From the Latin resultare (meaning to spring back), a resulting trust is created automatically when certain circumstances occur. A resulting trust differs from a constructive trust in that it gives effect to the presumed intention of the parties, rather than their express intentions. Sometimes it is very important to establish the existence of a resulting trust, particularly in relation to bankruptcy law. This article provides a broad overview of the nature of resulting trusts.
Automatic Resulting Trusts or Presumed Resulting Trusts?
An automatic resulting trust arises when an express trust fails or when there is a surplus of funds or assets after the termination of a trust. The law presumes that there is an intention that the leftover beneficial interest should be kept in a resulting trust for the creator.
A presumed resulting trust arises when someone makes contributions to the purchase of a property but has no legal title equivalent to the contribution. In this case, the interest is held on trust for the contributor. This includes trusts that arise from voluntary transfer with no consideration. This form of resulting trusts is of particular interest in this article.
Circumstances Leading to Presumed Resulting Trusts
A presumed resulting trust occurs when a property is transferred to someone who pays nothing for the asset. There is a legal implication that the property must be being held in trust for the person who did pay for it. The trust property is said to “revert” or “result” back to the purchaser of the property. In this way, a resulting trust is an equitable remedy that can be presumed in order to undo unjust enrichment.
It is essential to note that any presumption under equity about a person’s intention may be rebutted with evidence of actual intention. As such, the best rebuttal is evidence of an express trust that stipulates that the property is transferred for the benefit of the recipient.
Can A Resulting Trust Be Created By A Court Order?
A court can review the evidence and determine that the circumstances give rise to a resulting trust. However, a court order does not create a resulting trust, as the trust is said to come into being when the circumstances occurred. Rather, the court issues an order to enforce the pre-existing trust.
Resulting Trusts and Bankruptcy Law
In Australia, first home buyers are now frequently turning to their parents to find mortgage funding. In fact, there is a rising number of parents who are purchasing properties in their child’s name. It is not always clear from the outside (and potentially not from the inside) whether the parents intend these properties to be fully owned by the child as a gift (“presumption of advancement”), or whether the parents intend to retain an equitable interest in the property (“resulting trust”).
In general terms, the law will presume a resulting trust in circumstances where value is given without receiving benefit, unless there is evidence that this value was intended to be a gift. However, the relationship between the parties can influence this presumption. In the case of parents and children (and de facto partners and spouses), there is a dominant presumption of advancement. As a result, when a parent contributes to the purchase of a property for their child, the law will presume that the money was an outright gift and that there was never any intention that the child would hold the property in trust for their parents. This becomes a critical distinction if either the parents or the child becomes bankrupt.
Bankruptcy of the Parent
If the parent becomes personally bankrupt, then the child’s property could be vulnerable to creditors if the property is held in a resulting trust. However, in such a case, there is a presumption of advancement due to the relationship of the parties. As such, without further evidence, the funds would be considered a gift. If the trustee can rebut the presumption of advancement, and prove that a resulting trust was created, the trustee in bankruptcy may require the child to “repay” the funds into the bankrupt estate.
Bankruptcy of the Child
On the other hand, if the child becomes bankrupt, and there was a resulting trust in favour of the parents, then these funds are not available to the trustee in bankruptcy. As the presumption is of advancement (and therefore, it is presumed that the funds were a gift), the parents will need to adduce evidence to rebut this presumption. If they can prove that the transfer of property was not a gift, and that the property was held for their benefit, then it will be preserved from the child’s bankruptcy.
If you intend to purchase property together with a family member, it is important to obtain legal advice and to clearly document your intention regarding the ownership of the property. Otherwise, the presumption of advancement could play a part in losing some or all of the asset.