A Trust is arguably one of the most dynamic tools you can incorporate into your Estate Plan. This is because there are several different types of Trusts, with each of them serving very different purposes. They are sophisticated legal tools that are designed to hold assets such that they can be used for the benefit of another person or entity. Further, they often shield those assets from things that can potentially take away from their value, such as taxes or probate.
There is one type of Trust that is particularly unique: a Constructive Trust. This type of Trust is created when someone is trying to right a wrong pertaining to property. What does this really mean? Trust & Will explains the meaning of the Constructive Trust, how they work, and other important facts that you’d want to know.
What is a Constructive Trust?
A Constructive Trust is a type of Trust that holds property for a person or entity with the purpose of remedying a situation when that person or entity may have been wrong. Constructive Trusts are typically set up by court order when the court rules that there has been unjust enrichment. This means that someone may have wrongfully possessed property through fraud, misrepresentation, or a breach in their fiduciary duty.
Constructive Trusts usually aren’t set up electively as a part of someone’s Estate Plan. Rather, it’s a tool for the court system to remedy a situation in which someone has been wrong. The Trust is set up to change property ownership, from the person who wrongfully possessed the property and back to the rightful owner.
When a court decides that a Constructive Trust must be set up, it means that the person who currently owns the property is no longer the legal owner. Instead, they are holding it on the behalf of the actual owner (the person who was wronged) via the Trust. The rightful owner then benefits from the property, including any value that may have been appreciated.
What is the Meaning of “Constructive Trust?”
You can guess the Constructive Trust definition by taking a look at the words that make it up. A “Trust” is a legal tool and fiduciary entity that owns property and assets for the benefit of another individual or entity. “Constructive” typically alludes to a circumstance that leads to improvement or serves a good purpose.
By putting these two definitions together, the meaning of Constructive Trust becomes more clear. As explained above, it is a Trust that is used for the specific purpose of remedying or improving a situation in which someone was wronged. In this case, the property is held to change ownership from one owner to another. The previous owner is the person or entity who acquired the property from wrongdoing, and the new owner is the rightful person or entity who should have and will own the property moving forward.
Constructive Trust Example
Here is a Constructive Trust example to help illustrate how they work. Let’s say that John embezzles $25,000 from Sarah and uses these stolen funds to put a down payment on a house. Sarah sues John, and the judge finds him guilty. Aside from the criminal charges, the judge orders that John sets up a Constructive Trust.
When the Trust is set up, the ownership of the home is transferred to the Trust. John is no longer the owner. The Trust protects and preserves the home for Sarah, since it was financed using her money. Now the Trust serves as a holding place until a resolution is reached. Sarah will be repaid the original $25,000 or she may receive the deed to the house. (Earlier we explained that the victim can receive back the value of what was stolen, plus any value it has appreciated.) Once the wrong is righted, the Constructive Trust is terminated.
How is a Constructive Trust Enforced?
A Constructive Trust is imposed and enforced by a judge. It is at the judge’s discretion to decide how the agreement is enforced. They may choose to impose a Constructive Trust for equitable remedy if they think that the defendant would be otherwise unfairly advantaged. They may also impose a Constructive Trust if the defendant interfered with a traditional Trust. If a Traditional Trust could not be created due to formation issues, then a Constructive Trust may be the solution.
The judge can also allow for a Constructive Trust to be created in discretion so that the victims can rightfully regain what was theirs.
A judge that imposes a Constructive Trust does not intend for it to last indefinitely. They will typically impose the equitable remedy agreement and then order the defendant to take action. Once the victim (the plaintiff) is properly reimbursed, the Trust is terminated.
What Is the Difference Between a Resulting Trust and a Constructive Trust?
People often ask if there is a difference between a Resulting Trust vs. Constructive Trust. Both Trusts are examples of implied Trusts, which are created through an act of law after a case has been presented. A Constructive Trust is used as a civil remedy, a tool that enables the plaintiff to recover their property or damages from the defendant. If the defendant were to keep the contents of the Trust, they would be unfairly enriched. In contrast, a Resulting Trust is dictated by a judge based on the conduct of the parties that are involved.
A Resulting Trust is imposed when a Trust was already in place, but further legal action is required. They are commonly used when a Trustor did not set up the original Trust properly, failed to write instructions for the distribution of all property, and/or does not include a contingency plan.
When this happens, the Trustee cannot fulfill the terms of the Trust. In cases such as these, the judge may declare that the property still held in the Trust is now a part of a Resulting Trust. They will then determine how the remaining funds should be distributed.
When Should a Constructive Trust be Considered?
If you’re an individual who is looking to set up their Trust, then you won’t have to worry about a Constructive Trust as a possible option. A Constructive Trust is only established by a court to help remedy a civil dispute over property. It’s typically created when one party unfairly obtains ownership over property through a mistake or misconduct, and is used to transfer the property back to the rightful owner.
Here are some common scenarios in which a Constructive Trust may be imposed:
Breach of fiduciary duty
Coercion or duress
Crimes such as theft or homicide
A Constructive Trust might also be used if there is an argument over how a property should be passed following the death of the owner. Beneficiaries who feel wronged may take the issue to court, resulting in a court-imposed Constructive Trust. For instance, let’s say the oldest child convinced their parents not to create a Will with the assurance that they would distribute assets equally amongst all the children. However, after the parents pass away, the oldest child sells everything and keeps the proceeds for themself. Their siblings then sue them and take them to court. The judge orders the creation of a Constructive Trust and distributes the estate according to the state’s intestacy (probate) laws.
How Can I Get a Constructive Trust
A Constructive Trust is not a type of Trust that you would create on your own. It is a type of Trust that is created as a result of a court order. If you feel that someone is unfairly enriching themselves with the property that was taken from you (or property that was purchased using funds that were taken from you), then it is recommended that you seek legal advice.
In scenarios in which you were a victim of a crime such as theft, embezzlement or fraud, you will likely have a civil lawsuit on your hands. If the court determines that the property should be returned to you, then a Constructive Trust will likely be imposed as a mechanism to process the transfer.
Create Your Trust Today
It’s a great idea to know what a Constructive Trust is for your personal estate planning literacy. However, it’s a special type of Trust that is used for judicial purposes. Further, you hopefully wouldn’t need to encounter a Constructive Trust in your lifetime. As you learned today, a Constructive Trust is only used by a court of law for equitable remedy — to right a wrong. If you were a victim of fraud or embezzlement, a Constructive Trust is a helpful tool that a judge can use to make sure that your rightful property is returned to you.
Otherwise, there are plenty of other Trusts you can choose from for your own estate planning purposes. This guide takes an in-depth look at several different types of Trusts, and helps explain which ones might be the right fit for you.
Once you decide which type of Trust you’d like to set up, we’d be happy to support you in the process of creating it! Trust & Will provides an online platform that makes it easy for anyone to set up their Trust (and their Will and other important estate planning documents) in an accessible way. We recognize that estate planning can feel daunting, so we came up with a solution that makes the process simple, straightforward and easy. Join us! You’ll be so glad that you decided to take the initiative to create your Trust and protect your property and loved ones. Take our free quiz to see where you should get started, or compare our different estate planning options. Get started today!
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