What is a Constructive Trust
What is a Constructive Trust
Understanding the Constructive Trust
By J. Douglas Barics
February 2025
A constructive trust a remedy used by the courts to prevent unjust enrichment. Its purpose is not to enforce agreements which were never completed, but instead they are designed to rectify fraud or unjust enrichment through the court’s equity powers.
Each of the two words in the phrase “constructive trust” has a specific meaning and understanding those words is helpful in understanding how a constructive trust works.
The Trust
A trust occurs when one person holds property in their name on behalf of another. The simplest example to understand the concept of a trust is when a small child is given a money, and the parents decided to open up a bank account on behalf of child, but in the parent’s name. Thus, while the account is in the parent’s name, it is understood that it is the child’s money.
Formal trusts are by definition in writing. Every trust must have a grantor, which is the person creating the trust. A trust must have a corpus, or assets, which are placed into the trust by the grantor. Every trust must have a trustee, which is the person who is handling the trust. And finally, every trust must have a beneficiary, which is the person who gets the benefit of the assets in the trust. Each trust must also have its terms spelled out. For example, the trustee may have complete discretion as to how and when money from the trust is used for the beneficiary. Or by contrast, the trust may provide that a percentage of the trust be paid out each year.
Constructive
The term “constructive” means the court will find something to exist through actions when it is not in writing or even said in words. For example a constructive eviction occurs when a landlord makes a home so unusable that the tenant is forced to leave. Constructive evictions are prohibited, and if one is shown to exist, the landlord could face serious consequences.
The Constructive Trust
Putting these two terms together, the constructive trust simply means that a court will impose an unwritten trust between two or more people based on their actions. The lack of anything in writing is a key element of the constructive trust, which is why one of the elements is a close trusting relationship between the parties as these kind of relationships are where things are not put in writing.
Common Situations where a Constructive Trust is Used
There are two common situations when a constructive trust gives a wronged party relief. These two examples are only to illustrate the most common instances when a constructive trust is used, but they are by no means the only situations where it is appropriate.
Transfer of Assets
The first is when money or an asset is transferred from one person to another, with an agreement it will be returned at some time in the future. But when the request is made to return it, the person who has title to the property refuses to do so. In this situation, the remedy is a constructive trust.
Payment Towards an Asset
The second is when one person agrees to pay or provide equity into an asset which is owned by another individual. Here, the asset itself does not trade hands, the funding or equity into the asset gives the basis. If the person with title to the asset denies the other person has any rights, the constructive trust is once again the means to a remedy.
Elements of a Constructive Trust
There are four elements to a constructive trust:
- A confidential relationship
- A promise
- A transfer made because of that promise
- Unjust enrichment
A Confidential Relationship
There must be a close or confidential relationship between the parties. The trust coming from this relationship means that the parties would likely not put any agreement in writing.
A Promise
There must be some sort of promise between the parties. This promise can either be express or implied based on their actions.
A Transfer Made Because of that Promise
Some sort of transfer must have occurred due to that promise. The transfer can be either direct, such as transferring the asset in question, or indirect such as paying for the asset.
Unjust Enrichment
The party receiving the benefit of the transfer would be unjustly enriched if they were allowed to keep the transferred assets.
The constructive trust is a power tool that should not be disregarded. It exists to provide a remedy to those whose situations fall outside other legal remedies, yet are clearly in need of an answer. The flexible nature of the constructive trust is designed to fill that gap.
About J. Douglas Barics
J. Douglas Barics is an attorney located in Commack NY who regularly represents individuals in all domestic and related matters.
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Disclaimer: The article "What is a Constructive Trust" is provided as a free educational service and does not constitute legal advice. For more information see the full disclaimer.