The Imposition of Constructive Trusts and Other Concepts at Probate—Part I
by David W. Kirch

Reproduced by permission. ©1998 Colorado Bar Association,

27 The Colorado Lawyer 41 (December 1998). All rights reserved.

Editor’s Note:

This is the first part of a two-part article on recovery of joint tenancy property and other lifetime transfers through the imposition of constructive trusts and other tools. Part I of this article analyzes generally how constructive trusts and other concepts operate in the probate context. Part II, to be published in the January 1999 issue, will discuss the outer limits of the concept, causes of action that support it, and some tactical aspects of constructive trust litigation.

In the area of probate litigation, the concept of constructive trusts has a special, but frequently overlooked, use in the commonly encountered circumstance of property being transferred outright or into joint tenancy by right of survivorship during lifetime by an elderly person, in such a way as to disinherit the natural objects of that person’s bounty or otherwise change that person’s existing estate plan. This happens frequently as an informal estate planning or property management device by the elderly. While the legal principles and procedures involving a will contest (usually based on fraud, undue influence, and lack of testamentary capacity) are well defined, generally clear cut and well understood, those involved in the setting aside of inter vivos transfers on similar grounds are not.1

Background

It is an extremely common practice for elderly parents to place property into joint tenancy with right of survivorship, or in the sole name of a single child or other trusted person, under the misguided belief that such an informal arrangement is the best manner in which to provide for management of assets in the event of incapacity (avoiding a conservatorship, but overlooking the better alternative of a durable power of attorney) and accomplishes the overrated objective of avoiding probate (despite the ease and inexpensive option of informal probate). The same may be true of transfers to a spouse when there are children by a prior marriage. Usually, there is the intention and implicit understanding that the person holding title will use the property for the benefit of the transferor during his or her lifetime and that it will be shared with other beneficiaries at death.

In most cases, the transferee acts in accordance with the transferor’s wishes and shares the intended property with the transferor or other beneficiaries after the transferor’s death. However, the transferee sometimes suffers a change of mind, decides to not honor the transferor’s intentions, and asserts unrestricted claims to ownership of the transferred property. The original transfer may be, but does not necessarily have to have been, the result of undue influence, mistake, or fraud, and generally will involve a transferee with a “confidential relationship” to the transferor. There may simply have been the absence of an intent to make a gift.

After the transferor’s death in such circumstances, many attorneys assume that there is little chance of remedying this situation absent substantial evidence that the transferor lacked the legal capacity to make the transfer or clearly lacked the intention to make a gift, even though such a transfer, if made under the will of the decedent, would likely have been attacked on grounds of fraud, undue influence, or lack of testamentary capacity. In the case of property titled in joint tenancy, this assumption is supported by the provisions of CRS § 15-15-212(5), requiring clear and convincing evidence to establish that joint tenancy with right of survivorship was set up as a matter of convenience only and not to vest rights of ownership in the survivor in order to bring the property back into the transferor’s estate.2

However, even when the transferor cannot be shown to have lacked legal capacity or the intent to make a gift, the operation of the remedy of the imposition of a constructive trust or other concepts can be brought to bear on situations that involve confidential relationships or undue influence justifying setting aside the transfer or recognizing the rights of the transferor (or, after death, the transferor’s heirs or devisees) in the property.

Operation in the Probate Context

Broadly, a constructive trust is an equitable device used to compel an individual who unfairly holds property to convey it to the person to whom it justly belongs.3 The concept has been applied in a wide variety of circumstances to prevent unjust enrichment.4

Outside the probate arena, where there is evidence that a spouse engaged in a scheme to gain financial benefit for himself or herself, an equitable duty exists and a constructive trust is properly imposed.5 It has been stated that a constructive trust is a remedy devised to prevent unjust enrichment and compel restitution of property which, in equity and good conscience, does not belong to the defendant; it does not require an intent to create a trust and neither actual fraud nor the existence of a fiduciary relationship need be shown.6

Interplay of Concepts

A constructive trust action, when based on a confidential relationship, is akin to an action to establish undue influence in the making of a will. However, rather than seeking to invalidate a will, the plaintiff often may be seeking to claim property passing outside of a will that would have otherwise passed to the plaintiff under the decedent’s will. As a result of evidentiary presumptions, discussed below, satisfying the burden of proof to gain relief may be easier than establishing undue influence in a will contest.

