What is a constructive trust?
Unfortunately, an all-encompassing definition is not possible, and constructive trusts have variously been criticised as “a rag-bag of instances having little in common” and “a vague dust-heap”.
Generally speaking, a constructive trust is imposed by court order in circumstances where a person cannot in good conscience retain the full beneficial title to the property in question.
The court focuses on ‘unconscionability’ when deciding whether or not to impose a trust. If person A holds the legal title but it is unconscionable for them to do so, the court will declare they hold some/all of the property on trust for person B (irrespective of whether person A ever intended a trust to arise).
This is different to the two other main categories of trusts: express trusts and resulting trusts.
What is an express trust?
Express trusts are (as the name suggests) created by an express intention. The settlor of the trust either declares that the property is held for the benefit of others, or transfers the property to a third party to hold on trust for the benefit of others.
What is a resulting trust?
Derived from the Latin ‘resultare’ (meaning to spring back), a resulting trust is created automatically on the occurrence of certain circumstances. A resulting trust differs from a constructive trust in that it gives effect to the presumed intention of the parties (rather than their express intentions). In particular circumstances (e.g. in bankruptcy law) establishing the presence or absence of a resulting trust can be very important. This article gives a broad overview of the nature of resulting trusts.
Automatic or presumed resulting trusts?
An automatic resulting trust arises when an express trust fails or where there are surplus of assets or funds following the termination of a trust. The law presumes an intention that the leftover beneficial interest is to be kept in a resulting trust for the creator.
When someone contributes to the purchase of a property but has no legal title equivalent to the contribution, the law presumes that the interest is held on trust for the contributor and a resulting trust arises (e.g.. a voluntary transfer with no payment).
Circumstances giving rise to presumed resulting trusts
A presumed resulting trust occurs when a property is transferred to someone who pays nothing for it. There is a legal implication that the property must be being held in trust for the person who paid for it. The trust property is said to “revert” (or “result”) back to the purchaser of the property. In this way, a resulting trust is an equitable remedy that can be presumed to undo unjust enrichment.
However, any presumption under equity about a person’s intention may be rebutted with evidence of actual intention. The best rebuttal is evidence of an express trust stipulating that the property is transferred for the recipient’s benefit.
Can a court order create a resulting trust?
A court can, upon reviewing the evidence, determine that the circumstances give rise to a resulting trust. A court order does not create a resulting trust, as the trust comes into being when the circumstances occurred. Rather, the court issues an order to enforce the pre-existing trust.
Resulting trusts and bankruptcy law
Increasingly, parents of first home buyers are funding their child’s mortgage and purchasing properties in their child’s name. It is not always clear whether the parents’ intention is:
- That the property is to be fully owned by the child as a gift (“presumption of advancement”); or
- that the parents retain an equitable interest in the property (“resulting trust”).
The law will usually presume a resulting trust where value is given without receiving benefit, unless the presumption is rebutted by evidence that the value was intended to be a gift. The relationship between the parties can influence this presumption. In the case of parents and children and of de facto partners and spouses, there is a dominant presumption of advancement. When a parent contributes to the purchase of a property for their child, the law will presume that the money was an outright gift and that there was never an intention that the child would hold the property in trust for their parents. This distinction becomes critical if either the parents or the child becomes bankrupt.
Bankruptcy of the parent
If the parent becomes personally bankrupt, the child’s property could be vulnerable to creditors if it is held in a resulting trust. However, the relationship between parent and child gives rise to a presumption of advancement. Unless there is sufficient evidence to rebut the presumption, the funds would be considered a gift. If the trustee successfully rebuts the presumption of advancement and proves that a resulting trust was created, the trustee in bankruptcy may require the child to “repay” the funds into the bankrupt estate.
Bankruptcy of the child
If the child becomes bankrupt, and there was a resulting trust in favour of the parents, these funds are not available to the trustee in bankruptcy. The parents must adduce evidence to rebut the presumption of advancement (i.e. that the funds were a gift). If they can prove that the transfer of property was not a gift (i.e. that the child held it for the parent’s benefit) then the property will be preserved from the child’s bankruptcy.
If you intend to purchase property together with a family member, you should obtain legal advice and clearly document your intention regarding the ownership of the property. Otherwise, the presumption of advancement could result in you losing some or all of the asset.
How can we help?
Contact us for advice and assistance regarding resulting trusts and the presumption of advancement.
