When a decedent’s assets are administered in a probate or trust administration, the personal representative administering the probate or the trustee administering the trust estate have legal responsibilities to creditors of the decedent’s estate.

In probate, the personal representative has a duty to send a notice of probate administration and a creditor claim form to all known and reasonably ascertainable creditors during the first four months of the probate (Probate Code sections 9050-9054). Paying creditors precedes distributions to beneficiaries; with the important exceptions such as the family allowance and probate homestead protecting the decedent’s surviving spouse and minor children (Probate Code sections 6500-6600).

Creditors must first file a creditor’s claim both with the probate court and with the personal representative not later than one year from the deceased debtor’s date of death (California Code Civil Procedure 366.2). When necessary, a creditor may commence probate to file their timely creditor’s claim. Creditor claims that are received after one year of the decedent’s death are generally speaking time barred.

In California, a decedent’s revocable living trust is liable for the claims of the deceased settlor’s creditors and expenses of administration in a probate estate to the extent that the assets inside the probate estate are insufficient to pay such claims and expenses (Probate Code section 19001). Thus, if a creditor claim is approved but there is insufficient assets in the decedent’s probate estate (e.g., a “dry probate’ opened to file a timely creditor’s claim) then the creditor may pursue satisfaction from the trust estate.

Unlike a probate proceeding, a trust administration requires the trustee to administer the deceased settlor’s trust estate, according to the trust’s own terms, for the benefit of the beneficiaries (Probate Code section 16000). Thus, the trustee must follow what the trust says about paying debts. Does it say that the trustee “may” pay all just debts”, in which case the trustee has discretion to pay just debts, or does the trust say that the trustee “shall” (i.e., must) pay all just debts of the deceased settlor, in which case the trustee has no discretion but to pay debts.

Nonetheless, unless the trust requires that the deceased settlor’s debts be paid, a trustee of a decedent’s revocable living trust has no affirmative duty in California state law to administer the trust estate for the benefit of the deceased settlor’s own creditors (Arluk Med. Ctr. Indus. Group, Inc. v Dobler (2004) 116 CA4th 1324). Unless otherwise provided in the trust, the trustee does not have to withhold distributions to beneficiaries pending resolution of a creditor’s claim. However, a trustee may still be sued by a known creditor if the trustee distributes assets that leaves the trust unable to pay the decedent’s creditors’ approved claims in the probate action. Accordingly, where no probate is opened, a trustee may choose either to open a probate or to use the optional trust creditor claims procedure, akin to opening a probate (Probate Code sections 19000-19400). A trustee should always proceed cautiously with the specific advice of counsel.

A creditor whose timely filed creditor claim is approved in a probate proceedings still has a legal right to pursue satisfaction of the claim from trust beneficiaries who received a distribution, but only to the extent of that beneficiary’s share of the total trust distributions (Probate Code sections 19400-19402). Whether a creditor would actually do so depends on whether the effort is likely to be worth the costs.

Other assets of a decedent may pass outside of any probate or trust administration such as assets that go to surviving joint tenants, to surviving death beneficiaries on transfer on death or pay on death accounts, or by way of a small estate affidavit procedure do not require any notice to creditors. However, the beneficiaries who receive assets subject to a small estate affidavit do take subject to the possibility that the creditors may open a probate and seek to recover such assets from the beneficiaries to include in the probate estate and become subject to creditor claims.

Handling creditor claims can be fraught with peril. The foregoing overview is not legal advice. Consult a qualified attorney for fact specific legal guidance. Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.

“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”