August 15, 2014

Is Avoiding Probate Always Good?

One of the main reasons why a person writes a revocable trust is to avoid probate. The rationale is that once the person dies, the administration of their trust estate is typically a more expedient and economical method to administer than a probate estate. For example, probate takes 6-12 months to complete in California and the attorney fee is based off of the value of the estate. If the estate was worth $400,000, the statutory attorney fee is $11,000. This probate fee is higher than a trust administration fee in almost all cases because there are more steps to complete in probate than in trust administration. However, probate does have one mandatory aspect over trust administration that can be advantageous for beneficiaries, an avenue to address creditor claims.

When a person passes away, they will invariably have some outstanding debt. This might include a phone bill, a cable bill, a utility bill or a mortgage. These debts can range from the hundreds of dollars to millions of dollars, depending on the size of the estate. For instance, if a person purchased a multi-million dollar home, it would be easily conceivable that they had a $1M+ mortgage. 

The second step of probate is to satisfy the claims of creditors.  However, the manner in which these claims are addressed is not always the same for probate and trust administration.

In probate, the personal representative is required to provide notice to all creditors so they can submit their claim to the probate court. The personal representative can then either accept or reject the claim. Ultimately, before probate can be closed, the personal representative is required to state that all creditor claims have been satisfied. For example, in my petitions that I have I used to close probate, I say the following: "Petitioner has made all reasonable efforts to ascertain Decedent’s creditors. Notice of administration has been sent to all known and reasonably ascertainable creditors. More than 4 months have elapsed since the date letters first issued. The time for filing creditors' claims expired on January 18, 2014." 

Conversely, in trust administration cases, there is no requirement that the trustee have a creditor claim procedure, i.e. open probate. Instead, California law makes it optional for the trustee if they want to open probate. Probate Code § 19010. Thus, the trustee is free to satisfy creditor claims non-judicially. Alternatively stated, the trustee can pay debts without having to provide proof to a probate judge that they have done so. Occasionally this is not an issue if the decedent had few debts or their debts were easily verifiable. Issues arise though when the decedent had contingent or unknown debts, e.g. they were a defendant in a lawsuit. Hence, it cannot be said that opening probate is disadvantageous in every respect. By forcing the personal representative to address creditor claims before a distribution is made, the beneficiaries should feel confident that there is no lingering unaccounted for debt.