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Trusts ā¢ Trusts as a Matter of Law
TRUSTS#027
Legal Definition
A constructive trust is a remedy to prevent unjust enrichment or fraud and the wrongdoer's only obligation is to transfer the property to the intended beneficiary as determined by the court.
It arises when: (1) the trustee makes a profit because of self-dealing; (2) there is fraud in the inducement or undue influence; (3) the settlor creates a secret trust; and (4) in the case of an oral real estate trust, where the settlor and trustee have a fiduciary relationship, there was fraud in the inducement and detrimental reliance by the beneficiary.
It arises when: (1) the trustee makes a profit because of self-dealing; (2) there is fraud in the inducement or undue influence; (3) the settlor creates a secret trust; and (4) in the case of an oral real estate trust, where the settlor and trustee have a fiduciary relationship, there was fraud in the inducement and detrimental reliance by the beneficiary.
Plain English Explanation
You may notice the word "constructive" from other cards. It usually implies that a court has stepped in and created a "legal fiction" to right a wrong. For example, constructive eviction applies in property law to circumstances where a tenant has been practically evicted, even if they aren't technically or legally evicted, so the court, to allow the tenant to pursue damages, calls it "constructive eviction. Here, a constructive trust is a trust that the courts create to avoid someone unfairly receiving stuff they shouldn't (otherwise known as "unjust enrichment"). They generally happen when:
(1) Self-Dealing by a Trustee: Imagine Bob is in charge of managing a trust thatās supposed to benefit Sam. But instead of doing whatās best for Sam, Bob decides to help himself and makes a profit using the trustās assets. This is what we call self-dealing, and itās a big no-no. The court will step in and say, āBob, you canāt keep that profit. It belongs to the trust, and ultimately, to Sam.ā The court creates a constructive trust to make sure Bob hands over the profit to Sam.
(2) Fraud in the Inducement or Undue Influence: Now, suppose Bob tricks Sam into giving him property by lying or making false promises. Or maybe Bob pressures Sam into transferring property to him through manipulation or undue influence. In these cases, the court doesnāt let Bob get away with it. Instead, the court sets up a constructive trust and orders Bob to transfer the property back to Sam (or whoever the rightful beneficiary is) because Bob shouldnāt profit from his dishonesty or unfair tactics.
(3) Secret Trusts: Picture this: Bob tells Sam, āIām going to put you in my will, but letās keep it a secret.ā Sam relies on Bobās promise and does something significant, like caring for Bobās property or supporting Bob financially. But when Bob passes away, thereās no mention of Sam in the will. This is what we call a secret trust. To fix this, the court imposes a constructive trust to make sure Sam gets what Bob promised, even if itās not in writing.
(4) Oral Real Estate Trusts with Fiduciary Relationships: Finally, letās say Bob orally promises to hold some real estate for Samās benefit. They donāt put this promise in writing, but they have a close relationship where Bob is supposed to look out for Samās interestsālike a fiduciary. If Bob breaks this promise, and Sam has relied on it to his detriment, the court can step in. The court will create a constructive trust to make sure Bob doesnāt keep the property for himself but instead transfers it to Sam, as originally intended.
(1) Self-Dealing by a Trustee: Imagine Bob is in charge of managing a trust thatās supposed to benefit Sam. But instead of doing whatās best for Sam, Bob decides to help himself and makes a profit using the trustās assets. This is what we call self-dealing, and itās a big no-no. The court will step in and say, āBob, you canāt keep that profit. It belongs to the trust, and ultimately, to Sam.ā The court creates a constructive trust to make sure Bob hands over the profit to Sam.
(2) Fraud in the Inducement or Undue Influence: Now, suppose Bob tricks Sam into giving him property by lying or making false promises. Or maybe Bob pressures Sam into transferring property to him through manipulation or undue influence. In these cases, the court doesnāt let Bob get away with it. Instead, the court sets up a constructive trust and orders Bob to transfer the property back to Sam (or whoever the rightful beneficiary is) because Bob shouldnāt profit from his dishonesty or unfair tactics.
(3) Secret Trusts: Picture this: Bob tells Sam, āIām going to put you in my will, but letās keep it a secret.ā Sam relies on Bobās promise and does something significant, like caring for Bobās property or supporting Bob financially. But when Bob passes away, thereās no mention of Sam in the will. This is what we call a secret trust. To fix this, the court imposes a constructive trust to make sure Sam gets what Bob promised, even if itās not in writing.