As one commentator has stated in a treatise on trust abridgment:

A constructive trust arises when a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. . . . A constructive trust may arise, however, even though the acquisition of the property was not wrongful. It arises when the retention of the property would result in the unjust enrichment of the person retaining it . . . . But where the property would have passed to a third person but for the wrong, the wrongdoer may be compelled to surrender the property to the third person, rather than to surrender it to the person from whom he obtained it or to his estate.7

A confidential relationship warranting imposition of a constructive trust for abuse of that relationship may arise when an individual has justifiably reposed confidence in another.8 A constructive trust arises when a person, clothed with some fiduciary character, gains some advantage to himself or herself.9

While it may be possible to show undue influence in connection with the original transfer,10 if the existence of a confidential relationship has been established, a transaction may be set aside and a constructive trust imposed if that relationship has been abused. It is not necessary for the abuse to be the procuring cause of the original conveyance. The abuse of the confidential relationship can be merely the failure to honor the transferor’s intentions with respect to the original transfer, which would not have been made but for the confidential relationship.11 The 1975 case of Judkins v. Carpenter12 involved a claim by the heirs of the transferror; in the 1993 Eads v. Dearing13 case, a claim by the parent-transferor against a child-transferee was at issue.

After a transferor’s death, it would appear that some basis must exist for the court to conclude that the decedent intended the property to go to the plaintiff (that is, a defeated expectancy). The courts will look for some wrongdoing, undue influence, or other participation by the defendant in defeating this expectancy, or for some basis for assuming an intention initially that the transferee share the property with others (that the transfer was intended as an informal property management or estate-planning device with a disposition inconsistent with the transferor’s overall estate plan).

The statute of frauds does not prevent the declaration of a constructive trust, and the parol evidence rule will not bar testimony regarding the parties’ intentions.14 Thus, the concept has utility in circumstances where an oral trust might otherwise have been asserted and where lack of capacity or undue influence could not otherwise be proven. However, the imposition of a trust relationship need not be based on an express agreement between the deemed settlor and trustor, as appears to be true in connection with application of the “resulting trust” concept.15 In fact, the defendant may have had an understanding and intent opposite that of the decedent’s at the time of the conveyance or other action causing the property to pass to the defendant.16

Courts have enforced an oral trust on grounds of the “remedy of specific restitution,” as distinct from the remedy of a constructive trust based on abuse of a confidential relationship.17 This assumes some sort of agreement between the parties. Under similar circumstances, the concept of resulting trusts, as an “intent-rectifying” remedy, has been applied. This is similar to the “equitable trust” label concept adopted by the Colorado Court of Appeals and expressly rejected by the Colorado Supreme Court in 1979 in Page v. Clark.18

In Colorado, the parol evidence rule and statute of frauds would not be impediments to the enforcement of an oral trust with regard to personal property, but would operate as a bar to proof of a trust obligation with respect to real estate. This gives rise to the use of the constructive trust concept in situations where, otherwise, a remedy may not be available.19

It is frequently stated that constructive trusts are not intent-rectifying trusts, as are resulting trusts, but generally are termed “fraud-rectifying” trusts, with the word fraud used in the sense of any kind of wrongdoing, including breach of a promise to hold property for the benefit of others, and not just confined to intentional false representations.20 In operation, this distinction does not seem particularly helpful in understanding the difference in these concepts. However, if the court in In re Specialized Installers, Inc.21 correctly interpreted Colorado law, “wrongdoing” may mean nothing more than that the property does not go to the intended party.

