BMO Harris Bank v. Towers

Mary and Martin Cornelius each created a trust that gave their son, Martin Cornelius Jr. (Martin Jr.), (1) the use of the trust’s assets during his life and (2) a limited power to appoint the trust’s assets in his will to his spouse or other identified relatives. However, if Martin Jr. did not effectively exercise his limited power of appointment, the assets would go to Martin Jr.’s descendants. At his death, Martin Jr. was survived by his wife and four children: Harry (defendant), Martin III (defendant), Camilla (defendant), and Dagmar. Martin Jr.’s will appointed both parental trusts’ assets to a third trust that Martin Jr. had created. This third trust also included the assets from Martin Jr.’s own personal estate. Martin Jr.’s wife was the third trust’s beneficiary for life, with any remaining assets to be distributed at her death to Harry and three of Martin Jr.’s grandchildren. According to the will, Martin Jr. had intentionally not listed Martin III and Dagmar as beneficiaries. Under the third trust’s terms, Martin Jr.’s estate’s debts were paid from the trust’s funds. Although not required by the trust’s terms, the debts were paid solely from the estate’s assets, and no parental trust assets went toward paying these debts. The trustee of the two parental trusts (plaintiff) asked the court to determine whether Martin Jr. had effectively exercised his powers of appointment. The third trust’s trustee (defendant) argued that the exercise had been valid because the assets went into a trust that benefitted permitted appointees. The trial court found that Martin Jr.’s exercise of his limited power of appointment was not effective because (1) the third trust also benefited Martin Jr.’s estate and (2) the estate was not a permitted appointee. Because the power had not been exercised effectively, the trial court ordered that the parental trusts’ assets be distributed equally among Martin Jr.’s descendants, his four children. The third trust’s trustee, Harry, Camilla, and Martin III appealed.