Trusts can be helpful in estate planning if you want to avoid probate or minimize estate taxes. A revocable living trust, for example, might be useful if you have assets you want to pass on to your beneficiaries that aren’t part of your will. Certain types of trusts, however, may only be used in very specific situations and a constructive trust is one of them. A constructive trust 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 understand how it works.
Constructive Trust, Definition
A constructive trust isn’t a trust in the traditional sense. For example, if you were creating a revocable living trust there are certain steps you’d need to take, including drawing up the trust document, naming a trustee, choosing beneficiaries and transferring property or other assets to the trust. This type of trust could be used to manage your assets during your lifetime and beyond, on behalf of your beneficiaries.
Constructive trusts, on the other hand, can be established by the court when two parties are involved in a civil dispute over property. This type of trust could be established when someone is unfairly given ownership over property, either because of a mistake or because of misconduct on their part.
For example, say you have a living trust set up and your trustee commits a breach of fiduciary duty. That breach allows them to assume control of trust assets. You could go to court to have a constructive trust established to correct the situation. This is what’s known as an “equitable remedy”.
How Constructive Trusts Work
A constructive trust first requires that there be some sort of court action between a property owner and another person who is unfairly benefiting from the property. So for example, say your elderly mother’s caretaker coerces her into signing over the title to a piece of property she owns.
Since you’re your mother’s legal guardian, you bring a lawsuit against the caregiver on her behalf. If the court finds that the caretaker abused their position to gain access to the property, a constructive trust can be set up to right the wrong. The property could be placed in the trust temporarily while its ownership is transferred back to your mother’s estate.
Constructive trusts are typically meant to be short-term arrangements to give you temporary relief when your property or assets have been unfairly taken by someone else. The person who is benefiting from the property is charged with returning it to the trust. And in cases where the property itself can’t be returned, they have to pay the trust its equivalent monetary value.
So going back to the previous example, say the property in question was a vehicle that the caretaker then sold to someone else. They no longer have the car so it can’t be transferred to the constructive trust. But the court could obligate them to pay money into the trust equal to the car’s fair market value.
When Would You Need a Constructive Trust?
A constructive trust could be used by the court to help offer equitable remedy in a number of situations when someone has unlawfully claimed ownership of property. Generally, they’re only necessary in limited situations. For example, you might need a constructive trust when the transfer of property is associated with any of the following:
Duress or coercion
Fraudulent misrepresentation or concealment
Breach of trust
Commission of a crime, including theft or homicide
You may also need a court to impose a constructive trust for situations involving broken oral promises to convey property. For example, say you give your niece a car based on the promise that she’ll use it to enroll in school and earn a degree. But she ends up selling the car instead and doesn’t go back to school. If you wanted to recoup the cost of the car, you could take her to court and ask for a constructive trust.
This type of trust may also be necessary if there’s a dispute over how someone’s property should be distributed after they pass away. Say you have an older brother who convinces your parents not to write a will, telling them instead that he’ll make sure their assets are distributed to you and your siblings fairly. Once your parents pass away, he keeps all the assets for himself, or sells them and pockets the money.
If you and your siblings bring a court action, the court may establish a constructive trust to provide some relief and ensure that you each get what you’re entitled to following your state’s inheritance laws. The advantage of doing so is that you can make sure your parents’ assets are divided fairly. But constructive trusts can complicate family relationships if they escalate a dispute over property, so that’s something to consider.
Constructive Trusts vs. Other Types of Trusts
What separates constructive trusts from other types of trusts is how they’re created and what they’re used for. In a constructive trust, for example, you don’t name the trustee; the defendant that you’re suing is appointed trustee by the court. They’re responsible for making sure whatever property is being disputed is returned to the trust, or its monetary equivalent.
Unlike other trusts, which can last your entire lifetime, constructive trusts are typically meant to be temporary. The trust’s main purpose is to fix whatever situation caused you to unfairly lose ownership of your property and nothing more. While you can create a living trust with the help of an attorney, the court is usually required to step in and set up a constructive trust on your behalf. It’s also the court’s duty to enforce the terms of trust once it’s been created.
The Bottom Line
A constructive trust could be useful in situations where someone else assumes ownership of your property by mistake or deliberately through fraudulent means. If you’ve tried to get your property back through other avenues, filing a lawsuit to get a constructive trust established may be a last resort option. If you think you may need a constructive trust, it may be helpful to talk to an attorney about what’s involved in bringing a civil lawsuit.
Tips for Investing
Consider talking to a financial advisor about the details of your estate plan, including whether it’s necessary to establish a trust. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
Trusts can be helpful in managing your estate in different ways. For instance, you may want to pass on assets to your spouse, children or grandchildren but remove some of the heirs’ estate and gift taxes. You can also use a trust to donate to your favorite charities or shelter assets for a special needs dependent so they can keep receiving government benefits.
Photo credit: ©iStock.com/DNY59, ©iStock.com/andresr, ©iStock.com/simpson33