A claim by children by a prior marriage against a surviving spouse for “undue influence” is difficult to prove, given the courts’ recognition that one spouse will naturally have influence over the other.22 However, proof of diminishing capacity and other circumstances creating greater susceptibility to influence by a spouse may operate in such circumstances to support imposition of a constructive trust. Traditionally, more of a “master-slave” relationship is required for a finding of undue influence.23

American Jurisprudence states that: “The issue is not whether the property was acquired in a wrongful manner, but the wrongfulness of its retention.”24 It goes on to say:

The Courts do not seem inclined to debate whether the Defendant transferee or the disappointed donee is more deserving of the property than the other. . . . [I]t seems that the disappointed Plaintiffs’ primary burden, besides showing the confidential relationship, is to show a rational expectancy based on the transferor’s intention, entitled to equitable protection.25 [Emphasis in original.]

A decedent’s last will and testament or declarations to third parties should provide proof of such an expectancy. The same is true of payments of income to the transferor or plaintiffs.

Shifting the Burden of Proof

Under Colorado law, in cases involving a confidential or fiduciary relationship to the transferor, including the 1975 Colorado Supreme Court case of Judkins v. Carpenter, the burden of going forward with evidence establishing that the transaction was not the result of undue influence shifts to the defendant.26 The kind of proof that will suffice and the practical impact of shifting the burden of going forward (as opposed to a shifting of the burden of proof) are not clear from Judkins. Judkins suggests that a transferee’s self-serving statements may be enough to satisfy this burden. Would the dead man’s statute bar such statements? Judkins was an interpleader action, but, under the Colorado Court of Appeals case of Eads v. Dearing, the principle also operates in a constructive trust action.27

Interestingly, both Judkins and Eads discussed the burden of proof, but found the existence of undue influence, independent of this concept, which raises questions regarding the practical significance of the shifting burden of proof. The shifting of the burden of proof appears designed to create a more level playing field where transfers are made by persons susceptible to manipulation to persons in a position to exercise such manipulation.

Establishing a Confidential Relationship

Constructive trusts have been imposed even in the absence of evidence that the dominant party suggested the transfer or otherwise acted to impose his or her will on the dependent party.28 This is particularly true where the transferor uses the transfer as an informal estate planning device.

Although mental confusion or impairment will support a constructive trust claim, in Judkins, the Colorado Supreme Court rejected the Court of Appeals’ strict application of a testamentary capacity or legal competence standard. Even a decedent who had the capacity to handle his or her own business affairs may, because of circumstances causing dependency on the transferee, have made a transfer subject to imposition of a constructive trust on grounds of undue influence, fraud, or breach of fiduciary duty.

Fraud is not essential for imposition of a constructive trust, and where money was obtained by the defendant from a person to whom he or she bore a confidential relationship, a constructive trust is properly imposed.29 A family relationship alone probably will not give rise to a confidential relationship,30 but it is a factor considered by the courts.

Circumstances of age, physical or mental infirmity, and dependence on a family member for assistance can give rise to a confidential or fiduciary (the courts have used the terms as if they were interchangeable in this context) relationship justifying the imposition of a constructive trust.31 However, these are by no means necessary elements.32 Likewise, a combination of a close personal relationship, a decedent’s (transferor’s) poor health, a defendant’s control or dominance over the decedent, the decedent’s physical infirmities, the decedent’s need for emotional support and the decedent’s changeable and confused mental state, should be conclusive evidence of a confidential relationship, shifting the burden of going forward to show no undue influence to the defendant. The absence of legal advice for the decedent in making the transfer33 and a defendant’s participation in the transfer34 are further evidence that has been recognized as establishing undue influence.

On the other hand, neither loss of mental capacity,35 nor fraud in procuring the transfer,36 nor inability to handle business affairs37 should need to be shown for the court to impose a constructive trust in favor of the intended recipient of the property in issue.

