Filing an Untimely Creditor's Claim

Marin County Civic Center

When a person passes away, they often owe money to various persons, namely creditors. These creditors might be a family member, a government agency, friend, neighbor, credit card company or even an ex-spouse. Creditors have strict filing deadlines when filing a claim in a probate proceeding. The particular filing deadline, or statute of limitations, will depend upon when the decedent passed away, when Letters were first issued or when a notice of administration was provided to the creditor. 

A recent unpublished appellate decision focused on the lack of timeliness by a creditor to file her claim.

"After Gary Kelson (Decedent) died, Paul Kelson (Executor) petitioned for probate of Decedent's will. Letters testamentary appointing Executor issued on December 7, 2021.

In May 2022, Objector filed a creditor's claim for more than $650,000.^[1] To support the claim, Objector attached a 2002 judgment in dissolution proceedings between Objector and Decedent. The judgment provided for Decedent to pay family and child support to Objector in specified amounts for specified time periods. In a subsequent filing, Objector explained that Decedent failed to fully pay the ordered support and further failed to return personal property identified as Objector's in the 2002 judgment.

In January 2023, Executor rejected Objector's claim. In filings supporting Executor's petition for final distribution, Executor stated Objector's claim was untimely. Objector filed a response and objections to the petition. Following a hearing, the probate court granted Executor's petition for final distribution. With respect to Objector, the court's order found Objector's claim was filed "more than 120 days following issuance of letters testamentary. [Objector] did not file a petition with this Court to allow her late-filed creditor claim under Probate Code section 9103. [Executor's] rejection of said claim as untimely was therefore proper."

The trial court's decision was later upheld on appeal by the California Court of Appeal. 

Estate of Gary Kelson, Marin County Superior Court case no. PRO2103356

Of note, the Marin County Superior Court is housed in the Marin County Civic Center, pictured above. This building was designed by renowned architect Frank Lloyd Wright. 

Prioritizing Debts in a Probate Case

When a person passes away, they will invariably have some debt. This can take the form of a mortgage, a credit card bill, hospital expenses, cell phone bill, car insurance, etc.

A primary duty of any estate administration matter, whether probate or non-probate, is to itemize and categorize these debts. 

Once the decedent's debts have been itemized and categorized, the next step is to prioritize the debts. Yes not all debts are created equal. The following is the order of priority for creditors:

1. Administration expenses—for obligations secured by a mortgage, deed of trust, or other lien, only the administration expenses that are reasonably related to the administration of the secured property are given priority (Prob C §11420(a)(1));

2. Obligations secured by a mortgage, deed of trust, or other lien, including a judgment lien, to the extent that they can be paid out of the property subject to the lien—if the property is insufficient, the unsatisfied obligation is a general debt (Prob C §11420(a)(2));

3. Funeral expenses (Prob C §11420(a)(3));

4. Expenses of last illness (Prob C §11420(a)(4));

5. Family allowance (Prob C §11420(a)(5));

6. Wage claims (Prob C §11420(a)(6)); and

7. General debts (Prob C §11420(a)(7)).

 

A recent unpublished appellate decision addressed the issue of prioritizing debts:

 

"Appellant David Downs is serving as the administrator of the estate of Shawna Graham. The estate's primary asset is a piece of real property that Downs wants to sell for $365,000. The property is over-encumbered. Respondent Wells Fargo Bank, N.A. (Wells Fargo), is the beneficiary of a deed of trust on the property and is owed approximately $338,000; Matadors Community Credit Union (Matadors) has a security interest in a solar energy system installed on the property and is owed approximately $29,000; and decedent owed the Internal Revenue Service (IRS) approximately $40,000 in unpaid federal taxes. The costs of selling the property will be approximately $39,000, and Downs contends he and his attorney are entitled to approximately $66,500 in administrative expenses. If the property is sold for $365,000, there will not be enough money to pay all these debts."

 

The administrator then filed a petition to determine the order of payment if the property were to be sold. The administrator sought to have payment be made in the following order:

         

• $40,059 in federal taxes be placed in a trust account.

• $66,537 in costs of administration be placed in a trust account.

• $39,408 in costs of sale be paid directly to the parties to whom they are owed.