(4) Oral Real Estate Trusts with Fiduciary Relationships: Finally, letās say Bob orally promises to hold some real estate for Samās benefit. They donāt put this promise in writing, but they have a close relationship where Bob is supposed to look out for Samās interestsālike a fiduciary. If Bob breaks this promise, and Sam has relied on it to his detriment, the court can step in. The court will create a constructive trust to make sure Bob doesnāt keep the property for himself but instead transfers it to Sam, as originally intended.
Hypothetical
Hypo 1: Sam creates a trust for Amy and funds it with $1,000. Sam makes Bob the trustee. Bob decides to use $500 of the trust to buy some Bitcoin which generates $5,000 in profit. Bob puts the $500 back into Amy's trust. Amy finds out what Bob did. Result: Bob will be forced to give Amy all of the money he made investing in Bitcoin with Amy's trust funds via a constructive trust because Bob committed self-dealing
Hypo 2: Bob is the trustee for a trust that contains a shopping mall worth $5 million. The terms of the trust state that upon the settlor's death, Bob is to distribute the shopping mall to Sam. However, when the settlor dies, Bob transfers the shopping mall to himself rather than Sam. Years later, Sam learns what Bob did. Result: The court will impose a constructive trust and order Bob to transfer the shopping mall to Sam, who was the rightful beneficiary. Bob wrongly obtained the property through self-dealing in violation of the trust terms.
Hypo 3: Bob convinces his sick elderly neighbor Sam to deed over Sam's house before he dies in exchange for Bob's promise to care for Sam and provide housing for Sam's wife after he passes. Bob never follows through on his promise. Result: The court will likely find Bob used undue influence on Sam to obtain the house, and constructive trust can be used to transfer the house to Sam's wife, the intended beneficiary.
Hypo 4: Bob inherits a large fortune from his uncle. Before his uncle died, his uncle told Bob he wanted 10% of the inheritance to go to his longtime gardener, Sam. Bob doesn't tell Sam or anyone else about this conversation. Result: Even though the uncle's intent was not in writing, his conversation with Bob created a secret trust. The court can order Bob to transfer 10% of the inheritance to Sam through a constructive trust.
Hypo 5: Bob orally promises to hold a parcel of land "in trust" for Sam in exchange for a down payment from Sam. Sam pays the down payment and moves onto the land. Bob later tries to evict Sam. Result: The court will likely find an oral trust existed between Bob and Sam regarding the land, which Bob violated. The constructive trust doctrine can be used to affirm Sam's rights to the land. You may be thinking, "Wait, this involves real property, so doesn't it need to be in writing?" You're correct ā however, the court isn't just going to let Bob be unjustly enriched.
Hypo 2: Bob is the trustee for a trust that contains a shopping mall worth $5 million. The terms of the trust state that upon the settlor's death, Bob is to distribute the shopping mall to Sam. However, when the settlor dies, Bob transfers the shopping mall to himself rather than Sam. Years later, Sam learns what Bob did. Result: The court will impose a constructive trust and order Bob to transfer the shopping mall to Sam, who was the rightful beneficiary. Bob wrongly obtained the property through self-dealing in violation of the trust terms.
Hypo 3: Bob convinces his sick elderly neighbor Sam to deed over Sam's house before he dies in exchange for Bob's promise to care for Sam and provide housing for Sam's wife after he passes. Bob never follows through on his promise. Result: The court will likely find Bob used undue influence on Sam to obtain the house, and constructive trust can be used to transfer the house to Sam's wife, the intended beneficiary.
Hypo 4: Bob inherits a large fortune from his uncle. Before his uncle died, his uncle told Bob he wanted 10% of the inheritance to go to his longtime gardener, Sam. Bob doesn't tell Sam or anyone else about this conversation. Result: Even though the uncle's intent was not in writing, his conversation with Bob created a secret trust. The court can order Bob to transfer 10% of the inheritance to Sam through a constructive trust.
Hypo 5: Bob orally promises to hold a parcel of land "in trust" for Sam in exchange for a down payment from Sam. Sam pays the down payment and moves onto the land. Bob later tries to evict Sam. Result: The court will likely find an oral trust existed between Bob and Sam regarding the land, which Bob violated. The constructive trust doctrine can be used to affirm Sam's rights to the land. You may be thinking, "Wait, this involves real property, so doesn't it need to be in writing?" You're correct ā however, the court isn't just going to let Bob be unjustly enriched.
