appointment exercised under Betty's Will is invalid and ineffective as the Betty Jane McDowell Revocable Trust is not a person or beneficiary to which the assets of Trust A could be transferred."Hornung alleged that the assets of Trust A should instead be distributed pursuant to the terms of Robert's trust, which provided that any residue was to be distributed in equal shares to Hornung and Stockall.Hornung's petition "request[ed] that the Court instruct the Trustee of [Robert's trust] to recover, preserve, and distribute the principal of Trust A accordingly and ... issue a preliminary order estopping the transfer of any assets of Trust A."

Stockall, in her capacity as the trustee of Betty's trust and in her individual capacity, counterclaimed in the county court action.Her counterclaim also sought instructions and a declaration of rights of the beneficiaries under Robert's trust.Stockall denied that the power of appointment exercised by Betty was invalid.Stockall's counterclaim requested that the court enter an order (1) finding that Betty's exercise of the power of appointment was valid and enforceable, (2) approving the actions taken by the trustee of Robert's trust in "distributing the remaining principal of [Trust A] to the Trustee of Betty's Trust in accordance with Betty's exercise of the power of appointment," and (3) requiring the trustee of Robert's Trust "to promptly distribute the remainder of the principal of [Trust A] in accordance with Betty's exercise of the power of appointment ... to the Trustee of Betty's Trust...."Our record reflects that notice of the action and the counterclaim was provided to the trustees of both Robert's trust and Betty's trust and to all potential beneficiaries of either trust.

A bench trial was held.Hornung, Stockall, and the trustee of Robert's trust participated.The court determined Betty's exercise of the power of appointment was ineffective because it exceeded the scope of the limited power granted in Robert's trust, in that it commingled the Trust A assets with Betty's trust assets and thus benefited Betty, her estate, and creditors of her estate so that it was not limited to one of the three classes of beneficiaries Robert designated.The court ordered the trustee of Robert's trust to recover all assets of Trust A and to distribute them in accordance with the terms of Robert's trust.

Stockall appealed, and the trustee of Robert's trust (who is also Stockall's husband) filed a cross-appeal.We granted Stockall's petition to bypass the Nebraska Court of Appeals and moved this appeal to our docket.

II.ASSIGNMENTS OF ERROR

Stockall assigns, restated, that the county court erred in (1) finding Betty's exercise of the power of appointment granted to her by Robert's trust was ineffective; (2) finding Betty exceeded the power granted to her by Robert's trust; (3) finding merged assets (assets appointed from Robert's trust and assets that originally constituted Betty's trust) were used to pay taxes and creditors of Betty's estate; (4) finding Betty benefited herself, her estate, her creditors, and the creditors of her estate by merging the Trust A assets with her trust; (5)findingNeb. Rev. Stat. § 30-3850(a)(3)(Reissue 2016) would allow Betty's creditors to reach the assets Betty appointed from Robert's trust to her trust; (6) finding Betty's appointment of the Trust A assets to her trust caused those assets to be taxable as part of Betty's gross estate; and (7) finding Betty did not designate a permissible appointee in her will and instead opted to appoint the Trust A property to her trust.

The trustee of Robert's trust assigns on cross-appeal, restated, that the county court(1) erred in ordering him as trustee to recover all Trust A assets and then distribute them under Robert's trust and (2) lacked subject matter jurisdiction to determine that Betty's exercise of the power of appointment was invalid or to hold that transfers from Robert's and Betty's trusts were void.

III.STANDARD OF REVIEW

The interpretation of the words of a trust is a question of law.¹Absent an equity question, an appellate court reviews trust administration matters for error appearing on the record; but where an equity question is presented, appellate review of that issue is de novo on the record.²

IV.ANALYSIS

1.APPOINTMENT WAS INEFFECTIVE

Stockall argues the county court erred in finding Betty's exercise of the power of appointment was ineffective.We find no error on this issue.

In Nebraska, powers of appointment are construed according to the principles of the common law.³In the construction of powers of appointment, the cardinal principle is that the intention of the donor is controlling.⁴The donee of a power of appointment must keep within its terms, and where the donor prescribes the method of its execution, that method must be strictly followed, so far at least as may be necessary to give effect to the donor's intent and design.⁵Where there is a prohibition, limitation, or restriction, such provision will control and the donee will not be permitted to disregard the same.⁶

Here, Robert's trust gave Betty the power to "appoint by will" the Trust A property to "be distributed to or held in trust for the benefit of such one or more of my issue, the spouses of any such issue, and tax-exempt charitable organizations."The parties agree this power of appointment was a special or limited power of appointment.A power of appointment is considered special or limited when the donee's appointment is limited to a group which is not unreasonably large and which does not include the donee.⁷Here, Robert made it clear the permissible group included only tax-exempt charitable institutions, Robert's issue, and spouses of his issue.

To determine whether Betty effectively exercised this limited power of appointment, we look to the provisions of Betty's will, which provided:

[A]ll such property over which I have a power of appointment, together with all of my property, whether real or personal, is hereby devised to the Trustee[of Betty's revocable trust], to be administered by the Trustee as part of the property of said ... Trust, and to be held or distributed according to the terms thereof.

Notably, the beneficiaries of Betty's trust were Stockall and several of Robert's grandchildren.Betty's...