What Is a Constructive Trust?

What Is a Constructive Trust?

by Brette Sember, Esq., November 2017

A constructive trust is a duty by one person or company to hold some property for another person or company. A constructive trust is set up by a court as an "equitable remedy." An equitable remedy is something done by the discretion of the court and not in accordance with a statute.

Unjust Enrichment and Constructive Trusts

What is a remedial constructive trust (also called a constructive trust)? A constructive trust is created to remedy (or make up for) a situation where there is "unjust enrichment." If someone has possession of property (money, real estate, or other assets) that they should not have because they obtained it unfairly through fraud or breach of a fiduciary duty, this is unjust enrichment. The constructive trust is set up to solve the unfair situation that has happened.

Purpose of a Constructive Trust

Constructive trust and property interests are linked, because the trust is set up to change ownership of the property, to right the wrong that's been done. A decision by a court that a constructive trust has been set up means that the person currently holding the property is no longer the legal owner and is holding it for the actual owner (the person who was done wrong by the actions). All benefits of the property belong to the real owner, even if it becomes more valuable than when it was wrongfully acquired.

A Constructive Trust Example

For example, say Larry stole $5,000 from Ahmed and used that money to buy a used car. Ahmed understandably is upset and sues Larry for the money and the judge agrees with Ahmed. The used car can be placed in a constructive trust so that Larry is no longer its true owner.

Once the trust is created, Larry is holding the car for Ahmed and must protect the property for him. The court could require Larry to turn the car over to Ahmed or pay him back the funds. The trust protects the car and preserves it for Ahmed, since it was bought with Ahmed's money. Once it's transferred back or the money is repaid, the constructive trust ends.

Temporary or Ongoing

A constructive trust can be either a temporary measure designed to protect the property until the defendant transfers it back to the real owner, or an ongoing trust, so that if the defendant converted the other person's property into something that can't be easily transferred back, the true owner can obtain the benefits of the property.

An example would be if Karen stole money from Lee and used it to buy a life insurance policy. The insurance policy can't be transferred to Lee, but a constructive trust can be established that makes Lee the beneficiary of the policy.

Constructive Trust vs. Resulting Trust

A resulting trust differs from a constructive trust because it is a trust that is set up based on a person's intentions.

For example, if Maria gives Tom $1,000 and asks him to buy her a painting at an auction he is going to, but Tom buys the painting in his own name, a resulting trust occurs where Tom is holding the painting for Maria. The difference from a constructive trust is that here Maria gave Tom the money with instructions to buy the painting for her. If Tom had stolen the money from Maria and then bought the painting with it, a constructive trust would be the result.