In the UK, about 35% of inheritance disputes between siblings involve constructive trust claims.
Whether you are writing your Will, acting as an executor to one, or making a claim that an estate has not been distributed correctly, understanding what a constructive trust is, and when they might arise, should be helpful.
What are constructive trusts and why are they important?
Constructive trusts are legal mechanisms that courts use to recognise beneficial interests when property ownership is disputed.
A distinction with an express trust (what we usually think of as a trust) is that a constructive trust arises by operation of law, not by explicit intention of the parties involved.
For example, if you contributed significantly to the purchase of your elderly father's home but your name isn't on the deed, a court might recognise that a constructive trust comprising your beneficial interest in the property exists.
What the court decides is whether such a trust exists already, not whether one should.
Underlying legal principles
The legal principles underpinning constructive trusts are legal interest versus beneficial interest, equity, fairness, and prevention of unjust enrichment.
You can own something as a legal owner. For example, if you buy a chocolate bar from a newsagent using money that you earned, you'll be the legal owner.
However, you can also have rights to benefit from something, which is known as a beneficial interest.
For example, you might enter into an agreement with a sibling to buy a house. Because you don't want to be on the mortgage, and because your sibling has no money, you agree to pay the deposit, provided that your sibling takes out the mortgage in their name alone. Your sibling becomes the legal owner (whose name is on the deeds as having legal title), but you have a beneficial interest in the property because you have a right to the increased value when it is sold.
Equity refers to the court's power to ensure fairness beyond strict legal rules.
Unjust enrichment means someone benefitting more than they should, usually financially but possibly in other ways.
Types of constructive trust
There are two types of constructive trusts: institutional and remedial.
Institutional constructive trusts arise automatically when certain circumstances occur, such as when someone in a fiduciary position misuses property. For example, a company director who receives a personal 'off the books' financial incentive (a bribe) to choose a particular supplier. As another example, an institutional trust might arise if your brother, as executor of your father's will, used estate funds for personal gain.
Remedial constructive trusts are imposed by courts as a remedy to achieve a fair outcome.
A remedial constructive trust could be imposed if you've been promised a share in the family business in return for years of unpaid work, but this promise wasn't reflected in your parents' will.
How do constructive trusts arise in inheritance cases?
Constructive trusts often arise in inheritance cases when there's ambiguity in a will or competing claims to property.
These trusts can emerge from verbal promises made by the deceased, contributions to property maintenance or mortgage payments, and situations where legal ownership doesn't reflect the true intentions of the parties involved.
Specific scenarios where constructive trusts might be relevant in inheritance cases (known as contentious probate) include:
Verbal promises
Your father promised you the family farm in return for years of unpaid work, but his will leaves it to all siblings equally. A constructive trust might recognise your contribution and expectation.
Property contributions
You've paid for significant renovations to your parents' house, expecting to inherit it, but the will doesn't reflect this. A court might impose a constructive trust to acknowledge your financial input.
Mismatched intentions
Your mother always said she wanted her jewellery collection split between you and your sister, but her will leaves it all to your sister. A constructive trust could be used to honour your mother's expressed wishes.
In each of these situations, a court might impose a constructive trust to ensure fairness and prevent unjust enrichment.
Ambiguous or poorly drafted wills can lead to disputes that may be resolved through constructive trusts. Specific examples of ambiguity include:
- unclear beneficiary designations, for example, 'to my children' when there are step-children (note that under law, step-children are considered children - the question is whether the testator intended this);
- vague property descriptions, for example, 'my house' when the deceased owned multiple properties; and
- contradictory clauses, for example, leaving the same asset to different beneficiaries in different parts of the will).
Constructive trusts can protect beneficiaries when formal legal arrangements are unclear or incomplete. Examples include:
- when property was promised verbally but not included in the will, for example, 'Mum always said I'd inherit her antique collection, but it's not mentioned in the will';
- when a family member has contributed to property upkeep expecting to inherit, for example, 'I've been paying the property taxes and maintenance on the family cottage for years, because I've been expecting to inherit it'; and
- when the deceased's true intentions are clear but not legally documented (e.g., 'Dad often said he wanted his business split equally between me and my brother, but the will leaves it entirely to my brother').
In these situations, constructive trusts might be used to protect the intended beneficiary's interests, ensuring that verbal promises or understood agreements are honoured despite the lack of formal documentation.
Mutual wills, where each person agrees not to revoke their will without the consent of the other, also create a common intention constructive trust. If the surviving person changes their will after the death of the other, a trust would act as an equitable remedy to revert the beneficial interests to what they would have been had the will not been changed.
How do courts decide whether a constructive trust exists?
When determining whether to impose a constructive trust, courts follow these steps:
- examining the parties' intentions;
- assessing any detrimental reliance; and
- considering the overall fairness of the situation.
The burden of proof typically lies with the person claiming the trust exists. Courts apply two main legal tests: the common intention test and the 'unconscionability' test.
For example, in the case of a couple who jointly purchased a home but put it in only one name, the court would look for evidence of their common intention regarding ownership, such as discussions about sharing the property or joint financial contributions.
Courts interpret ambiguous wills in the context of constructive trusts, considering factors like the testator's known intentions and family circumstances.
