The Imposition of Constructive Trusts and Other Concepts at Probate-part Ii

• Jurisdiction: Colorado,United States
• Citation: Vol. 28 No. 1 Pg. 49
• Pages: 49
• Publication year: 1999

28 Colo.Law. 49 Colorado Lawyer 1999.

1999, January, Pg. 49. The Imposition of Constructive Trusts and Other Concepts at Probate-Part II

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49

Vol. 28, No. 1, Pg. 49

The Colorado Lawyer
January 1999
Vol. 28, No. 1 [Page 49]

Specialty Law Columns
Estate and Trust Forum
The Imposition of Constructive Trusts and Other Concepts at Probate - Part II
by David W. Kirch

Editor's Note

This is the second 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, which appeared in the December 1998 issue at page 41 analyzed generally how constructive trusts and other concepts operate in the probate context. This Part II discusses the outer limits of the concept, causes of action that support it, and some tactical aspects of constructive trust litigation

As noted in Part I of this article, availability of the remedy of imposition of a constructive trust is not limited to the transferor. A constructive trust may be imposed in favor of an individual who would have been the donee or devisee of the property against a person who obtains the property by undue influence, thus preventing the gift to the intended donee from being accomplished. A constructive trust arises in favor of one who, but for the undue influence of the transferee (the constructive trustee), would have received the property.1 However, the courts may be more willing to impose a constructive trust on grounds of unjust enrichment (without findings of fraud, confidential relationship, or duress) if it is the original owner of the property who will recover, as opposed to third-party intended beneficiaries.

Outer Limits of the Concept

The doctrine should be applicable to the wide variety of nonprobate transfers taking effect at death or coming into question after death, because of their impact on third parties (for example, life insurance and pension benefits, beneficiary designations, P.O.D. accounts, any assets held in joint tenancy, transfers into inter vivos trusts, and lifetime outright transfers). The doctrine can even be used to attack a subsequent will.

As an example of the concept's potentially limitless utility (in situations attorneys frequently view as otherwise hopeless), a constructive trust has been imposed on life insurance proceeds paid in violation of a separation agreement, regardless of the fact that the designated recipient was innocent and without notice.2 In certain instances, this may certainly be a better remedy than a claim against the probate estate (which may be insolvent).

The ability to impose a constructive trust on assets of a decedent held by a party as a matter of convenience when the transferee does not dispute the rights of other parties can produce tax benefits. It should result in an increased tax basis in the assets at death. Further, the transfer of assets from the original transferee to the third parties should not be a taxable gift, even if in excess of the $10,000 annual exclusion.

There appears to be a general consensus supporting the view that a constructive trust should be impressed, even though the wrongful conduct by which the title was acquired was that of a third party and not the donee (deemed trustor).3 In Seidlitz v. Eames,4 the Colorado Court of Appeals awarded life insurance proceeds to the children of the murderer (mistress) of the insured, on the basis that they were the successor-owners of the policies. As an alternative to the argument made by the dissenting judge—that under CRS § 15-11-803(3), the children should not receive the proceeds because this was a "benefit" to the insured's murderer—the question is whether the decedent's estate or spouse could have asked for the imposition of a constructive trust on the proceeds.

The devisees of an earlier will might seek to impress a constructive trust on a decedent's estate even when the assertion of traditional grounds for invalidation of the most recent will and its revocation of the earlier will (incapacity and undue influence) appear not to be appropriate or likely to be successful.5 On the other hand, the courts should consider the importance of protecting the recipient of the property from potentially unfounded or tenuous claims. It is certainly debatable that the courts should draw the line in using the doctrine to grant relief in cases where the intended beneficiary's rights were defeated because of the "transferor's" own failure to get the job done right by a completed gift or formal documentation. The concept should not be used to remedy every injustice or "botched" inter vivos gift or testamentary disposition.6

Causes of Action Supporting The Doctrine

The imposition of a constructive trust is an equitable remedy, not a separate cause of action itself, although the court opinions applying the concept have lacked clarity and precision in this regard. In cases involving the imposition of a constructive trust, a number of different causes of action can be (and have been) asserted. These include undue influence, breach of fiduciary duty, failure to lodge a will, fraudulent and negligent misrepresentation, tortious interference with inheritance rights, abuse of process, tortious misfeasance and nonfeasance, and conspiracy. Such causes of action also will support a claim for punitive damages.

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