• $224,131 to Wells Fargo to partially pay off the mortgage.

• $0 to Matadors.

The trial court denied the requested order in its entirety. On appeal, the appellate court affirmed in part and reversed in part.

Estate of Graham, Placer County Superior Court, case # SPR0009820.

Filing a Timely Creditor's Claim

All people pass away owing some kind of debt. Some estates have large debts while others have small debts. If an estate is probated, the probate process provides an opportunity to file a claim against the decedent's estate. Each creditor is tasked with filing their claim in a timely manner. Otherwise their claim can be time-barred even if their claim is valid.

A recent published appellate opinion addressed the issue of when a creditor's claim is timely filed.

Estate of Holdaway (2019) _______ CA4th _______

"The decedent died on June 13, 2013. On June 11, 2014, Everett filed a petition for probate and creditor's claim seeking $90,875. The claim was based on (1) four loans to the decedent, totaling $25,200; (2) unspecified "in-home services" she provided to the decedent, valued at $24,000; (3) unspecified "in-home expenses" of $17,675 she incurred on the decedent's behalf; and (4) "certain property" owned by Everett in the possession of the decedent at the time of his death, valued at $24,000.

After five continuances requested by Everett's counsel, in March 2015 the trial court issued an order to show cause why the petition should not be dismissed for failure to prosecute. On May 7, 2015, the trial court ordered the case "dismissed without prejudice as to [the] entire action" for failure to prosecute.

In December 2015, Everett filed another petition for probate with the trial court under the same case number as her previous petition. In May 2016, Holdaway, who is the decedent's son, filed a competing petition for probate. The competing petition stated that the decedent had died testate, and attached an attested and subscribed will that left all the property to a family trust he had established. The will nominated the decedent's wife or, in the alternative, Holdaway, as executor. In October 2016, the trial court granted Holdaway's competing petition, dismissed Everett's petition, appointed Holdaway as the personal representative of decedent's estate, and admitted the will. There were no objections to these rulings, and the court noted that the dismissal of Everett's petition was "by agreement" of the parties.

On March 10, 2017, Holdaway formally rejected Everett's creditor's claim against the estate. On May 19, 2017, Everett filed her complaint challenging the rejection, seeking damages in the amount of the claim, $90,875.

Holdaway demurred to the complaint, arguing among other things that it was time barred under Code of Civil Procedure section 366.2, and that in any case it was barred by other statutes of limitations. The trial court sustained Holdaway's demurrer without leave to amend."

On appeal, the appellate court reversed the trial court holding that only the estate's personal representative had the power to reject Ms. Everett's creditor claim. Since the personal representative did not reject the claim until March 10, 2017, Ms. Everett had 90 days thereafter to file her lawsuit against the estate.

The fact that Ms. Everett initiated her lawsuit years after the decedent's death was immaterial. Normally a claim must be filed against a decedent's estate within 1 year of death. Code of Civil Procedure section 366.2. In this case though, since Ms. Everett had filed her creditor's claim within 1 year of the decedent's death, the statute of limitations was tolled until it was rejected by the personal representative on March 10, 2017. Following the personal representative's rejection, Ms. Everett had 90 days to commence a lawsuit. She timely did so by filing her complaint on May 19, 2017.

Estate of Michael Jackson

It is hard to believe that Michael Jackson passed away practically a decade ago. He passed away on June 25, 2009. 

Simply put Michael Jackson was a world-famous musician. He still is my sister's favorite musician. I can remember listening to his music as a child during the 1980s on a boombox that was playing a cassette tape. How times have changed.............

Following Mr. Jackson's passing, 4 individuals came forward to assert a claim against his estate. The claimants alleged that Mr. Jackson had promised them a share of a new company during a meeting on June 1, 2006 in Japan.  

However, no claim was immediately filed after the co-executors had been appointed on November 10, 2009 to administer Mr. Jackson's estate. 

Instead, according to the unpublished appellate opinion, "[o]n December 20, 2012, El-Amin wrote to the executors advising them of the June 1, 2006 meeting and claiming that at that meeting Jackson had made promises to appellants of ownership interests in his company and had stated how those supposed equity interests would be allocated."

This prompted the co-executors into action. 

