A trust is an estate planning instrument used to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries.
A trust creates a relationship in which one person (the “grantor”) puts assets into the hands of another person. This is the “trustee,” and they hold title to the property with the responsibility of keeping or using the property for the benefit of someone else (the “beneficiary”).
When someone personally sets up a trust, this is known as an “express trust,” distinguishing it from a resulting trust, which arises automatically.
The trustee’s duty is a fiduciary duty to responsibly manage whatever property is placed in the trust for the benefit of the beneficiaries. The trustee is also responsible for distributing the trust assets to the beneficiaries, as instructed by the trust.
An act (or a failure to act) by a trustee that is not authorized either by the trust document or by law is a breach of trust. For example, a breach of a resulting trust can occur if a trustee distributes trust assets to a beneficiary who is not entitled to them.
There are many different types of trusts, such as:
- Inter Vivos or Living Trust: One of the most commonly created trusts is an inter vivos trust, which is created while the grantor is still alive. An inter vivos trust is often designed to be revocable so that the grantor can add or remove property freely during their lifetime
- Testamentary Trust: A testamentary trust is created through a will, and usually becomes effective upon the death of the creator of the trust
- Spendthrift Trust: A spendthrift trust is a trust that is created for a beneficiary who is not careful with their money. The beneficiary may receive a monthly allowance, but cannot access the trust property (and thus cannot waste it). Spendthrift trusts also protect a beneficiary from themselves by shielding them from their debts or creditors
- Purchase Money Trust: A purchase money trust is created when someone buys a piece of property but instructs the seller to transfer the title to a different person. Under this trust arrangement, at some point in the future the trustee will eventually transfer the title back to the buyer after a certain amount of time has passed or a specific condition has occurred
What Is A Resulting Trust?
While there are many types of trusts, the overall idea is that the trust creator wishes to protect certain assets, reduce taxes, and/or privately transfer wealth. Trusts can fail. Some of the most common reasons a trust may fail are:
- The grantor fails to fully fund the trust
- The grantor fails to update the trust as time goes by and changes are needed
- The beneficiaries are no longer alive or cannot be found
Whatever the reason for it happening, when a trust fails the property must be passed to someone. When a trust fails or does not completely dispose of the trust property, a judge may invoke an equitable remedy known as a “resulting trust.”
A resulting trust is created by a judge to dispose of trust property when the intended beneficiaries are not available to receive it or when the trust fails for another reason. It is a legal tool that is used to prevent someone from enriching themselves unjustly with the undistributed trust property, and to prevent trustees from abusing their power by transferring the remaining trust property to themselves.
How Does a Resulting Trust Work?
An “automatic resulting trust” arises when an express trust fails or when there are assets left over after distribution of the trust assets. The law presumes that there is an intention that the leftover assets should be kept in a resulting trust for the creator.
A “presumed resulting trust” arises when someone makes contributions to the purchase of a property but does not have legal title to the contribution. In this case, the property is held in trust for the original grantor.
What Circumstances Require a Resulting Trust?
Some circumstances may require a judge to eliminate the original express trust in favor of a resulting trust. Examples include:
- Express Trust Failure: As described above, this is when a valid and properly executed trust becomes impossible to carry out. Legally, the creator or grantor becomes the beneficiary, and the trust property is returned to them. If they are no longer alive, the property will then be distributed to their heirs as named by either a valid will or state intestacy laws
- Semi-Secret Trusts: A semi-secret trust is a trust that does not name any beneficiaries or is unclear about who they are. There can be no valid trust if there are no beneficiaries. The trust property is put into a resulting trust to return to the creator or distribute through the proper probate path
- Purchase Money Resulting Trust: This occurs when a person purchases property but instructs the seller to transfer the title to a different person. The beneficiary purchases the trust property, but the property is in the grantor’s name. This tool is sometimes used for estate planning purposes to ensure the transfer of the property back to the beneficiary because they previously paid for it
Are Resulting Trusts and Constructive Trusts the Same?
A constructive trust is another form of equitable relief that a court issues to prevent a defendant from being unjustly enriched.
Resulting trusts and constructive trusts serve different legal purposes. A resulting trust is generally established based on a person’s intentions or through the unintentional failure of the original trust. A constructive trust is created to right a wrong, such as theft or fraud.
When a court orders a constructive trust, the person holding the property is no longer the legal owner of it. They are considered to be holding it for the real owner, and through the court process the true owner will receive all benefits, including increased value of the property or interest.
Both are judicially created equitable remedies that are used to prevent unjust enrichment, usually by the trustee. Resulting trusts are generally a product of their circumstances, as opposed to active wrong, which is righted by a constructive trust.
Are There Any Defenses to Resulting Trust Formation?
Resulting trusts prevent trustees or beneficiaries from improperly holding property that belongs to the trust’s creator. However, there are two defenses that a trustee may raise to prevent the grantor from invoking a resulting trust:
- Laches: If the creator fails to file suit for a resulting trust in a reasonable amount of time, the trustee may claim laches if they can prove that they were injured in some way by the delay
- Unclean hands: A court may deny a resulting trust to a creator who acts in bad faith. For example, if a grantor acts illegally concerning the trust, the court will treat the situation as if they have waived their rights to a resulting trust.
Do I Need a Lawyer for a Resulting Trust Issue?
The laws which govern resulting trusts vary depending on the jurisdiction. Some states have laws prescribing the automatic formation of resulting trusts based on the nature of a certain transaction. Alternatively, some states do not allow resulting trusts at all.
You should consult with a local trust lawyer if you have any questions or issues associated with a resulting trust. An experienced local attorney can help you understand your legal rights and options according to your state’s specific trust laws and will also be able to represent you in court as needed.
