In trusts and estates law, a purchase money resulting trust is a type of trust that is created when an individual contributes funds to purchase a particular property, but instructs the seller to transfer title to the property to a different individual. It is also known as a purchase money trust.
Thus, to form this kind of trust requires two actions: first, that a person uses their own money to purchase the property, and second, that they do not take legal title to the property that they purchased.
Under this trust arrangement, the buyer will become the beneficiary and the person who holds title will be considered the trustee. At some point in the future, the trustee will eventually transfer title back to the buyer either after a certain amount of time has passed or a specific condition has occurred.
In cases where a transaction results in forming a purchase money trust between two spouses or between a parent and a child, it will be presumed that a gift was intended. Thus, the non-purchasing spouse or parent will not be required to give the buyer anything in return for title (e.g., consideration).
In contrast, a third-party trustee may need to give the buyer something in return unless the buyer expressly states that the purchase was intended as a loan or a gift, or declares that they did not intend to create a trust.
Finally, the laws governing purchase money trusts can vary widely from state to state. For instance, some states have completely abolished the use of purchase money trusts in favor of more modern kinds of trust arrangements, while other states have placed restrictions on when and how a purchase money trust can be created. Thus, you may want to review your state’s laws before attempting to form a purchase money trust.
Why Would a Purchase Money Trust be Used?
Although it may seem odd for a buyer to purchase property only to give title away to someone else, there are a few good reasons as to why a buyer may want to create a purchase money trust.
One of the main reasons why a purchase money trust may be used has to do with inheritance rights. For example, couples in a domestic partnership may choose to create a purchase money trust. This makes it so that if the partner who holds title to the property dies, both the title and that property will automatically transfer to the surviving partner since they were the ones who originally paid for the property.
While some states have enacted laws that recognize domestic partnerships and grant couples in them the right of survivorship or inheritance, not every state offers such rights. Thus, in states that do not have a statute, domestic partners can form a purchase money trust as a way to ensure that their partner inherits or receives ownership rights in the property upon the other partner’s death.
Another reason as to why a party would want to use a purchase money resulting trust is to gain certain tax incentives from the property. For instance, a buyer may be able to reduce the value of their estate by keeping their name off the title, which in turn, may result in fewer estate taxes during the probate process.
Lastly, a purchase money resulting trust may also be intentionally formed to issue a loan to an individual who is not eligible to receive a traditional mortgage loan from a lender like a bank.
What if There are Some Legal Disputes Over a Purchase Money Trust?
One issue that frequently arises in connection with a purchase money trust is that sometimes they are created automatically because of how a sale transaction occurred. This means that no formal document was used to create the trust, but rather the trust “resulted” as a matter of course and in accordance with state laws. Not all property transactions, however, will lead to the formation of a purchase money trust.
For example, if a state has abolished the use of purchase money trusts or if the property transaction was made in order to satisfy an illegal objective, then a purchase money trust will not automatically arise from the sales transaction in question. A purchase money trust will also not arise where the party who paid to purchase the property expressly states that they do not intend to form a trust.
Some other legal disputes that may occur over a purchase money resulting trust include:
- When the parties argue over who actually owns the trust property;
- Whether the trust was really meant to be gift or a loan instead;
- If the trustee breaches their fiduciary duty to the beneficiary (usually, the buyer) of the trust;
- Whether fraud, misrepresentation of fact, or some other crime was committed in forming the trust; and/or
- If the buyer was under duress or was coerced by a third-party to follow through with the sales transaction that would then create a trust or vice versa (e.g., the third-party was forced into the transaction by the buyer).
As previously mentioned, the laws concerning trusts and their requirements will vary by state. Thus, what may be grounds for a lawsuit in one state may not be available as a reason to file a lawsuit in another state. Therefore, buyers and purchasers who are involved in a legal dispute over a purchase money resulting trust should strongly consider hiring a lawyer to represent them if they are being sued or would like to sue the other party for damages.
Do I Need a Lawyer for Help With a Purchase Money Trust?
Trust and estate matters are notoriously difficult to handle without the help of a lawyer. In particular, there are many laws and requirements that must be complied with in order to form any type of trust.
When it comes to forming a purchase money trust, however, this category of trusts present a different kind of challenge in that a buyer may not always know when a trust has been formed solely because of the nature of their transaction and due to the fact that not every state recognizes purchase money resulting trusts.
Therefore, if you have any issues or concerns involving a purchase money trust, it may be in your best interest to speak to a local trust lawyer for further guidance.
An experienced trust lawyer will be able to answer any questions you may have about purchase money trusts, can explain what rights you have under the relevant state laws, and can determine whether or not a particular sales transaction establishes a purchase money trust.
In addition, your lawyer can also help you draft, edit, and review any written documents that are directly linked to the trust, can make sure that the terms of the trust are legally enforceable, and can discuss other ways in which you may be able to form a trust that is more suitable to your specific situation.
Lastly, if you are involved in a dispute over the creation of a trust or its contents, your lawyer will also be able to assist you in preparing and filing a claim with the appropriate court. They can make sure that you understand your options for legal recourse and the potential remedies you may receive based on each of those options. They can also provide representation in court if necessary.