What is a constructive trust?

Many Michigan residents are familiar with a trust in regard to estate planning. However, fewer know about constructive trusts, which have a completely different purpose than regular trusts do. A constructive trust is court-ordered when someone obtained the property of someone else in a wrongful way.

According to FindLaw, a constructive trust does not actually exist in a concrete manner and is commonly referred to as a “legal fiction.” This is because it is missing the legal framework, such as the presence of a trustee, other types of trusts have. When something is illegally obtained, the court can order a constructive trust to get the defendant to repay any profit that was garnered in the obtained interest or property title.

When do the courts order constructive trusts? There are a variety of situations that can garner a constructive trust order. These include when property is unlawfully obtained by:

  • Undue influence
  • Theft
  • Defamation
  • Violent crime such as a homicide
  • Fraud

According to the Los Angeles County Bar Association, embezzlement is one type of fraud for which a constructive trust may be ordered. It is estimated that employee embezzlement results in almost $40 billion of stolen money every year. Even if the person who embezzled the money has gotten rid of the stolen funds, a constructive trust is a possibility. In order for this to work, the plaintiff needs to trace any third-party-held property that was purchased with the stolen money, or even by the employee’s salary. When this search is successful, the plaintiff is entitled to the property or profit made from the sale of the property.