Living, Testamentary, and Constructive Trusts: Are They All the Same?
In the world of estate planning, terms that refer to legal documents such as wills, trusts, powers of attorney, and healthcare directives can be confusing and even overwhelming at times. What is a will, and how does it differ from a trust? What distinguishes a springing power of attorney from an immediate power of attorney? Or are they the same thing? No wonder estate planning can get so confusing!
The concept of trusts is another area within estate planning that can create a great deal of confusion for people unfamiliar with the law. In this article, we hope to clarify some of the different types so that, when you encounter them, you can avoid confusion and better determine which tools are appropriate for your situation and whether they are being used in your own estate planning.
A living trust is the most common type of trust that you will encounter in estate planning. Many individuals use a revocable living trust as their primary estate planning tool. You may also see living trusts referred to as inter vivos trusts; “inter vivos” is simply the Latin phrase for “between living persons.” A living trust is created during the trust maker’s lifetime rather than at death. To create a living trust, the trust maker enters into an agreement with a trustee that places the trustee under a legal obligation to use the money and property in the trust only for the benefit of beneficiaries named in a trust document, or “instrument,” signed by the trust maker. A trustee who fails to fulfill the terms of the agreement can be held liable for any damages suffered by the beneficiaries and can be removed as the trustee. Living trusts can be either revocable or irrevocable, and they can be designed in limitless ways, precisely customized to achieve the unique goals and objectives of the trust maker.
Another type of trust is a testamentary trust, which is created under the terms of a decedent’s last will and testament. A testamentary trust comes into being upon the testator’s (the person who created the will) death, because a will becomes effective only when the testator dies. For example, an individual’s last will and testament may instruct the executor of their estate to create a trust after the testator’s death for the specific purpose of receiving some of or all the property owned by the deceased testator’s estate. The will typically has provisions for naming a trustee and contains the terms of the trust, spelling out how the property in the trust will be used or distributed for the beneficiaries’ benefit. Because this type of trust is not created until the death of the trustmaker, it is referred to as a “testamentary” trust as it exists as a result of the trustmaker’s last will and testament.
Constructive trusts rarely have anything to do with estate planning or postdeath administration of an individual’s estate. In fact, a constructive trust is not actually a trust at all. Rather, it is an equitable remedy used by the courts to prevent someone from benefiting from property that has been wrongly obtained. In contrast to a living trust or a testamentary trust, no fiduciary relationship results when the court imposes a constructive trust as a judicial remedy. One might encounter the use of constructive trusts by a judge in a bankruptcy proceeding.
For example, if a debtor who was filing for bankruptcy transferred certain property to their cousin just days before filing but did not disclose that transfer of property to the bankruptcy court, the court could require that property to be held in a constructive trust for the benefit of the debtor’s creditors even though the property’s title may be in the cousin’s name. This action by the court would thereby prevent the cousin from being able to sell or use the property for their own benefit until it can be turned over to the creditors who had a claim on the debtor’s property.
Are These Trusts the Same?
As you can see, even though these three types of trusts all share certain terminology (i.e., the word “trust”), they can be very different in certain respects. And in the case of a constructive trust, they can have almost no relation whatsoever to the other types of trusts discussed above.
So why do our laws insist on using similar terminology to describe such different concepts? Unfortunately, in the law, tradition is a difficult thing to escape. Certain legal terminology has a long history of describing very particular legal concepts, and attempting to create new terminology for concepts known for centuries in the law can create even greater confusion and conflict in the courts. So we sometimes cling to these traditional terms despite the confusion they may cause to the layperson.
That is not to say that legal terminology can never change. It does happen. So, perhaps someday there will be more clarity when talking about the different types of trusts, but in the meantime, I hope we have been able to clarify at least one small corner of the legal world for you.