Conclusion

When confronted with lifetime transfers by the elderly, the attorney should not limit his or her inquiry to questions of capacity and undue influence. A constructive trust may be available as a remedy to set aside such transfers on the basis of diminished capacity or other factors making the elderly susceptible to manipulation or abuse of confidential relationships. Part II of this article, to be published in the January 1999 issue, will discuss the specifics of pursuing a constructive trust claim.

NOTES

1.
See Colorado Pattern Jury Instructions, Chapter 34 for Will Contests.

2.
See also
In re Estate of Barnhart, 563 P.2d 972 (Colo.App. 1977) (joint tenancy may be set aside when created solely for the donor’s convenience and no right of survivorship was intended).

3.
In re Marriage of Allen, 724 P.2d 651 (Colo. 1986).

4. 10 Sertert, Colorado Creditor’s Remedies-Debtor’s Relief, §§ 8.1 through 8.6 (West’s Colorado Practice Series).

5.
Rasmussen v. VanRiel, 708 P.2d 471 (Colo. App. 1985).

6.
In re Specialized Installers, Inc., 12 B.R. 546 (1981); Page v. Clark, 592 P.2d 792 (Colo. 1979).

7. Scott, The Law of Trusts Abridgment,
§§ 461-464 at 770-71.

8.
Page, supra, note 6.

9.
Botkin v. Page, 91 Colo. 221, 14 P.2d 187 (1932); Pioneer Real Estate Inc. v. Larese, 762 P.2d 720 (Colo.App. 1988).

10.
Judkins v. Carpenter, 537 P.2d 737 (Colo. 1975); Eads v. Dearing, 874 P.2d 474 (Colo. App. 1993).

11.
Weeks v. Esch, 568 P.2d 494 (Colo.App. 1977).

12.
Supra, note 10.

13.
Supra, note 10.

14.
In re Marriage of Heinzman, 596 P.2d 61 (Colo. 1979).

15.
See
First Nat’l Bank of Denver v. Harry W. Rabb Found., 479 P.2d 986 (Colo.App. 1970).

16.
See
Mancuso v. United Bank of Pueblo, 818 P.2d 732 (Colo. 1991), which discusses the difference between constructive and resulting trusts.

17.
Orella v. Johnson, 242 P.2d 5 (Cal. 1952).

18.
Supra, note 6.

19.
Kenyon v. Poehlmann, 718 P.2d 264 (Colo. App. 1986).

20. Bogert, Trusts, 6th ed. (1987) at 287; Marriage of Heinzman, supra, note 14.

21. 12 B.R. 546 (1981).

22.
Hodges v. Hodges, 692 S.W.2d 361 (Mo. App. 1985).

23.
Barnes v. Barnes, 66 Me. 286 (1876). See also Sanford v. Coleman, 418 So.2d 856 (Ala. 1982).

24. 31 Am.Jur.2d Proof of Facts, “Constructive Trusts Based on Confidential Relationship Between Parties to Transfer of Property,” § 2 at 237.

25.
Id. at 262-263; Skidmore v. Back, 512 S.W.2d 223 (Mo.App. 1974).

26.
Judkins, supra, note 10.

27.
Eads, supra, note 10.

28.
First Nat’l Bank v. Curran, 206 N.W. 2d 317 (Iowa 1973).

29.
Judkins, supra, note 10.

30.
Meyer v. Schwartz, 638 P.2d 811 (Colo.App. 1981).

31.
Weeks, supra, note 11; Breeden v. Dailey, 574 P.2d 504 (Colo.App. 1977).

32.
Supra, note 24, § 4 at 240.

33.
See
Judkins, supra, note 10, and Curran, supra, note 28.

34.
See Colorado Jury Instructions 2d, 31:14.

35.
See
Judkins, supra, note 10.

36.
See Weeks, supra, note 11.

37.
See Curran, supra, note 28.