"On January 28, 2013, the executors filed their "Petition for an Order Determining that the Estate of Michael Joseph Jackson Is the Sole Member and Owner of the Michael Jackson Company, LLC," pursuant to Probate Code section 850 (the Petition), by which they sought an order confirming that "the Estate is the sole member and owner of the [LLC] and that no other person has an interest in the [LLC]." The Petition noted that Jackson had been listed as the sole member of the LLC on the Estate Inventory and Appraisal, filed in 2011."

"On May 7, 2013, Morris and El-Amin filed a complaint in the Los Angeles Superior Court, seeking damages for Jackson's alleged repudiation of the claimed joint venture among the parties which they alleged had been formed at the meeting in Tokyo to determine the value of their interests in the claimed joint venture and to obtain damages for its breach."

The probate petition and civil action were eventually consolidated. 

"Following a multi-day bench trial on the Petition in the probate court and posttrial briefing, on March 27, 2017, the trial court issued a 27-page minute order containing its credibility determinations, findings of fact and legal rulings. The court determined the Estate was the sole owner of the LLC."

On appeal, the appellate court affirmed the trial court's decision.

The crux of claimants' case was the delayed filing. Mr. Jackson passed away on June 25, 2009. Code of Civil Procedure § 366.2 generally imposes a strict 1-year deadline to file a claim against a decedent's estate. No exception to Code of Civil Procedure § 366.2 applied to this matter, so the claimants needed to file their claim by no later than June 25, 2010. Unfortunately for the claimants, their claim was filed after June 25,  2010 and so their claim was time-barred.

Spendthrift Clause - Carmack v. Reynolds

A common provision to include in a trust for a careless beneficiary is a spendthrift provision. This provision provides protection to a beneficiary's inheritance by limiting the ability of a creditor to attach their claim to a beneficiary's interest in the trust. Still, a spendthrift clause does not absolutely insulate a beneficiary's inheritance from creditors. 

Certain types of creditors can attach to the beneficiary's interest regardless of a spendthrift provision, e.g. child support creditors. For general creditors, recovery is typically not as easy. 

A recent California Supreme Court case addressed the issue of how far a bankruptcy trustee can reach into a beneficiary's interest in a trust.

Carmack v. Reynolds (2017) _____ Cal.4th _____

The pertinent facts are as follows:

"The trust provides that at Freddie's death, Reynolds is entitled to $250,000 from the trust if he survives Freddie by 30 days. In addition, Reynolds is entitled to receive $100,000 a year for 10 years and then one-third of the remainder. All payments are expected to be made from principal; the trust's assets are in undeveloped real estate that do not produce income. Those assets are estimated to be worth several million dollars, although their exact value will not be known until the trust assets are liquidated.

The day after his father died, Reynolds filed for voluntary bankruptcy under chapter 7 of the United States Bankruptcy Code. The trustees of the Reynolds Family Trust sought a declaratory judgment on the extent of the bankruptcy trustee's interest in the trust. The bankruptcy court held that under the California Probate Code, the bankruptcy trustee standing as a hypothetical lien creditor could reach 25 percent of Reynolds's interest in the trust. The bankruptcy appellate panel affirmed. The bankruptcy trustee appealed to the Ninth Circuit, which asked us to clarify if Probate Code section 15306.5 caps a bankruptcy estate's access to a spendthrift trust at 25 percent of the beneficiary's interest where the trust pays entirely from principal. We granted the Ninth Circuit's request."

The court found that "that a bankruptcy trustee, standing as a hypothetical judgment creditor, can reach a beneficiary's interest in a trust that pays entirely out of principal in two ways. It may reach up to the full amount of any distributions of principal that are currently due and payable to the beneficiary, unless the trust instrument specifies that those distributions are for the beneficiary's support or education and the beneficiary needs those distributions for either purpose. Separately, the bankruptcy trustee can reach up to 25 percent of any anticipated payments made to, or for the benefit of, the beneficiary, reduced to the extent necessary by the support needs of the beneficiary and any dependents."

Fiduciary Duty Owed to a Creditor?

