Creditor claims against a decedent's trust estate

The recent appellate court decision by the First Appellate Department of the California Court of Appeals in Spears v. Spears, 97 Cal. App. 5th 1294, 2023 Cal. App., is an important change to how creditors of a decedent's estate could satisfy their creditor's claim against the decedent's trust estate, under certain conditions, in the California First Appellate Department.

Previously, a decedent's creditor needed first to file a timely creditor claim in the decedent's probate estate and obtain either a judgement or approval of the claim, and, if there were insufficient assets in the decedent's probate estate to pay the claim, then proceed against the decedent's trust estate to pay the unpaid balance.

An important exception to the foregoing rule is when the trustee elects to open the optional trust creditors claim procedure (analogous to a probate proceeding), under sections 19000 of the Probate Code, in the absence of a probate. This allows the creditor to file the claim in the trust creditor claims proceedings.

A trustee may elect this procedure when the trust beneficiaries are located in California and they wish to avoid being chased by the decedent's creditors after the creditor's claim becomes a judgment; a judgment creditor has the right to proceed against the beneficiaries who have received distributions when the trust has insufficient assets on hand.

In the Arluk Medical Center Industrial Group, Inc. v. Dobler, 89 Cal. App.4th 530 (Second Dist., Div. Seven, May 25, 2001), the Second Appellate Department, held that, “if the claimant prevails and obtains a judgment in its favor, the judgment is payable in the ordinary course of the administration of the estate. If the estate is inadequate to satisfy the judgment, the judgment creditor may proceed against the assets in the settlor's revocable living trust. The judgment creditor “need only establish it has a money judgment against the decedent/settlor; thereafter, the judgment is paid in the normal course of administration of the trust.” 89 Cal. App.4th at pp. 540-541.

Under Arluk decision the trustee does not have to keep a reserve to pay pending creditor claims filed in a probate proceeding. In Arluk, the creditor's judgment came after 5 years of probate litigation, by which time the trust was insolvent as the assets were essentially distributed.

In Spears, however, no probate proceedings were open. Thus, there was no probate proceeding in which the creditor could file a claim. Instead, the creditor filed a claim in a trust proceeding directly against the decedent's trust estate even though the trustee had not opened a trust creditors claim proceeding The trustee followed the decision in Arluk and denied the claim stating that the creditor needed to file a creditor's claim in a probate estate.

However, the appellate court in Spears ruled that, “if there is no probate proceeding to administer the decedent's estate, it is impossible for the creditor to obtain a judgment against the settlor's estate. Arluk also ignores section 19402 and its implicit requirement that a creditor must first proceed against the assets of a trust before seeking recovery from trust beneficiaries who received distributions. (§ 19402, subd. (b).) In any event, in Arluk, a probate proceeding was opened for the settlor's estate and the creditor obtained a judgment against the estate. (Arluk, supra, 116 Cal. App.4th at pp. 1329—1330.) Arluk's comment about what happens when there is no proceeding to administer an estate is therefore dicta.” Spears v. Spears, 97 Cal. App. 5th 1294, 1304.

The decision then discussed how the creditor could pursue its claim against the trust: “[the creditor] had two methods available to him through which to assert his claims. If there is no probate administration and the trust claims procedure is not initiated, the creditor may file suit against the trustee to enforce a debt, claim, or action against the deceased settlor. … [¶] Alternatively, a creditor of the deceased settlor or a person who claims that the trustee is in possession of real or personal property belonging to the claimant may file a petition under [Probate Code] §850(a) (3)(A) or (C).” Spears v. Spears, Id..

The foregoing discussion is not legal advice. Consult a qualified attorney or accountant for guidance. Dennis A. Fordham, attorney, is a State BarCertified 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.