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Trusts & Estates partner Alexandra Letzel takes a look at creditor claims within the trust and estate litigation space. In this Q&A, Alexandra addresses common challenges arising from creditor claims, potential remedies and recent case decisions that may indicate a shift in the legal landscape regarding creditor claims and questions legal counsel should consider when approaching these matters.
Tell me about your practice and the types of matters you generally work on.
I focus on high net worth trust, probate, guardianship and conservatorship litigation, including will and trust contests and disputes involving fiduciaries. I also work alongside our nationally recognized estate planners in connection with providing pre-litigation advice and handling trust and estate administration issues. I support clients navigating the legal, financial and personal aspects of these cases and am passionate about understanding my clients’ needs and family dynamics.
Recognizing the intricate nature of creditor claims, are there any emerging challenges that estate administrators have been facing?
I think the biggest and most common challenge arises when an individual dies holding all assets in a revocable trust without a need for probate. Under those circumstances, the trustee of the decedent’s revocable trust is faced with several options.
One option is, if the trustee is also the nominated executor of the decedent’s will and aware of creditors, the trustee can open probate proceedings to send out the notice to creditors, which is a judicial counsel form that informs creditors of a deceased person’s passing and instructs them to submit any claims against the estate within a set time frame. This serves to shorten the time period for creditors to file their claims from a one-year period following the decedent’s date of death to four months after letters are issued to the general personal representative or 60 days after a notice of administration is sent to a creditor. This procedure is best utilized earlier in the one-year period following the decedent’s death because it does not extend the one-year statute of limitations under California Code of Civil Procedure Section 366.2.
If the trustee wants to avoid the hassle of probate because it is a no-asset estate, another option that they can utilize is the trust claims procedure under Probate Code Section 19000 et seq. This is a less expensive option than opening a full probate proceeding but still serves the purpose of shortening the time frame within which the decedent’s creditors may file claims against trust assets. In this situation, the trustee files a proposed notice to creditors with the court, receives a case number and then publishes the notice in a local newspaper and serves it on any known creditors. The form for the notice is provided in Probate Code Section 19040. Upon completion of these requirements, the period is shortened from one year from the decedent’s date of death to the latter of four months after the first publication of the notice to creditors under Section 19040 or 60 days after the date the actual notice is mailed or personally delivered to creditors. It is important to note that the optional trust claims procedure can only be utilized if probate proceedings have not been opened for the decedent.
Finally, the trustee could do nothing and put the burden on one of the creditors to open a probate proceeding or file a lawsuit. It’s important to note that each of these options depends on the set of facts involved in each case, and a fiduciary should consult with counsel before concluding which is the best route for them.
Are there any notable cases that have set precedents or clarified the legal framework surrounding creditor claims?
The creditor claim process is largely statutory. However, a recent California Court of Appeal ruling has sparked some discussion among fiduciary counsel. In December 2023, a decision out of the First Appellate District was published and held that where no probate proceeding is opened and the trustee does not elect to utilize the optional trust claims procedure, a creditor may file suit to recover on a decedent’s debt from the decedent’s revocable trust estate without first having to proceed against the decedent’s estate.
This decision deviates from older authorities, requiring that a timely filed creditor’s claim is a condition precedent to a subsequent civil action on the rejected claim. In addition, it brings to light a host of issues regarding distributee liability as codified in Probate Code Sections 19400 and 19402, including when creditors may or must add trust beneficiaries as defendants in their lawsuit to recover on a decedent’s debt from the decedent’s revocable trust estate. These shifts in court decisions and the new issues arising out of them may signal that we could be moving into a wave of new laws for the creditor claims process.
What best practices and legal considerations should estate administrators and their counsel keep in mind when negotiating and settling creditor claims?
I typically start by asking two questions: Is it a valid claim? And was it timely filed? If the answer to both of those questions is yes, then the personal representative should pay the claim. If there is insufficient liquidity in the estate to pay the full amount of a valid, timely filed claim, the estate is usually best served by seeking to negotiate with the creditor to settle the claim before rejecting it and forcing litigation. If the creditor and personal representative cannot come to an agreement, the personal representative can reject the claim in full or in part and the creditor usually has 90 days to file their lawsuit on the rejected portion of the claim. Alternatively, the creditor can file a lawsuit if 30 days have passed since they filed the claim and the personal representative has not acted on it.
Creditor claims in the context of trust and estate litigation are highly complex, but it’s important to have counsel who understands the intricate facts of the case, the legal framework and the options available to get the most ideal result for the client.