In a fiduciary relationship, the fiduciary is legally obligated to act in the bests interests of the principal. This relationship can arise in various situations. For example, a lawyer owes a fiduciary duty to a client just as an executor owes a fiduciary duty to an estate beneficiary. Given the privileged status of a principal in a fiduciary relationship, it is a very favorable position for the principal. That is, the law imposes a high standard of care on the fiduciary. However, not every relationship involves a fiduciary relationship. A recent California Court of Appeal decision illustrates this point.

Vance v. Bizek  ____ Cal App. 4th ___ (2014)

Dan Bizek obtained a judgment against Sally Gordon in the amount of $987,747. Mr. Bizek then tried to attach this judgment to Ms. Gordon's interest in the Wallace and Pearl Burt Trust, of which she was a beneficiary. Of note, Pearl Burt was Ms. Gordon's mother. Ms. Gordon was also the sole beneficiary of the Pearl Burt Trust. On April 6, 2011, Mr. Bizek's petition to attach his judgment to Ms. Gordon's interest in the Wallace and Pearl Burt Trust was granted. In turn, Ms. Gordon disclaimed her entire interest in the trust on the same day so that her interest passed to her daughter, Cyndi Vance (Author's comment: a disclaimer to avoid creditor attachment is surprisingly permissible in California under certain situations). 

Ms. Vance and Mr. Bizek then filed competing petitions to ascertain the validity of the disclaimer.

The thrust of Mr. Bizek's petition was that Ms. Gordon commingled funds as she was a trustee of both the Wallace and Pearl Burt Trust and the Pearl Burt Trust. Consequently, she had, inter alia, withdrawn money from the former and deposited it into the latter. The result, Mr. Bizek argued, was that Ms. Gordon had violated her fiduciary duty citing Probate Code § 16004. The relevant portion reads "a transaction between the trustee and a beneficiary which occurs during the existence of the trust or while the trustee’s influence with the beneficiary remains and by which the trustee obtains an advantage from the beneficiary is presumed to be a violation of the trustee’s fiduciary duties." Probate Code § 16004(c).

The problem with Mr. Bizek's argument though, as the holding of the case points out, is that Mr. Bizek was not a beneficiary of the Wallace and Pearl Burt Trust. Hence, application of Probate Code § 16004 was improper by the trial court. He was merely a creditor of the Wallace and Pearl Burt Trust, not a beneficiary. Thus there was no breach of fiduciary duty by Ms. Gordon to Mr. Bizek because none was owed to Mr. Bizek for purposes of the Wallace and Pearl Burt Trust.

A takeaway from this case is to keep in mind that a fiduciary duty does not arise automatically. Rather it arises in certain situations and close attention to detail is needed when determining whether it is invoked or not.

Spendthrift Clause

Great Wall of China

Some people are fortunate to be prudent with money. These people live within their means and do not spend lavishly or superfluously. The necessities of life such as food, clothing and shelter are accounted for, with the occasional luxury sprinkled in. Conversely, there are those cursed by profligate spending. These people make reckless spending decisions, much to their detriment. Silly items such as fancy cars, jewelry and clothes often are associated with these people.

In the context of estate planning, a person is able to somewhat protect the free-spending beneficiary from themselves by inserting a spendthrift clause into their trust. This clause generally bars a creditor from attaching to the beneficiary's interest in the principal, income or both of a trust. Prob C § 15300.

For example, Samuel established a trust for his irreverent nephew Benito. This trust was to benefit Benito during his lifetime. In the trust, Samuel wrote that Benito's interest in the principal and income of the trust was not subject to voluntary or involuntary transfer. This amounted to a spendthrift provision as Samuel was concerned that Benito's recklessness would jeopardize his trust funds. Samuel had worked tirelessly in life and wanted to benefit Benito, as opposed to a creditor. 

Unfortunately Benito is spell-bound by a black Friday sale at a local retail store and incurs a massive credit card bill. Naturally Benito is unable to pay this bill and the credit card company obtains a money judgment against Benito. However, since the trust had a spendthrift provision, the credit card company cannot simply demand payment from Benito's trust. Rather, the creditor can either wait until a distribution is made to Benito from the trust or it can petition the court to direct Samuel to pay Benito's portion of trust principal and then collect. CCP § 709.010.

