How a Constructive Trust Works

A traditional trust is a legal agreement between two parties, the trustee and the trustor. A trustor sets up a trust to protect or bequeath certain assets. A trustee is responsible for making sure that the trust is carried out according to the trustor's wishes. Oftentimes the trustor and the trustee may be the same person. The purpose is to eventually transfer ownership of property from one individual to another individual of their choice.

A court may enact a constructive trust whether or not there was a previous trust set up for the property in question. A court may decide to use a constructive trust when there is a civil dispute between individuals or when property ownership or enrichment is unfairly (willfully or inadvertently) held by a defendant. Without a question of "ownership," there cannot be a constructive trust.

If a court feels that a plaintiff should rightly hold a property they may enact this type of trust to ensure the defendant returns ownership to or compensates to the plaintiff. The four circumstances under which a court will use a constructive trust include:

  • fraud
  • breach of faith
  • ignorance
  • mistake

A court (not the plaintiff) decides what the "unjustly enriched" owner needs to do or pay in order to compensate the rightful owner.

Constructive Trust Example

An example of a person seeking a constructive trust due to fraud precludes that the person seeking recompense from the fraudster was in some sort of a fiduciary relationship with them. This relationship resulted in the fraudster being unjustly enriched. Alfred and Jane are business partners. Jane uses some company money to pay for a car that she is not technically using to benefit the company. A court may order Jane to transfer ownership of the car (and possibly money if the car has lost value since the purchase) to Alfred.

Example two, a constructive trust may be enacted if Mary has possession of $500 of her friend Susan's money and decides to buy an expensive piece of jewelry with it. Mary may not have $500 to return to Susan. This breach of faith may result in a constructive trust to require Mary to protect and take care of that expensive piece of jewelry until it can be transferred to Susan's ownership.

A third example, when Tony's Pizza mistakenly pays back a bank loan in the wrong amount (more than owed), the bank does not notice right away. The owner can use a constructive trust to assist the business in recuperating the money and any possible interest the bank made off of the overpayment.

Constructive Trust vs. Resulting Trust

If we can think of property in a constructive trust as stolen, then the property in the resulting trust is borrowed or being held for someone else. In a resulting trust, you may purchase or acquire something in your own name, but you intend to give it to the proper owner as soon as possible. In a constructive trust, you have no intention to hand over the property or asset and a court must order you to do so. Constructive trusts are solutions to civil disputes. Resulting trusts are intent-based transfers.