What You Should Know about Constructive Trusts

Trusts can be a great part of estate planning, if you want to avoid probate or minimize estate taxes. A special trust is a constructive trust, which can be established to remedy situations where property that belongs to you is held unfairly by someone else. This type of trust has limited uses, but it’s important to know how it works.

KAKE.com’s recent article entitled, “What Is a Constructive Trust?” explains that a constructive trust can be established by the a judge, when two parties are fighting over property. It could be created when an individual is unfairly given ownership over property—because of a mistake or because of their misdeeds.

As an example, if you have a living trust, and your trustee commits a breach of fiduciary duty that lets him assume control of trust assets. You could go to court to have a constructive trust established to correct the situation in what’s known as an “equitable remedy”.

First, a constructive trust requires that there be some sort of court action between a property owner and another person who’s unfairly benefiting from the property. This could be your elderly dad’s caretaker, who coerces him into signing over the title to his property. Since you’re your dad’s legal guardian, you bring a lawsuit against the caregiver on his behalf. If the court finds that the caretaker abused her position to gain access to the property, a constructive trust can be set up to correct this, and the property could be put in the trust temporarily, while its ownership is transferred back to your father’s estate.

Constructive trusts are typically meant to be temporary relief, when your property or assets have been unfairly taken by another. The person benefiting from the property must return it to the trust. If the property can’t be returned, they have to pay the trust its equivalent monetary value.

You might need a constructive trust, when the transfer of property is connected to undue influence, duress or coercion, mistake, embezzlement, breach of trust, breach of fiduciary duty, fraudulent misrepresentation or concealment, or the commission of a crime (including theft or homicide). You may also need a judge to impose a constructive trust, when there is a broken oral promise to convey property. A constructive trust might also be needed, if there’s a dispute over how someone’s property should be distributed after they die.

The big difference between constructive trusts and other types of trusts is how they’re created and their purpose. A constructive trust doesn’t have a trustee. Instead, the person you’re suing is appointed trustee by the judge. He’s responsible for ensuring that the disputed property is returned to the trust, or its monetary equivalent.

Again, a constructive trust is designed to correct whatever situation caused you to unfairly lose ownership of your property but nothing else.

Reference: KAKE.com (June 5, 2020) “What Is a Constructive Trust?”