While California provides for a collection method as stated above, many creditors do not wish to engage in this for multiple reasons. First, it is expensive and time-consuming to petition a court to direct a trustee to satisfy the money judgment on behalf of the beneficiary-debtor. Second, if the trustee already paid the money to the beneficiary, the creditor has to be timely in their collection methods. The phrase "here today gone tomorrow" is apropos because the beneficiary can spend as they see fit when they receive it. They are under no duty to wait for the creditor to attach the judgment to it. This can easily disintegrate into a game of cat and mouse which taxes anyone's patience. 

To be clear, a spendthrift provision is not an impregnable barrier that will thwart the attempts of any creditor. A determined creditor can collect their judgment provided they have available funds, time and patience. Yet for many creditors, this can be seen as a lost cause because there is an opportunity cost for everything. Time spent chasing down a debtor like Benito sacrifices time that could have been spent chasing down a debtor with potential easier to attach assets.

Who Can Initiate Probate?

To begin probate, California law specifies which persons are eligible to do so. Typically the petitioner is seeking to become the personal representative, the person who will represent the interests of the estate.  Depending on who the person is, the personal representative can be known by the following terms: (1) executor, (2) administrator, (3) administrator with the will annexed, (4) special administrator, (5) successor personal representative, or (6) public administrator. Prob C §58(a).

According to California law, "any interested person may commence proceedings for administration of the estate of the decedent by a petition to the court for an order determining the date and place of the decedent’s death and for either or both of the following: (1) Appointment of a personal representative. (2) Probate of the decedent’s will. Prob C § 8000. The question then becomes, what is the definition of an "interested person."

Consequently California law defines the phrase "interested person" to be the following individuals: (1) an heir, (2) devisee, (3) child, (4) spouse, (5) creditor, (6) beneficiary, or (7) any other person having a property right in or claim against the estate of the decedent that may be affected by the proceeding; (8) any person who has priority for appointment as personal representative; and (9) a fiduciary representing an interested person. Prob C § 48. 

Naturally the question then becomes what constitutes an heir, creditor, etc. The following are definitions of an heir and devisee.

An heir is a person who would inherit the decedent's estate if the decedent did not write a will pursuant to the laws of intestate succession. Prob C § 44. This is a fancy way of saying that a person's estate goes to their next of kin if they did not write a will. For example, John, a widower was a wealthy land-owner who resided in Los Gatos, CA. He had 3 children, Heathcliff, Hugo and Henry. John despised lawyers because he believed them to be devilish and avarice. Consequently, John never planned his estate and he died without having penned any estate planning instrument(s). His 3 sons, as heirs, would each be entitled to commence probate proceedings in Santa Clara County because they would inherit his estate through intestate succession.

A devisee is a person named in a will as the beneficiary of either personal and real property or both. Prob C § 34. For instance, from the above example, if John had wrote a will and named his son Heathcliff as the beneficiary of his Rolex watch, then Heathcliff would qualify as a devisee.    

Insolvent or Underwater Estate

In light of recent economic times, I have received phone calls from individuals who were the potential beneficiaries of an estate, albeit an insolvent or underwater estate. 

These people were left with the dilemma of either administering or not administering the decedent’s estate. By no means is this post intended to apply to all situations involving an insolvent estate. Instead, this post is merely to highlight some relevant laws that may factor into a decision to administer an insolvent estate.

First, a person needs to recognize if they are obligated to administer the decedent’s estate because they are liable for the decedent’s debt. If the person is not liable for the decedent’s debts, then there is really no rational reason to administer an insolvent estate hold sentimental reasons. 

The general rule is that a person is not liable for the debts of another. 

However, there are a few exceptions to this general rule. First, a spouse may be liable for the debts of the deceased spouse due to California’s community property laws. For example, if the deceased spouse incurred a substantial amount of hospital bills, it is likely that the surviving spouse would be liable for this. Second, a joint account holder would be liable for the debts of the other joint account holder. For example, if two people signed up for a credit card together, both would be liable for the debt even if one party did not incur any expenses. Third, a person may be liable for the debt of another if they act as a guarantor. A guarantor is somebody who will answer for the debt, default, or miscarriage of another. CC §2787. A common guarantor situation is where a person promises to guaranty a mortgage loan because the lender would not extend credit to the borrower without the inclusion of a guarantor. If none of these exceptions apply, then it is likely that the person will not be liable to pay the decedent’s debt and thus would not be forced into administering the decedent’s estate.

