Constructive Trust: Definition, Types, Defenses & Legal Help

A trust is used in estate planning to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries. While the requirements for forming a trust vary considerably by state, the following requirements are generally necessary:

• Settlor Capacity: In order to create a valid trust, the settlor must have the proper mental capacity to create the trust. This means that they must intend to create a trust expressed with any necessary formalities of the state, such as the trust being in writing;
• Identifiable Property: Trust property, or “trust res,” must be specifically identifiable. This means that there must be a sufficient description to know what property is to be held;
• Identifiable Beneficiary: The beneficiary or group of beneficiaries must be sufficiently identifiable, meaning they must be able to be determined when the trust is formed. However, in the case of a charitable trust, this may not be a requirement; and
• Proper Trust Purpose: The trust cannot be created for an illegal reason. An example of this would be how a person cannot create a spendthrift trust and hold the property in their own name for their benefit, simply to avoid creditors from reaching their assets.

Generally speaking, all trusts created in the United States are presumed irrevocable unless the trust instrument otherwise states that the trust is revocable.

Some of the most common trusts that may be created include:

• Inter Vivos or Living Trust;
• Testamentary Trust;
• Charitable Trust;
• Discretionary Trust;
• Special Needs Trust;
• Spendthrift Trust; and
• Land Trust.

Numerous other trusts may be created for other purposes. Other, less common trusts that may be created include:

• Asset Protection Trusts;
• Bypass (or AB) Trusts;
• Clifford (or Short-Term) Trusts;
• Crummey Trusts;
• Implied Trusts;
• Pooled Trusts;
• Secret (and Semi-Secret) Trusts; and
• Totten Trusts (Payable on Death Accounts).

It is important to note that a trust may also contain characteristics of multiple trusts. An example of this would be how it is not uncommon for a trust to be an irrevocable, express, inter vivos, discretionary, spendthrift trust. Before creating a trust, you should carefully consider the purpose for which you are creating the trust, as one or multiple trusts may be the best solution for you.

What Is A Constructive Trust?

A constructive trust is not a type of trust; rather, it is a form of equitable relief that a court issues to prevent a defendant from being unjustly enriched. Constructive trusts can also be used as a means with which to restore any losses that a plaintiff may have suffered due to the defendant’s abuse of the trust funds.

Generally, a basic trust is created by an individual known as the settlor, intending to transfer property to another party known as the trustee. They will then be responsible for distributing its contents to a third party, the beneficiaries.

However, in a constructive or implied trust, the trust is not officially formed by the settlor. Rather, the trust is imposed by a court based on the facts and circumstances surrounding the trust matter. An example would be if a defendant trustee improperly steals trust funds for their own benefit, the court can create a constructive trust as a remedy to return what was stolen to the plaintiff. The plaintiff is generally a beneficiary. Constructive trusts may not be available as a remedy in cases where a plaintiff has previously filed for relief in monetary damages.

Constructive trusts are most commonly associated with circumstances in which a trustee has abused their fiduciary duty of administering trust assets. Other situations in which a constructive or implied trust may be enforced include, but may not be limited to:

• Secret Trusts: If all or parts of the trust agreement were kept a secret from other relevant parties, the court may impose a constructive trust to reestablish the rights of the affected parties;
• Interference: This happens when a defendant or another party has somehow interfered with trust matters, which led to a negative result;
• Issues With Trust Formation: A constructive trust may be issued to cure any defects caused by an improperly formed trust. An example of this would be how a trust may be defective if the documents that created it contained mistakes or if it was created under illegal conditions such as duress, undue influence, fraud, or coercion; and
• Unjust Enrichment: As previously mentioned, constructive trusts are most commonly used in situations the defendant would receive an unfair advantage if a court does not impose a constructive trust for relief.

A constructive or implied trust can also be enforced against a plaintiff, a rare occurrence. An example would be if a trustee initiates improvements on a trust property. The court may require the settlor to reimburse the trustee for those improvements as long as they were done reasonably.

What Relief Is Made Available By Using A Constructive Trust?

The actions that a person may take as a constructive trust will largely depend on the type of offense committed. An example of this would be if a trustee abused their financial obligations to the trust, they may be required to reimburse a constructive trust.

Another example would be if the trustee is unlawfully holding property title. The constructive trust may order them to transfer the title to its rightful owner. If the trustee has completely abandoned their role, the constructive trust may appoint a new trustee and assign them new duties. Other parties may be subject to constructive trust remedies, such as people who interfere with trust matters.

Simply put, constructive trusts enable a judge to tailor its requirements in a way best suited for the type of offense committed. The court considers which actions would most likely fix the wrongdoings of the defendant, then orders the defendant to do them through a constructive trust.

Unlike a standard trust, a constructive trust only exists temporarily and does not give a trustee any power over its administration. Alternatively, all constructive trust obligations will be based on the offense that the trustee or defendant has supposedly committed.

Are There Any Defenses To Constructive Trusts?

As a constructive trust is a type of equitable remedy, most of the defenses that can be raised against a claim for equitable relief will most likely apply:

• Laches: This defense can be raised against a plaintiff who reasonably delays filing an action against a wrongdoer. However, this delay must have resulted in harm or loss to the defendant. As such, the plaintiff should not be granted relief in the form of a constructive trust;
• Unclean Hands: This bars a plaintiff from obtaining a constructive trust. Unclean hands can be argued in a case in which the plaintiff engaged in a similar type of wrongdoing as the defendant; and
• Unconscionable Agreement: A constructive trust will be denied if the trust agreement itself was unconscionable at the time of its creation. An example would be if it required the defendant to act illegally or unreasonably.

Do I Need A Lawyer For Help With A Constructive Trust?

Constructive trusts are generally only available under certain circumstances, and when state laws allow. If you need assistance with a constructive trust, you should contact a local trust lawyer for further legal guidance. They will be aware of your legal rights and options according to your state’s specific laws, and can help you file your request for a constructive trust.

Alternatively, if a constructive trust action has been filed against you, your lawyer can determine whether there are any defenses available that you can raise against the claim. In either case, your attorney will also be able to represent you in court as needed.