A trust is an estate planning legal instrument used to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries. Generally speaking, all trusts created in the United States are presumed to be irrevocable, unless the trust instrument states that the trust is revocable. However, this is not true for Texas, Oklahoma, or California, where trusts are generally presumed to be revocable unless specified as irrevocable.
The most common reason and purpose for creating a trust is to hold some sort of property in the trust for the benefit of another person or party. The following are some of the most common trusts that may be created:
- Inter Vivos or Living Trust: A trust created while the settlor is still alive. An inter vivos trust is often designed to be revocable so that the settlor can add or remove property freely throughout their lifetime;
- Testamentary Trust: Created through a will and generally becomes effective upon the death of the trust creator;
- Charitable Trust: Charitable trusts are created to transfer and designate a person’s assets or property to a charitable organization, for the benefit of a particular charity or organization. The requirements for creating a charitable trust are generally more relaxed compared to the requirements for other trusts, as they are viewed as a benefit to the public;
- Discretionary Trust: A trust that allows the trustee (or the person who manages the trust property) to decide when and how the trust assets and property should be distributed to the named beneficiaries;
- Special Needs Trust: Special needs trusts are created to provide additional income for a disabled beneficiary, but still allow them to receive government benefits. In short, special needs trusts help work around the issue of a gift or inheritance being included in the calculation of the recipient’s income for benefits;
- Spendthrift Trust: A trust created to provide for another person’s needs while preventing the beneficiary from accessing the trust property. Spendthrift trusts also protect the beneficiary by shielding them from their debts or creditors; or
- Land Trust: Trusts that allow a trustee to hold title to a certain piece of land or property, giving them the power to manage the property and make income distributions.
Numerous other trusts may be created for other purposes, such as:
A trust may also contain characteristics of multiple trusts. An example of this would be how it is not uncommon for a trust to be an irrevocable, express, inter vivos, discretionary, spendthrift trust. This is why before you create a trust, it is important to think carefully about the purpose for which you are creating the trust, as one or multiple trusts may be the best solution for your estate planning needs.
What Is A Resulting Trust?
A trust creates a fiduciary relationship between its creator, beneficiaries, and a third party known 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.
As was previously discussed, while there are many types of trusts, the overall idea is that the trust creator wishes to:
- Protect certain assets;
- Reduce taxes; or
- Privately transfer wealth.
However, when a trust fails or does not completely dispose of the trust property, a judge may invoke an equitable remedy known as 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 when the trust fails for another reason. It is a legal tool that is used to prevent a party from unjustly enriching themselves with trust property and prevent trustees from abusing their power.
When Is A Resulting Trust Required?
Some common situations may require a judge to eliminate the original express trust in favor of a resulting trust. Examples include, but may not be limited to:
- Express Trust Failure: This refers to when a valid and properly executed trust becomes impossible to carry out because the named beneficiaries are either missing or deceased. Because you must have beneficiaries to have a valid trust, if this critical element is eliminated, the trust itself becomes void.
- Legally, the creator or settlor 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 either 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 regarding the specific terms of the trust. There can be no valid trust if there are no beneficiaries. The trust property is put into a resulting trust to return to the creator or distribute through the proper probate path; and
- Purchase Money Resulting Trust: This occurs when a person purchases property but instructs the seller to transfer the property or title to a different person. The beneficiary purchases the trust property, but the property is in the creator’s name. This tool is sometimes used for estate planning purposes to ensure the transfer of the property back to the beneficiary because they previously paid valuable consideration.
Are Resulting Trusts And Constructive Trusts The Same? Are There Any Defenses To Resulting Trust Formation?
Resulting trusts and constructive trusts serve different legal purposes. As was previously discussed, a resulting trust is generally established based on a person’s intentions or through the unintentional failure of the original trust. A constructive trust is created to right a wrong, such as theft or fraud.
When a court orders a constructive trust, the person holding the property is no longer the legal owner of it. They are considered to be holding it for the real owner, who receives all benefits, including increased value.
Both are judicially created equitable remedies that are used to prevent unjust enrichment. Resulting trusts are generally a product of their circumstances, as opposed to active wrong. Honoring the intentions of the original trust and its creator is the overall intention.
Resulting trusts prevent trustees or beneficiaries from improperly holding property for the trust’s creator. However, there are two defenses that a trustee may raise to prevent the creator from invoking a resulting trust:
- Laches: If the creator fails to file suit in a reasonable amount of time, the trustee may claim laches if they can prove prejudice; and
- Unclean Hands: Creators who act in bad faith may have a request for a resulting trust denied by the court.
If a settlor acts illegally concerning 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 Resulting Trust Issues?
The laws which govern what creates a resulting trust and what can be included in one varies largely depending on the jurisdiction. Some states have laws prescribing the automatic formation of resulting trusts based on the nature of a certain transaction. Alternatively, some states do not allow resulting trusts at all.
You should consult with a trust lawyer if you have any questions or issues associated with a resulting trust. An experienced and local attorney can help you understand your legal rights and options according to your state’s specific trust laws and will also be able to represent you in court as needed.