Second, a person needs to determine if in fact the estate is insolvent. 

Just because a home might be underwater does not necessarily equate to an insolvent estate. For instance, even though a home might be underwater, there may be additional assets such as a bank account or shares of a publicly traded company which could make the estate solvent. Thus, it is important for any person when looking at a potentially insolvent estate to view the estate through a comprehensive lens and not become fixated on one asset, namely an underwater home.

Third, the person need to recognize the process it would take to transfer the assets from the decedent. 

The reason for this is because some people might be willing to take on an insolvent estate, which may include a home that could later appreciate. Consequently, many assets can easily be transferred absent probate or trust administration whereby the transfer is done quickly and cheaply. For instance, a bank account can basically be transferred via a death certificate if there is a pay-on-death beneficiary. Moreover, real property held in joint tenancy can be transferred by recording an affidavit of death of a joint tenant with the local county recorder’s office. 

However, certain assets require probate or trust administration for transfer. For example, a home solely titled in the name of the decedent will require a probate to transfer title of the home. Since probate takes at least 9 months in most California counties to finish, this serves as a significant drawback for the person who wants a smooth and easy transfer.

Fourth, the person needs to realize that inherited assets are taken subject to pre-existing liabilities. 

A person is not allowed to abuse the estate administration process by taking only the decedent’s assets but disregarding the decedent’s debts. For instance, assume that a person was the beneficiary of a piece of real property that was underwater by $125,000 but was also the pay-on-death beneficiary of a $75,000 bank account. The person’s intent was to disregard the home entirely but acquire the bank account. In this case, the lender may be permitted to pursue this person to satisfy the home loan through the bank account because it was arguably a victim of fraud. Prob C § 5202.

Asset Protection Trust

There is nothing illegal, wrongful or unethical about protecting your assets from potential creditors. 

Asset protection is commonly practiced by millions of Americans, including myself in multiple situations. 

The key feature of asset protection is the method used to achieve it. Some methods work in California, while others do not.

For example, a savvy real estate investor will purchase property through a limited liability entity, such as a LLC or a corporation. Thereby the real estate investor's liability, subject to a few exceptions, is limited to the company's assets regardless of whether a judgment, fine or levy against the company exceeds the value of the company's assets. 

Assume that Willis purchased a home in San Francisco’s Sunset District for $400,000 through his company, Winning, LLC. Willis then leased the home to Lionel for 1 year. Sadly, Lionel slipped and fell on a banana peel that Willis had negligently left on the property. Lionel broke his hip, thereby ruining his promising soccer career and successfully sued Willis for $500,000. At this point, if Willis had owned the home personally, Lionel could enforce the judgment against all of Willis’ assets until he collected his $500,000 judgment. However, Willis had prudently decided to own the rental home through a LLC, thereby limiting his liability to the company’s assets. Consequently, Lionel’s recovery would be limited to whatever the company owned, namely $400,000. Even though the LLC did not have the assets to satisfy Lionel’s judgment, California law says that Willis is not personally for the debts of his LLC, specifically $100,000. Corp C § 1710. Thus, Willis would be able to walk away from his lawsuit financially battered and bruised but not ruined.

Now contrast the above example with the case of a person who creates a revocable trust and funds the trust with a rental property and is also the beneficiary of this trust. 

The aforementioned would be an example of a “self-settled” trust. The reason being is that there is a overlapping of positions whereby the settlor, the person who writes the trust, is also the beneficiary. California law is very specific in saying that creditors can reach the assets of a self-settled trust. Prob C § 15304. From the above example, if Willis owned the rental property through his revocable trust, then Willis would have unlimited personally liability for the liabilities arising from the operations of the rental property. Thereby Lionel could enforce his $500,000 judgment against any of Willis’s assets. For instance, if Willis owned another home, Lionel could attach a judgment lien to the home, if Willis had a bank account, Lionel could execute a bank levy on that account, if Willis had a job, Lionel could perform a wage garnishment on Willis’ paycheck.

