What is a constructive trust?

Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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What Is A Constructive Trust In An Illinois Divorce?

What is a constructive trust?

Illinois family law has a lot of buzzwords that divorce lawyers understand (or pretend to) that regular people can’t seem to wrap their head around. “Constructive trusts” is one of those buzzwords.

If you search for “constructive trust” in the Illinois statutes, you’ll come back with exactly one instance of the term…which is just a referral to the court’s power to create a constructive trust.

This is because “constructive trust” is a tool that case law (also known as common law) provides for when an agreement fails or an order is impossible to enforce.

“[I]f common law principles of express contract govern express agreements between [couples], common law principles of implied contract, equitable relief and constructive trust must govern the parties’ relations in the absence of such an agreement.” Hewitt v. Hewitt, 394 NE 2d 1204 – Ill: Supreme Court 1979

A constructive trust is not an actual trust. A constructive trust is a legally enforceable concept that courts are free to employ should they encounter a gross injustice or a legal impossibility.

“A constructive trust is one raised by operation of law as distinguished from a trust created by express agreement between the settlor and the trustee.” Suttles v. Vogel, 126 Ill.2d 186, 193, 127 Ill.Dec. 819, 533 N.E.2d 901 (1988) (quoting Perry v. Wyeth, 25 Ill.2d 250, 253, 184 N.E.2d 861 (1962)).

Specifically, a constructive trust is either a written, by agreement court order or a constructive trust will be ordered by the court after a hearing. A constructive trust will impose that one party will act as a trustee for the other party in order to manage and eventually distribute some asset to that other party.

Stock Options And Constructive Trusts In An Illinois Divorce

In 90% of Illinois divorce cases constructive trusts are going to refer to a spouse with unvested stock options which are marital property but are not distributable until they finally vest.

For a stock option to “vest” means that the stock option is finally owned and executable by the previously owner of the previously “unvested” shares.

So, were the stock options even “owned” before they vested (which is often after the divorce)? The stock options have definitely been earned during the marriage. The Illinois statute removes all doubt that an unvested stock option has a marital portion.

“For purposes of distribution of property under this Section, all stock options and restricted stock or similar form of benefit granted to either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of marriage, whether vested or non-vested or whether their value is ascertainable, are presumed to be marital property.” 750 ILCS 5/503(b)(3)

Until the date of vesting, the spouse who is earning the stock options can be said to be the trustee for his spouse or former spouse’s share of those stock options. It is the stock option-owner spouse’s duty to their spouse to faithfully execute the stock option and deliver that share of the marital portion of the stock option’s value to his or her former spouse pursuant to the terms of the Marital Settlement Agreement.

So, this duty to maintain and execute a stock option which is in the employee’s name alone, is referred to as a constructive trust because the marital portion of the stock option CANNOT be transferred to the ex-spouse until the stock has vested.

So, why is it called a constructive trust and not just “following the terms of our agreement?”

As a constructive trust, there is a duty of care and additional enforcement options beyond the mere agreement that can be exercised by either party.

Constructive Trusts As An Enforcement Of The Terms Of An Illinois Divorce

Other civil courts beyond family law courts use constructive trusts all the time in order to prevent “unjust enrichment.

In these cases, a constructive trust is an equitable doctrine in which the holder of a legal title is held to be a trustee for the benefit of another who is entitled to that benefit.

“[A] court has the inherent power to enforce its orders, and the circuit court retains jurisdiction to enforce domestic relations orders…[A] court also retains its traditional equitable powers irrespective of empowering statutes.” In re Marriage of Shulga, 2019 IL App (1st) 182028

The doctrine of constructive trust is normally applied to resolve a situation where the holder of the legal title has been unjustly enriched at the expense of another who was supposed to get some or all of that property.

A constructive trust is a concept courts use to right a wrong. A constructive trust is not a written, planned trust.

Because a constructive trust is neither planned nor written, the boundaries of a constructive trust are less clear than those for a resulting or express trust.

No intent to create a trust need be established. Constructive trusts are exempt from the Statute of Frauds, so no written document is required, even if real estate is the subject of the constructive trust. The doctrine of constructive trusts is applied when the holder of legal title has been unjustly enriched at the expense of another.

Constructive trusts are completely reactive. Constructive trusts are created to avoid unjust enrichment and unconscionable results. Because of this, it is difficult to outline exactly what circumstances make a constructive trust an option and what, exactly, a constructive trust will cover.

Illinois case law broadly outlines what is required for a court to create a constructive trust and the duties of trusteeship that follow upon a constructive trust’s creation.