A longer example
Consider a case where three siblings inherited their parents' property portfolio. One sibling had managed the properties for years without pay, another had contributed financially to property improvements, while the third had no involvement. Despite the will dividing the portfolio equally, a court imposed a constructive trust to recognise the different contributions, awarding a larger share to the siblings who had contributed time and money.
The court's reasoning in imposing a common intention constructive trust considered several factors. First, it examined the intention of the deceased parents, which was inferred from their actions and statements over time. Second, it assessed the contributions made by each sibling, both in terms of time and money. Third, it considered the principle of fairness and prevention of unjust enrichment - allowing the uninvolved sibling to benefit equally would be unfair given the significant contributions of the others.
The evidence considered by the court included financial records showing property maintenance costs and improvements, testimony from family members about the parents' expressed intentions, and documentation of the time spent managing the properties.
The outcome resulted in a more equitable distribution of the estate, with the two contributing siblings receiving larger shares proportionate to their inputs, while the uninvolved sibling still retained a smaller share.
This example illustrates how constructive trusts can be powerful tools in resolving complex inheritance disputes, especially when wills don't fully reflect the deceased's intentions or the contributions made by beneficiaries. By imposing a constructive trust, the court was able to achieve a fair outcome that honoured the spirit of the parents' wishes and recognised the significant efforts of two siblings, while still preserving some inheritance for the third.
Other situations
Constructive trusts also arise when there's a breach of fiduciary duty.
A fiduciary duty is a legal obligation to act in another's best interests, applicable to company directors, executors of wills, trustees, and those with power of attorney. If a fiduciary breaches their duty - for instance, if an executor uses estate funds for personal investments - a court could impose a constructive trust to remedy the breach.
Proprietary estoppel is closely related. It prevents someone from going back on a promise about property rights when another person has relied on that promise to their detriment. Courts often use constructive trusts as a remedy in proprietary estoppel cases.
For instance, if your parents promised you'd inherit the family farm in return for years of unpaid work, but then leave it to your sibling in their will, proprietary estoppel might lead a court to impose a constructive trust in your favour.
What are the duties and responsibilities of constructive trustees?
Constructive trustees have legal obligations similar to express trustees, but these duties arise from the court's imposition rather than voluntary acceptance. The key duties of constructive trustees include acting in the beneficiary's best interests, protecting trust property, and providing accurate information about the trust. While these duties mirror those of express trustees, they stem from different origins.
Constructive trustees have a fiduciary duty, which requires a high standard of care and loyalty. This duty involves:
- avoiding conflicts of interest;
- not profiting from the trust position; and
- maintaining confidentiality.
For example, as a constructive trustee of your family home, you couldn't use trust funds to renovate only your living space or disclose sensitive financial information about your siblings' interests in the property.
Accounting obligations ensure transparency and trust management. Trustees must keep accurate records of trust property and transactions, including:
- income received;
- expenses paid;
- investments made; and
- any changes in trust assets.
Beneficiaries have the right to request this information, and trustees must respond promptly. To fulfil this duty effectively, trustees should consider using dedicated bank accounts for trust funds and maintaining detailed logs of all trust-related activities.
Breaching trustee duties can lead to serious consequences, including legal liability and financial penalties.
For instance, if you used trust funds to pay for a personal holiday, you might be required to repay the money with interest and potentially face removal as trustee.
To avoid such pitfalls, those who find themselves as constructive trustees should:
- seek legal advice to understand their obligations;
- maintain clear communication with beneficiaries;
- consider professional assistance for complex financial management;
- keep meticulous records of all trust-related activities; and
- regularly review and update their understanding of trustee responsibilities.
By diligently fulfilling these duties, constructive trustees can ensure fair management of trust assets and protect the interests of all beneficiaries involved. This is particularly important in family inheritance situations, where emotions and long-standing relationships can complicate property disputes.
What tax implications do constructive trusts have?
Constructive trusts impact tax situations, particularly for inheritance tax (IHT) and capital gains tax (CGT). The specific tax consequences depend on individual circumstances, with constructive trusts potentially creating tax liabilities or offering planning opportunities.
For example, a constructive trust recognising your partner's interest in a property might reduce IHT liability but create CGT considerations if the property is later sold.
Constructive trusts can affect IHT calculations as property subject to these trusts may be treated differently than outright gifts or bequests. These trusts might increase or decrease IHT liability by bringing additional assets into an estate or splitting ownership to utilise multiple nil-rate bands. For instance, if a constructive trust recognises your significant contributions to your parents' home, it could alter the value of the estate, and consequently the IHT calculations when the property passes to you and your siblings.
CGT implications arise particularly when trust property is sold or transferred, with the tax treatment often differing from outright ownership. Key CGT considerations for constructive trusts include how gains are calculated, available exemptions or reliefs - such as private residence relief - and who bears responsibility for paying the tax. Consider a scenario where you and your sister jointly own a family home subject to a constructive trust, but only you have lived in the property. If sold, this situation could affect the availability of private residence relief, potentially increasing the CGT liability.
Given the complexity of tax law and its significant financial impact, it is advisable to seek professional tax advice for your specific situation. Keep detailed records to manage tax liabilities effectively, including documentation of property contributions, improvements, and any agreements about beneficial ownership.