One of my law books wisely says “if a deal is too good to be true, it is probably not true.” So the next time you hear somebody or some advertisement talk about asset protection, pay attention to how they intend to achieve it. Often times, there is some elaborate procedure discussed involving an exotic location such as the Cayman Islands or the Bahamas, which is usually hype, or worse fraud. There is a correct method to achieve asset protection; the right steps have to be followed however. 

Estate Planning Mistakes

The following are some common estate planning problems I have seen over the years.

1. Adding a child's name to the title of the family home

Parents often wish to leave their entire estate to their children. One imprudent method of doing this is to add a child's name to the title of the home by partially transferring the parents' interest in the home to include the child as well. For example, Hal and Wendy have two children, Samuel and Donna. They decide that both should inherit the home once both of them have passed away. They execute a deed transferring their interest in a home to include their children as well. Thus, the deed to the home now reads that it is owned by Hal, Wendy, Samuel and Donna.

There are two reasons why this procedure is not recommended at all. 

First, since Samuel and Donna are owners of the home, they can force what is known as a "partition action." In a partition action, the property is either physically divided up and distributed to the owners in proportional to their interest, sold and the proceeds distributed in accordance with the ownership interests or one party buys out the interest of the other party. CCP §§873.210-873.290; CCP §§873.510-873.850; CCP §§873.910-873.980. Each owner has a right to seek a partition action subject to waiver. CCP § 872.710(b). Essentially, if one owner seeks a partition action, there is nothing a co-owner can do to stop it. From our example, if Samuel and Donna become fed up with their parents for whatever reason, say they failed to let them stay out late one evening when they can back from college, they can petition a local court to partition the family home, regardless of any objections by Hal and Wendy.

Second, adding a child's name to the family home is foolish because of liability reasons. Most assets are subject to recovery if a creditor obtains a court judgment against the debtor. For example, if Samuel ran over an unsuspecting bicyclist with his car and the injured bicyclist won a judgment against Samuel in civil court, Samuel would be personally liable for this judgment. This means that most of his assets would be subject to attachment by the bicyclist. Consequently, the bicyclist would be very pleased to see that he could attach a judgment lien to the property that Samuel owned with his parents. By placing a judgment lien on the property, this would prevent the sale of the home until the judgment lien was paid off. So if Hal and Wendy ever decided to sell the home, they would have to either pay off the judgment lien in full or negotiate a reduced price. 

2. Failure to observe formalities

The legal system is very much interested in formalities. Certain formalities must be met in order for a document or legal action to be considered valid. For example, typewritten wills in California require that 2 witnesses sign the will. Prob C § 6110(c). This means that a notarized signature will not suffice because a notary is only 1 person. Thus, the fact that you had your will notarized is a clear indication that it is probably not valid. For whatever reason, many people believe that 1 notary equals 2 witnesses for executing a will, which is clearly not true.

3. Selecting the wrong trustee of a living trust

Besides the beneficiary designation, the biggest question a person confronts when writing a trust is who will be the successor trustee. The choices include family members, friends, professional trustees, trust companies and attorneys. Often times a family member is selected and major problems ensue because the family member is ill-prepared to handle such a responsibility.

4. Oral estate planning   

It is not uncommon to hear a disgruntled heir state "Aunt Gertrude told me when I was young that I would inherit her antique brooch when she passed away." Yes we all have been the recipients of a statement by a relative promising us something when they pass on. 

The good news is that these statements make us feel happy because it shows that our relatives care enough about us to see us inherit a prized possession of theirs. The bad news is that these statement have speculative legal value at best and thereby most likely not to persuade a court as to its veracity. Prob C § 15207. In particular, most attorneys cringe when they hear about oral agreements pertaining to an inheritance because if the matter was so important it would have been written down. As the saying goes, "talk is cheap" and most people will casually throw around all sorts of ideas. Yet when given the opportunity to express their thoughts on paper, people often have a change of heart and refuse to spell out their testamentary intentions.

5. Avoidance of creditors by transferring property pre-death

People regularly incur a large amount of debt in the latter stages of their life due to costly life-prolonging medical care. Cognizant of this debt, people mistakenly assume that if they transfer their assets to the beneficiaries of their will or trust before they pass away, their creditors (medical insurance company, credit cards, etc.) will have no recourse against them because the property is not in their control. 

