Legal Tip 108: What is a Constructive Trust?

What is a Constructive Trust?

In certain situations there is a trust like relationship when there is no formal trust set up. The courts can declare a trust in these situations. The word “constructive” comes from the verb to construe, not from construct in these situations. A constructive trust is said to be a ‘remedy’ because it is used to right wrongs. Constructive trusts (and all trusts) come under a branch of law known as ‘equity’.


Example 1

X steals money from Y and gives it to his mum who buys a house with it. Court can declare that mum is holding that house on trust for Y.


Example 2

Dad dies and mum is getting old. She wants to sell up and move to a smaller home. Daughter convinces mum to sell and use her funds to construct a granny flat on daughter’s property. Daughter later has a dispute with mum and kicks her out. Title is in daughter’s name. Since mum use her money to build the granny flat and to improve the daughter’s property the courts will remedy the situation by declaring the mum has a constructive trust over the daughter’s property – a certain percentage or amount. The daughter can either pay mum out or the property be sold and mum paid out of the proceeds.


Example 3

As above but daughter gets a divorce or goes bankrupt. Similar principles will apply.


Example 4

Alan causes his wife to buy the main residence as he is a risky business man. He earns all the money and pays the loan. He later goes bankrupt. The trustee in bankruptcy (creditors) will go for half of the wife’s house and the courts may declare she is holding 50% under a constructive trust for Alan (and/or resulting trust).


The concept of ‘constructive trusts’ has important implications for asset protection, estate planning and other areas of law.

 

Law or rather it's interpretation and application - is it tricky or is tricky.

What drove you to Law, terry? How did it all began?

 

I get these arguments often in family law.

 

Feminisim doesn't pay well, so I became a lawyer - actually due to my interest in investing.

 

Can you give us some examples Larry?

 

Mum and dad divorced and sought property settlement. A child of the marriage sought orders that all interests in one of the property held in constructive trust for him.

Most commonly is when a man bought a property and have a girlfriend /De facto who contributed in non financial ways and would argue that the man held the property in constructive trusts for her when it comes to property settlement. Most of them settled before the final hearing.

 

Your examples 2 and 4 are ones that I come across. Like terry said, constructive trusts are imposed by the courts. Whether one's argument has legs... Most would settle anyway.

 

Thanks Larry. Do you come across a lot of 'loan agreements' between family - or gifts that people later pretend were loans?

 

Sigh. I have one enquiry that grandfather gave $XXX to grandson to buy an apartment in Sydney. GF and GM decided to split and now he wants the $XXX back because it's a loan. News to the grandson. I told the grandson that he has 2 options. Give back or defend. He will call me if he's served. I don't have a lot of these matters and when I do, I tried speaking sense and dollars to them. Happy to be paid but that's not my style. Are you on Philip St? We should catch up over coffee in the new year. You've got great knowledge and experience and I'll be glad to learn from you.

 

Hi Larry - I am on George st, but happy to meet up over Christmas.

 

Ah great, I'm on York. I'll flying out on Thursday and back in late January. Sometime in Feb if it suits. Thanks again for all the tips. It's like going through law school again with more practicality.

 

One of my latest tips may be of interest:
Legal Tip 181: Jointly owned Property and Bankruptcy Legal Tip 181: Jointly owned Property and Bankruptcy