“A constructive trust is created when a court declares the party in possession of wrongfully acquired property as the constructive trustee of that property, because it would be inequitable for that party to retain possession of the property…A constructive trust is generally imposed in two situations: first, where actual or constructive fraud is considered as equitable grounds for raising the trust and, second, where there is a fiduciary duty and a subsequent breach of that duty. A constructive trust may also arise when duress, coercion or mistake is present. Some form of wrongdoing is a prerequisite to the imposition of a constructive trust.” Suttles v. Vogel, 126 Ill. 2d 186, 193, 533 N.E.2d 901, 904-05 (1988).

It sounds like a constructive trust is a pure punishment. For example, a divorce litigant who didn’t disclose all of his assets before the divorce was finalized could find those hidden assets subject to a constructive trust as a remedy for their deceit. The litigant would then have the duty to determine their spouse’s marital portion and distribute that marital portion to their spouse.

Fraud and deceit aren’t always required to impose a constructive trust. If the above divorce litigant discovered a gold mine in his backyard the day after the divorce was finalized a constructive trust could still be imposed to resolve this unjust enrichment.

“Although some form of wrongdoing is generally required for the imposition of a constructive trust, wrongdoing is not always a necessary element. For example, a constructive trust may be imposed in the case of mistake, although no wrongdoing is involved.” Smithberg v. Ill. Mun. Retirement Fund, 192 Ill. 2d 291, 299 (2000)

Both of these scenarios would not have been resolved by a Petition For Contempt because the hidden assets were unknown to the agreement. As the assets were not addressed, there was no clause in the agreement regarding the assets that could have been violated.

Once a constructive trust has been imposed by an Illinois court, the new trustee has a duty to the beneficiary of that constructive trust in regards to the property covered by the constructive trust. Breaching that trust allows Illinois courts to impose a variety of enforcements/punishments.

“(a) A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.
(b) To remedy a breach of trust that has occurred or may occur, the court may:
(1) compel the trustee to perform the trustee’s duties;
(2) enjoin the trustee from committing a breach of trust;
(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
(4) order a trustee to account;
(5) appoint a special fiduciary to take possession of the trust property and administer the trust;
(6) suspend the trustee;
(7) remove the trustee as provided in Section 706;
(8) reduce or deny compensation to the trustee; or
(9) subject to Section 1012, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds.
(c) Nothing in this Section limits the equitable powers of the court to order other appropriate relief.” 760 ILCS 3/1001

The range of penalties for being a bad constructive trust trustee go from another constructive trust of other non-marital property to ANYTHING. This includes incarceration. This is the real power of a constructive trust. Once a constructive trust is imposed, the court is limitless in its ability to enforce its own orders.

In reality, 99% of constructive trust orders for divorce cases find that “[t]he sole duty of the constructive trustee is to transfer title and possession of the wrongfully acquired property to the beneficiary.” Blumenthal v. Brewer, 69 NE 3d 834 – Ill: Supreme Court 2016

Constructive Trusts And Third Parties In An Illinois Divorce

A constructive trust is one of the many tools a court has to enforce a Marital Settlement Agreement (or what should have been included in the Marital Settlement Agreement).

It is very easy to enforce disposition of property by requiring the party to follow the court’s orders. What happens when the property is no longer in the party’s possession. For example, what happens if the party gave heirloom jewelry to his new girlfriend when he was required to turn over the jewelry to his wife. Can the violating party simply say “Sorry, it’s too late. I no longer have the jewelry?”

The party can say that…but his girlfriend is going to be really unhappy when the girlfriend in included in the divorce case as an interpleader and the girlfriend’s new jewelry becomes subject to a constructive trust. Now the girlfriend will be the ex-wife’s trustee.

“[A] constructive trust requires any other party who receives the…proceeds, but who has an inferior equitable right to them, to hold the proceeds solely for the vested beneficiary.” Perkins v. Stuemke, 585 NE 2d 1125 – Ill: Appellate Court, 4th Dist. 1992

This blatant fraudulent conveyance is not very common in divorce cases. What is extremely common and with similar effect is one of the parties changing the beneficiary on their life insurance. By the time it is discovered, the party is dead and no longer subject to the jurisdiction of the court. The new beneficiary can take the money and run…unless someone asks for a constructive trust.

“When marital settlement agreements require an insured to maintain life insurance for the benefit of a particular beneficiary, that beneficiary has an enforceable, equitable right, to the proceeds of the insurance policies against any other named beneficiary” Schwass By and Through Postillion v. Schwass, 126 Ill.App.3d 512, 467 N.E.2d 957, 81 Ill.Dec. 835 (1st Dist., 1984).

If someone is talking to you about constructive trusts and you don’t understand them, you need to speak to someone who will help you understand this extremely vague yet powerful equitable doctrine Illinois divorce courts can employ. Contact my Chicago, Illinois family law firm to learn more about what a constructive trust is from an experienced Chicago divorce attorney.