For instance, Dan had health problems and owed Chase Bank roughly $50,000 in credit card debt due to medical charges. Dan had written in his will that his friend Ezekiel would inherit his home upon his death. Rather than have Chase Bank place a judgment lien on the property, Dan transferred his interest in the home to Ezekiel one month before he passed away, assuming that the transfer would allow Ezekiel to inherit the home free and clear of any claim by Chase Bank.

However, California law provides creditors many legal remedies if the transfer was done to defraud a creditor's attempt to recover a lawful debt owed. Uniform Fraudulent Transfer Act CC §§3439-3439.12. In this case, Chase Bank could see that Dan transferred the home to Ezekiel even though Dan surely had to know that he owed Chase Bank $50,000. Thus, Chase Bank could successfully pursue a lawsuit against Dan's estate for fraudulently conveying the property to Ezekiel. Chase Bank could then either nullify the transaction, attach their claim to the home via a judgment lien, or prevent a future transfer of the home by Ezekiel. CC § 3439.07. 

Probate Creditor Claims

The following is an overview of who gets priority when satisfying a decedent's debt during probate. 

1. Administration expenses—for obligations secured by a mortgage, deed of trust, or other lien, only the administration expenses that are reasonably related to the administration of the secured property are given priority (Prob C §11420(a)(1));

2. Obligations secured by a mortgage, deed of trust, or other lien, including a judgment lien, to the extent that they can be paid out of the property subject to the lien—if the property is insufficient, the unsatisfied obligation is a general debt (Prob C §11420(a)(2));

3. Funeral expenses (Prob C §11420(a)(3));

4. Expenses of last illness (Prob C §11420(a)(4));

5. Family allowance (Prob C §11420(a)(5));

6. Wage claims (Prob C §11420(a)(6)); and

7. General debts (Prob C §11420(a)(7)).

Living Trust Myths

These are the most common misperceptions I have been asked, read and heard about in regards to living trusts:

Fiction: If I hold assets in a living trust, creditors will not be able to attach their claims to it, thereby making me judgment-proof.

Fact: Creditors can attach their claims to assets you hold in a revocable trust for your benefit. Prob C §15304(a). For example, suppose that a substantial judgment was rendered against you in a California court because you negligently ran over your neighbor’s beloved dog Muffy. The fact that you transferred all of your assets into a trust for your benefit would not prevent your neighbor from attaching the judgment to the assets held in trust per Prob C §15304(a).

Fiction: A living trust is the perfect estate planning document.

Fact: A living trust is usually the best estate planning document given your range of choices, but is most certainly not a perfect estate planning document. For a single person, there are essentially three ways to transfer property at death: probate, non-probate transfers (joint tenancy real property, payable on death accounts, life insurance designations, etc.) or a trust. For a married person, the surviving spouse is entitled to use a spousal probate petition as well as the three aforementioned procedures. While each of the methods has its strengths and weaknesses, a trust provides the best combination of flexibility, cost and timing in comparison to the others. Again, writing a living trust is not a panacea, rather it is best option in most cases.

Fiction: I need to have a living trust done because I heard it is the smart thing to do.

Fact: If you do not own a home, have children or have more than roughly $100,000 in assets it is not recommended to draft a living trust because there are quicker and cheaper methods to administer your estate upon death than through a trust.

Fiction: A living trust requires little or no post-death administration.

Fact: This is the most commonly propagated myth about living trusts. Many individuals have turned to living trusts to avoid the necessity and cost of probate, under the impression that administration will be easy, inexpensive and expedient. However, the administration of a trust typically requires the assistance of professionals: lawyer, accountant, appraiser, etc., who require appropriate compensation. Granted the administration of a trust is commonly more expedient and economical than probate, it still nonetheless is similar to probate: assets need to be collected, debts need to be paid and the remaining assets need to be distributed.

Fiction: Once I draft and execute a trust, the process is complete.

Fact: A valid California trust requires trust property. Prob C §15202. Thus, the person who created the trust needs to transfer some asset into the trust in order for it to be valid. For example, suppose John Smith created a trust and owned a home. A grant deed that transfers title from John Smith to John Smith, Trustee of Smith 2009 Revocable Trust dated 6/12/09, would provide the trust with the required element of property.