Understanding Constructive and Resulting Trusts: Key Differences and Legal Implications

by Drazen Kozaric

In the realm of trusts and property law, two types of trusts often arise in legal disputes: constructive trusts and resulting trusts. Understanding the nuances between these two concepts is essential for anyone navigating property law or seeking remedies for unjust enrichment or breach of trust.

What is a Constructive Trust?

A constructive trust is a remedy imposed by operation of law to address situations of wrongdoing, such as fraud, breach of fiduciary duty, or unjust enrichment. It arises when one party wrongfully obtains or retains property that should belong to another party. The primary purpose of a constructive trust is to prevent the unjust enrichment of the person who has wrongfully acquired the property or asset.

Unlike a traditional trust, where the parties agree to create a fiduciary relationship, a constructive trust is “constructed” by a court based on the need to correct an inequitable situation. It is not based on the intentions of the parties involved but on the principle that it would be unjust for the defendant to retain the property.

Examples of Constructive Trusts:

• • Fraudulent Transfers: If a person fraudulently transfers property to another to hide assets from creditors or defraud another party, a court may impose a constructive trust on the property to return it to the rightful owner.

• • Breach of Fiduciary Duty: If an individual entrusted with another person’s assets misappropriates those assets for personal gain, a constructive trust may be imposed to ensure the property is returned to the rightful owner.

In these situations, the court intervenes to prevent the unjust party from benefiting from their wrongful conduct, essentially creating a trust to ensure the property is returned to its rightful owner.

What is a Resulting Trust?

A resulting trust is a type of trust that arises when property is transferred to someone, but the transferor did not intend for the recipient to retain full ownership. The resulting trust is presumed based on the circumstances, particularly the understanding or intention of the parties involved. It typically occurs when there is an inference that the person receiving the property is holding it on behalf of the transferor or a third party, even if the legal title is in their name.

Unlike constructive trusts, resulting trusts are not based on the wrongful conduct of the parties but on a presumed intent that the property was not meant to be a gift. They often arise when the formalities of ownership do not align with the underlying intentions of the parties.

Examples of Resulting Trusts:

• • Purchase Money Resulting Trust: If one person pays for property but the property is placed in another person’s name, the court may assume that the person who paid for the property intended to retain beneficial ownership. The person in whose name the property is titled holds it in trust for the person who provided the money.

• • Incomplete Gifts: If someone transfers property intending that the recipient hold it for a specific purpose or on behalf of another person, but the transfer does not fully reflect that intent, a resulting trust may be imposed to ensure the recipient fulfils the original intention.

In these cases, the court concludes that the recipient should not be allowed to keep the property as their own and holds it in trust for the person who provided the consideration or intended to retain ownership.

Key Differences Between Constructive and Resulting Trusts

While both types of trusts are equitable remedies used to address unfairness, they differ in several key ways:

1. 1. Origin and Purpose:
      
      • • Constructive Trust: Arises as a remedy to correct wrongful conduct, such as fraud, breach of fiduciary duty, or unjust enrichment. It is imposed by courts to prevent a party from unfairly benefiting from wrongful actions.
      • • Resulting Trust: Arises based on the presumed intention of the parties involved, especially in situations where property has been transferred, but the transferor did not intend for the recipient to gain full ownership. It is often used to reflect the true ownership of property.

1. 1. Basis for Creation:
      
      • • Constructive Trust: Imposed by the courts due to wrongful conduct or unjust enrichment.
      • • Resulting Trust: Imposed to reflect the presumed intent of the parties, typically in situations of incomplete or misunderstood transfers of property.

1. 1. Examples:
      
      • • Constructive Trust: Applied in cases of fraud, breach of trust, or when one party unfairly retains property that rightfully belongs to another.
      • • Resulting Trust: Applied in situations involving the transfer of property without the clear intention of a gift, such as a purchase money resulting trust or incomplete gifts.

Conclusion

While both constructive and resulting trusts are mechanisms to address unfairness or inequity, they arise in different contexts and serve distinct purposes. A constructive trust is typically used to correct wrongful conduct and prevent unjust enrichment, while a resulting trust reflects the presumed intentions of the parties involved in a property transfer. Understanding these differences is critical for individuals involved in property disputes or seeking to remedy situations involving wrongful ownership or beneficial interest. In both cases, the courts act to ensure that the rightful owner of property is not deprived of their assets due to circumstances beyond their control.