With all the endless types of Trusts that exist, it can be confusing to differentiate one from the other. You will only encounter a constructive trust in unique circumstances, but it is still essential to understand what is involved.
What is a constructive trust?
A constructive trust is a passive type of arrangement where one person holds property (whether real property, money, painting, a car, a bank account, or almost any other kind of property you can think of) as its nominal owner for the good of one or more beneficiaries.
A constructive trust is typically implied into the circumstance to prevent the person holding the property from unjustly benefiting from the property’s beneficiaries. Where there is no formal Trust Deed, the arrangement between the parties are such that an implied trust should be constructed between them.
It's important to note that a constructive trust can be difficult to establish. Courts often look to other remedies before finding that a constructive trust exists.
The main features of a constructive trust are:
- The trust is implied by a Court
- The Court determines that the normal owner of the asset holds it as a constructive trustee for the benefit of the beneficiaries
- There’s no formal trust document or agreement
- Scenarios of constructive trusts
The best way to explain a constructive trust is to give examples. Just like most legal situations, constructive trusts depend on a variety of circumstances, and each case is different.
Constructive trust examples*
*Disclaimer: All examples included herein are entirely fictional and are to be used as a guide only. The individual circumstances of each case will differ, and the above should not be used as a basis to initiate legal proceedings. Please consult a lawyer who is experienced with constructive trusts to find the best way to handle your matter.
One of the ways a constructive trust may arise is a breach of duty. For example, a real estate agent reduces their commission on condition that the vendor pays them an upfront cash component. Using the cash component, the real estate agent purchases a property. The agent’s employer discovers what they are doing and goes to Court, seeking a declaration that the property the agent purchased was held on constructive trust for the employer because of their breach of duty to the employer.
1. Property interference
Another example is property interference. For example, an elderly mother gives her daughter the sum of $500,000 and the daughter agrees that the mother can live with her on her property until she dies or needs to move. During this time, the mother contributes to the payment of various bills and purchasing of household items. The daughter then seeks to sell the property and buy a new property where she will live without the mother. The mother may seek an order from the Court that she has an interest in the daughter’s property by way of a constructive trust because of what she has put into the property and the money she gave the daughter during her tenure.
2. Insurance funds with a Trust
Another example of a constructive trust is where the Trustee of a Trust uses trust money to purchase an insurance policy. The Trustee then dies, and the insurance company pays out the benefit to their family but excludes the beneficiaries of the Trust. The beneficiaries of the trust may go to Court to seek an order that they receive the insurance funds by a constructive trust because it was their money that was used.
3. Unjust enrichment
A more complicated scenario is unjust enrichment. This occurs when, for instance, an employer accidentally transfers $20,000 into an employee’s account. If the employer were to take the matter to Court, it might be that the Court orders that the employee holds the money in trust for the employer. This is because if they were to benefit from the funds transferred, they would be unjustly enriched.
4. Unjust enrichment
Another example would be if Party A steals $1 million from Party B and buys a house with the money. The Court can trace the house back to the funds taken from Party B and deem the house to be held in trust by a Party A for Party B. Party A must then convey the title of the house to Party B.
Can you defend a constructive trust?
Depending on the particular circumstances of the case, a constructive trust can be hard to establish. Courts will try to look at other remedies before finding that a constructive trust exists.
When it comes to your legal affairs, it is always essential to speak to a qualified lawyer to get sound advice. Rose Law has over 30 years of experience in handling legitimate claims, and our dedicated team can help to make sense of any concerns you may have regarding a constructive trust.