Trusts are an interesting and powerful tool you can use for Estate Planning purposes. A trust is a tool that can hold assets for the benefit of another entity or person. Despite sharing the name ‘trust’, different types of trusts can look radically different, each with their own pros and cons. While this is not personalized legal advice, this article is an introduction to the little-known world of constructive trusts.
Constructive trusts are fascinating creatures of the law that serve a niche purpose. Unlike many trusts which are planned ahead of time, constructive trusts are formed when someone is trying to correct an injustice relating to assets or property. When a court finds that someone (may have) wrongfully possessed or taken control over assets through a breach of duty, misrepresentation, or fraud – a court often creates a constructive trust. Unlike other trusts (which are proactive), this is a reactive tool that is used to transfer ownership of the property back to its rightful owner.
The property doesn’t go directly to its rightful owner. Instead, it goes into a trust – which holds the property on behalf of the rightful owner. The person who previously possessed the property through unjust means no longer possesses the property. Here’s an example to clear things up.
Imagine that an older sister (Anna) steals $50,000 from their twin brother’s (Jimmy) college fund. Anna takes the fifty thousand dollars and purchases a tract of land in the mountains with the money. Jimmy takes Anna to court, and Jimmy wins. Anna may face potential criminal charges (not relevant for this article), and the judge may order Anna to create a Constructive Trust.
Suddenly, Anna’s weekend getaway isn’t hers anymore – it’s the property of the trust. The Constructive Trust preserves the asset for Jimmy, since it was purchased with his money. While the two sides work towards a resolution, the trust holds the property for the benefit of Jimmy – not Anna.
The resolution can vary from case to case, but Jimmy would most likely receive either the cash or the plot of land (although other scenarios may exist). At the resolution of the case, the assets in the trusts are transferred to Jimmy, and the Constructive Trust is dissolved.
Constructive Trusts are heavily influenced by the judge who orders its creation and enforcement. Constructive trusts are usually created with an equitable remedy in mind – righting a wrong. Occasionally, a constructive trust is created when a defendant’s actions made a traditional trust ineffective or impossible to create. Other times, a constructive trust may be created when there is a dispute about the inheritance of a deceased person.
Although they sound similar, a constructive trust is not a resulting trust. In short, resulting trusts usually are formed when a trust was implemented but is unable to be fulfilled for one reason or another. Unlike most trusts, you cannot create a constructive trust on your own. If you think that a situation in your life might justify the implementation of a Constructive Trust, you should contact an qualified attorney who specializes in these matters sooner rather than later!