For breaches of duty or contract, consider a constructive trust

Trusts are usually established to help minimize estate taxes or avoid probate. However, certain types of trusts, called constructive trusts, can be established against one’s will to remedy situations of "unjust enrichment." This occurs when someone possesses assets that they should not have through breach of fiduciary duty or fraud. Though this type of trust is limited in use, it may be useful to be informed about it. 

What is a constructive trust?

When an aggrieved party seeks remedy for the injustices they have faced, they may choose between constructive trusts and other relief at law. If they choose the trust, the court imposes its creation. The defendant, who holds the property unjustly, is forced to create a trust as a trust grantor. The plaintiff, who is seeking remedy, becomes the beneficiary of the trust.

The trust is set up to compel the defendant to give ownership of the assets to the plaintiff. The defendant is treated as the trustee from the date of the unlawful holding of the property, so they must pay back the full value of assets that they initially “received.” In some cases, they may be required to pay back any profits received during the period of wrongful holding. 

However, there are some cases in which the plaintiff has to supply reimbursement to the defendant for the trust’s creation. In cases where the defendant obtained the property under ignorance or by mistake - in other words, the defendant did not intentionally commit a wrong - they may be compensated for any improvements made or services performed in managing the property. If the defendant has spent money on the protection and preservation of the property by paying taxes or interest, they are also entitled to compensation.

When is a constructive trust established?

The following are examples of situations in which constructive trusts may be established:

• The assets were obtained by unconscionable conduct, such as the exertion of undue influence, homicide, fraudulent misrepresentation or concealment, theft, and so on.

• The defendant holds onto money that they know to have been paid to them by mistake.

• There is disloyalty or other breaches of trust by a trustee. For example, say you set up a living trust and the trustee does not perform his or her duties according to your will. Maybe they even used the assets to benefit themselves. 

• An oral promise is broken. For example, you give your grandson property because he said he will use it to pay for college tuition. However, he sells the property and goes partying with the money. In this case, you could take him to court and establish a constructive trust. 

• Due to any of the reasons listed above, the parties involved did have the intent to create a trust, but formation issues prevented the creation of a traditional trust from being established.

It is important to remember that the creation of a constructive trust is only possible if a specific property is involved. In other words, it cannot be created in cases of a breach of contract where no ownership of property is involved.

Temporary vs. ongoing constructive trusts

A constructive trust can be either temporary or ongoing depending on the nature of the property. In many cases, a constructive trust is a temporary and passive agreement, wherein the defendant’s sole duty as a grantor and trustee is to transfer possession to the beneficiary. They act as a trustee to administer the property for a very short period. During this period, they may hold and manage the property, but cannot benefit from it in any way. In this case, the trust is temporarily in place so that the property is protected during the transfer of ownership from the defendant to the plaintiff. 

However, if the property cannot easily be transferred to the plaintiff, the trust cannot be temporary. For example, let us say that the property was converted by the defendant into a life insurance policy. While this insurance policy itself cannot be transferred to the plaintiff, the benefits from the policy could be transferred instead through an ongoing trust.  

A constructive trust is useful in circumstances where someone wrongfully assumes ownership of your property. In cases such as these, you may want to talk to an attorney to file a lawsuit and establish a constructive trust. We offer a portal of vetted legal professionals skilled in such matters, which you can access here.

As always, if you require any assistance or have any further questions, feel free to make use of the concierge service here at peacefully. We assist with referrals to trusted professionals, offer case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung