When is a constructive trust formed?

A constructive trust is formed primarily to rectify situations where one party has been unjustly enriched at the expense of another. The essential purpose of a constructive trust is to prevent the wrongdoer from benefiting from their actions. When a court identifies that it is inequitable for one party to retain the benefits of property that rightfully belongs to another, it may impose a constructive trust to restore fairness.

In this context, unjust enrichment refers to circumstances where an individual has obtained a benefit or property through wrongful means, such as fraud or other forms of misconduct. The imposition of a constructive trust serves to ensure that the individual who has experienced loss or deprivation is made whole, as the court effectively recognizes the rightful ownership of the property by the victim and instructs that it be returned or managed in a way that aligns with equitable principles.

The other options, while they touch on aspects of trusts, do not accurately reflect the defining characteristics and purpose of a constructive trust. For instance, the idea of property being held illegally or a trust created without a formal agreement may touch on situations that can involve constructive trusts, but they are not foundational to the establishment of such a trust. Instead, the core principle remains the correction of unjust enrichment to promote fairness and prevent wrongful gains.