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Trust Administration Creditors Claim Procedure

Trustees doing post-death trust administration have powerful tools to cut down, or even eliminate, claims against the trust.  Probate estates have a mandatory creditor claims procedure.  Trustees can use an optional creditors claims procedure that is just as powerful.

The creditors claims procedure works for debts and liabilities incurred by the trust settlor (i.e. the person who died).  For example, a trust settlor who owes money on his credit card incurred a debt.  California has a one year statute of limitations for lawsuits that seek damages that come from the conduct of a decedent.  That is a short time that can be a powerful roadblock to liability.

However, trustees can do much better that the statute.  Trustees can invoke the creditors claim procedure by filing a notice in a newspaper informing creditors the creditors claim procedure is being used.  This gives creditors only four months in which to file their claim with the trust.  This period can be cut down to 60 days by mailing notice to a known creditor.  It also requires creditors to file a claim with the trust before filing a lawsuit.  Failing to file a claim with the trustee can result in the creditor having his claim barred.

Once a creditor has filed a claim the trustee must approve or deny the claim.  If 30 days go by with no action being taken then the creditor can treat the lack of response as a denial of the claim.  He can then file suit. 

As trustee, you won't let a claim linger for 30 days.  Any claim that is filed will be promptly evaluated.  The claim will be approved, denied, or approved in part and denied in part.  Assuming a claim is denied in whole or in part the creditor is now forced to choose what to do.  What creditors can not do is dither about whether they want to pursue a lawsuit.  

An interesting twist in trust law prohibits the use of the trust creditor claims procedure if the trust settlor also had a probate.  That's because this would result in two uses of the creditor claims procedure for the same person.  For trusts facing significant debts this suggests a way of potentially misleading creditors into believing there is far less money available to satisfy debts than there actually is.  The trustee could separately file for probate and give notice to the creditors within the probate estate.  Sophisticated creditors often ask for a copy of the inventory and appraisal in order to determine what is available for them to recover.  Because the probate estate won't have any assets the creditor may be dissuaded from pursuing the claim.  This all happens without revealing the existence of a trust.

No matter how it's done, invoking the creditors claim procedure can help to reduce or eliminate debts and claims against the trust estate.