A trust is a legal document that creates a fiduciary relationship between its creator, beneficiaries, and a third party known aptly as a trustee. The trustee’s duty is to responsibly manage whatever property is placed in the trust (and as directed by the creator) for the benefit of the beneficiaries.
While there are many types of trusts, the basic idea is that the trust creator is usually looking to protect certain assets, reduce taxes, or privately transfer wealth. But when a trust fails or does not completely dispose of the trust property, a judge may have to invoke an equitable remedy known as a resulting trust.
What is a Resulting Trust?
A resulting trust is judicially created to dispose of trust property when the intended beneficiaries are not available to receive it or the trust fails for another reason. It is a legal tool used to prevent a party from unjustly enriching themselves with trust property and prevents trustees from abusing their power. The term resulting trust itself can be a little confusing, as it is an Anglicized form of the Latin word “resalire,” which means to jump back.
What Circumstances Require a Resulting Trust?
There are a few common situations that may require a judge to eliminate the original express (written) trust in favor of a resulting trust. They are:
- Express trust failure. This is when a valid and properly executed trust becomes impossible to carry out because the named beneficiaries are either missing or deceased. You must have beneficiaries to have a trust, so if this critical element is eliminated, the trust itself becomes void.
- Legally, the creator (also known as a settlor) then becomes the beneficiary and the trust property is returned to them. If they are no longer alive, the property will then be distributed to their heirs as named by a valid will or state intestacy laws.
- Semi-secret trusts. A semi-secret trust is a trust that does not name any beneficiaries, or is unclear on the specific terms of the trust. Once again, if there are no beneficiaries, there can be no valid trust. The trust property is then put into a resulting trust to return to the creator or distribute through the proper probate path.
- Purchase money resulting trust. When a person purchases property, but instructs the seller to transfer the property or title to a different person. Here, the beneficiary purchases the trust property, but the property is in the creator’s name. While at first glance counterintuitive, it is a tool sometimes used for estate planning purposes to ensure transfer of the property back to the beneficiary (because they already paid valuable consideration).
Are Resulting Trusts and Constructive Trusts the Same?
No, resulting trusts and constructive trusts serve different legal purposes. A resulting trust is usually established based on a person’s (the creator’s) intentions, or through unintentionally failure of the original trust. A constructive trust is created to right a wrong, such as a theft or fraud.
When a court orders a constructive trust, the person holding the property is no longer the legal owner of it. From then on they are merely holding it for the real owner, who receives all benefits including increased value.
Both are judicially created equitable remedies used to prevent unjust enrichment. But resulting trusts often come about due to circumstances, as opposed to active wrong. Honoring the intentions of the original trust and its creator is the real goal.
Are there Any Defenses to Resulting Trust Formation?
Resulting trusts prevent trustees or beneficiaries from improperly holding property for the trust’s creator. But there are a few defenses that a trustee may raise to prevent the creator from invoking one.
- Laches. If the creator fails to file suit in a reasonable time frame, the trustee may claim laches if they can prove prejudice.
- Unclean hands. Creators acting in bad faith may have a request for a resulting trust denied by the court.
In addition, if a settlor’s acts illegally with regard to the trust, the court will treat the situation as if they have waived their rights to a resulting trust and cannot retrieve the property.
Do I Need a Lawyer for a Resulting Trust Issue?
Yes. The laws controlling what creates a resulting trust and what can be included in one varies wildly depending on the jurisdiction. For example, some states have laws prescribing the automatic formation of resulting trusts based on the nature of a certain transaction. In contrast, there are some states that don’t allow resulting trusts at all.
If you find yourself in a dispute over trust property, there are so many different issues to consider. This is why it is important to seek the help of a local estate lawyer to help you navigate these complicated situations and make sure all your rights are honored.