Most Californian’s now use revocable trusts to transfer assets to the heirs thus avoiding the cost and public nature of probate. See our article Revocable Living Trusts, Why Use Them? Upon the death of the Settlor, the Trust usually becomes irrevocable and is distributed pursuant to its instructions. Creditors of the Settlor and Trust face the prospect that the assets owned by the Settlor in the revocable Trust are now being distributed and the question arises as to how they present their claims and what the Trustee can and should do concerning those claims. It turns out that a wise Trustee can extinguish the claims long before the standard statute of limitations would run. That is the subject of this article
Basic Procedure:
Assuming the Trustee files a proper notice to creditors as described below, in order to successfully obtain assets held by a revocable Intervivos trust of a decedent, a creditor must follow strict procedures set forth in the Probate Code.
Probate Code sections 19000 et seq. (combined with the one-year statute of limitations set forth in Code of Civil Procedure section 366.2) restrict the time within which decedent’s creditors may file claims against trust assets. The Code also provides a comprehensive scheme for presenting, allowing, approving, rejecting and litigating such claims. See Wagner v. Wagner (2008) 162 Cal.App.4th 249, 254; Dobler v. Arluk Med. Ctr. Industrial Group, Inc. (2001) 89 Cal.App.4th 530, 535–536; and Embree v. Embree (2004) 125 CalApp.4th 487, 492–497.
These provisions create a “nonclaim” statute that bars creditor claims and actions against trust assets unless the creditor timely files a creditor’s claim within trust proceedings. See Probate Code section 19004 subdivision (c).
A trustee need not avail him or herself of the nonclaim statute, but failure to do so results in forfeiture of the protections provided by the nonclaim statute.
Also, the trustee’s failure to use the claims procedure also means that the distributees may be personally liable for a pro rata portion of the decedent’s debts. See Probate Code sections 19010, 19400 and 19402 subdivision (b). See also Arluk Medical Center Industrial Group, Inc. v. Dobler (2004) 116 Cal.App.4th 1324, 1333–1334; and Valentine v. Read (1996) 50 Cal.App.4th 787, 794 (statutory scheme governing creditor claims shields trustee from liability for making trust distributions).
Note that a trustee may not initiate the trust creditor claims procedure if a probate procedure has already been opened. The trust creditor claims procedure is in place of the probate claim procedure and, instead, the probate creditor claims procedure set forth in Probate Code section 9000 et seq. must be used. See Probate Code section 19003 subdivision (a).
This means that a given creditor only has to file one claim; he or she does not have to file in both a probate and in a trust proceeding. But assuming no probate proceeding has been opened (and it need not be in most revocable Intervivos trust arrangements) then the claim is presented in the trust proceeding assuming the trustee uses the process of the nonclaim statute.
The creditor claim procedure is started by filing a proposed Notice to Creditors in probate court, publishing it and giving “actual notice” to known creditors. Probate Code section 19003. There is no Judicial Council form and no statutory requirements for the notice form. Upon filing, the Probate Court will assign a cause number, and the claims by creditors will be filed within that cause number.
Assuming the notice meets all statutory requirements, a creditor’s claim must be timely filed (four months of first publication of the notice to creditors or 60 days after actual notice was mailed or personally delivered to the creditor, whichever happens later). Sometimes late claims can be permitted if good cause is shown the Court.
Any and all claims have to be filed within the one-year statute of limitations.
All claims have to be formal and in writing, although the Judicial Council has not yet adopted an official form.
The Code provides that once the claim is filed, the trustee allows or rejects the claim (with or without court approval) and gives the creditor notice of the action on a form prescribed by the Judicial Council. Probate Code sections 19005, 19011, 19250–19252. The only catch is that the Judicial Council has not yet adopted the form the Code requires. The best practice is to use a modified DE-174 form.
The trustee or a beneficiary (but not a creditor) also may petition the court to allow, compromise or settle any claim that has not been rejected by the trustee. Probate Code section 19020 subdivision (a).
If the trustee rejects the claim, the creditor must take action by filing a lawsuit or noticing arbitration as appropriate within 90 days after service of the notice of rejection or 90 days after a claim comes due if it was not due when the notice was given.
Finally, note that all statutory exemptions available to debtors under the enforcement of judgments law apply. See Probate Code section 18201 which lists all of the exemptions available.
Personal Liability of Beneficiaries Possible:
Interestingly, the trustee has no duty to preserve assets in the trust for the benefit of creditors involved in pending litigation against the estate. Courts have held that
[a]bsent affirmative wrongdoing amounting to a violation of some other legally cognizable duty, there is no legal authority for subjecting the trustee to personal liability for distributing assets to the trust beneficiaries to the potential detriment of a disputed claimant who later obtains a judgment against the decedent's estate.
But note:
Arluk Med. Ctr., supra, 116 Cal.App.4th at 1335–1340 (a judgment creditor may pursue trust property in the hands of beneficiaries to extent both estate and trust are inadequate to satisfy judgment).
Conclusion:
A Trustee is well advised to utilize the notice procedure described above to cut short the time for a creditor to seek to recover against the trust assets or beneficiaries and the creditor, upon receiving that notice or rejection of his or her claim, must move quickly to enforce his or her rights.