There’s nothing like creditors coming knocking to ruin your day. That time-honored adage also applies to estate and trust law.
Let’s say you’re the beneficiary of a trust or a trustee, or you might be one of these in the future. You’re worried about potential liability claims by creditors who could end up taking a significant share of the trust after the decedent has passed on.
Here’s how the law works when no probate court proceeding has been opened for a trust and the trustee elects not to pursue the optional creditor’s claim procedure, according to Santa Barbara criminal lawyer Aron Billard:
The event that begins the entire process is the decedent’s death. From that time the clock is ticking for liability actions to be filed.
One Year from Death:
Code of Civil Procedure § 366.2 bars any action brought on the liability of a decedent, whether accrued or not accrued, if it is filed more than one year after the decedent’s death, unless the limitation period is tolled or extended, or is tolled or preempted, by federal law. This is an absolute bar. (There are some exceptions for California Public Entities.)
The Trustee’s Duty:
Trustees must reject claims filed outside the one-year period established by Code of Civil Procedure § 366.2. Probate Code § 19253(a) (“claim barred by the statute of limitations may not be allowed by the trustee”).
Guarantor Risk of Default:
The decedent may be the key guarantor of a loan that is either in default or at risk of default. For these creditors the one-year bar is meaningful.
These creditors may have more intimate knowledge concerning a decedent’s net worth and may be motivated by the value of their claims to commence a probate court proceeding.
In an era when many decedents, especially those with substantial assets, use revocable trusts, a creditor may seriously consider opening a probate court proceeding as the first step in seeking enforcement of its claim. The risk of this lessens if the loan is not in default.
All of the summary administration procedures are explicitly governed by the one-year statute of CCP § 366.2.
Also consistent with CCP § 366.2, all of the summary administration procedures require the creditor to sue the transferee in place of the debtor before the expiration of the one-year period after the decedent’s death (earlier if the statute of limitation on the claim expires prior). This also applies to distributees from trusts.
No Probate, No Problem:
If there is no probate proceeding, the trustee has no duty to initiate the trust creditor claim procedure, thereby continuing the underlying principle that the trustee owes a duty only to the beneficiaries. There are real and potentially fatal challenges to a creditor’s successful debt collection when no probate has been opened and the trustee elects not to pursue the optional creditor’s claim procedure.