Living, Testamentary, and Constructive Trusts – Are They All the Same?

There are many different types of trusts that can be used in estate planning. Here we discuss a few types that may be appropriate for your situation that you might consider for your own estate planning.

Living Trusts

A living trust is the most common type of trust used in estate planning. Many individuals use a revocable living trust as their primary estate planning tool. Living trusts are sometimes referred to as inter vivos trusts, Latin 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 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. They can be designed in limitless ways, precisely customized to achieve the unique goals and objectives of the trust maker.

Testamentary Trusts

Another type of trust is a testamentary trust, which is created under the terms of a decedent’s will. Because a will becomes effective after the death of the testator (the person who created the will), a testamentary trust becomes effective only when the testator passes away. A will may direct that some or all of the decedent’s property be set aside in trust for the benefit of one or more beneficiaries. The will would then typically name a trustee and spell out the terms of the trust, directing how the property in the trust will be used or distributed for the beneficiaries’ benefit.

Constructive Trusts

Constructive trusts are actually not trusts at all and rarely have anything to do with estate planning or post-death administration of an individual’s estate. A constructive trust 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.

For example, a judge in a bankruptcy proceeding could impose a constructive trust. 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.

These Trusts are Not the Same

Even though the concepts described above all use the term “trust”, you can see that they are quite different and are used for particular purposes. Legal terminology has a long history and tradition that can be confusing to the layperson. To determine the best legal tools for your unique planning needs, please schedule a time to meet with us. We will help you navigate the various concepts and terminology to create a plan that will accomplish your goals, address your concerns, and reflect your values.